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Financial Reporting and Regulatory Update

Third Quarter 2018

From the SEC

New commissioner

On Sept. 11, 2018, Elad Roisman was sworn in as an SEC commissioner, replacing outgoing Commissioner Michael Piwowar. Roisman was nominated by President Donald Trump and confirmed by the U.S. Senate on Sept. 5. He most recently served as chief counsel to the Senate Banking Committee; prior to that, he served as counsel to former SEC Commissioner Daniel Gallagher.


Chief Accountant Wesley Bricker at the AICPA banking conference

On Sept. 17, 2018, SEC Chief Accountant Wesley Bricker addressed the American Institute of Certified Public Accountants (AICPA) National Conference on Banks and Saving Institutions. He covered CECL standard implementation, technology innovations in digital assets, and changes to the auditor’s report.

For CECL, he noted certain aspects of applying the standard that companies may already have experienced – in particular, assessing expected cash flows over the life of a financial asset. He emphasized processes, controls, and adoption plans to implement accounting changes, and he reminded the audience that SEC Staff Accounting Bulletin (SAB) 102 principles will continue to be applicable and that audit committees have a vital role in implementation. He also shared the following concepts regarding CECL transition disclosures:

  • Definition of key terms
  • Description of methodology and judgments
  • Tabular presentation of economic assumptions
  • Quantified impact of moving from incurred to expected model, disaggregated by lending portfolio

He shared illustrations addressing SEC requirements that uniquely affect digital asset transactions:

  • Maintaining accurate books and records and internal controls
  • Identifying related parties in order to appropriately account for and disclose those transactions
  • Considering loss contingencies due to legal matters
  • Dealing with potential illegal acts
  • Reviewing the ability of the external auditors to carry out their professional responsibilities

About auditor’s report changes, Bricker noted that he is pleased with the dry runs for CAMs that entities are undertaking ahead of the effective date for including CAMs in the auditor’s report.

Rules and proposals

Disclosure simplification

On Aug. 17, 2018, the SEC voted to amend its disclosure requirements in order to simplify them and make them consistent with GAAP and other SEC guidance. In addition, the commission referred a number of topics to the FASB for further consideration.
 Some of the specific changes include elimination of:

  • Ratio of earnings to fixed charges
  • Market price information – high and low trading prices
  • Dividends per share on face of income statement (instead moves required disclosure to changes in stockholders’ equity)
  • Financial information about segments and geographic area in description of business
  • Accounting policy for derivatives

In addition, the rule adds a new interim requirement for changes in stockholders’ equity in Form 10-Q, which requires registrants to disclose changes in shareholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date periods, with subtotals for each interim period.” Registrants may present the activity in a separate statement of changes in stockholders’ equity or in the notes to the interim financial statements. On Sept. 25, 2018, the SEC issued guidance (see question 105.09 of the Compliance and Disclosure Interpretations) to clarify the effective date for this portion of the amendments. The staff will not object if the first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. For example, a calendar year-end filer could omit this disclosure from its Sept. 30, 2018, Form 10-Q.

The final rule is effective Nov. 5, 2018.

Smaller reporting company transition guidance

On Aug. 10, 2018, the SEC released guidance on transitioning to the revised Smaller Reporting Company (SRC) definition, which is included in the small Entity Compliance Guide for Issuers. When determining SRC status under the revised definition after Sept. 10, 2018, a company should use the date it measures its public float. Newly qualified SRCs have the option to use the SRC scaled disclosure accommodations in filings in one of these ways:

  • In the next periodic or current report due after Sept.10, 2018
  • For transactional filings without a due date, in filings or amended filings made on or after Sept. 10, 2018

A calendar year-end reporting company newly qualified as an SRC under the revised definition and using public float and annual revenue amounts as of June 29, 2018, may first use the SRC scaled disclosure accommodations in its Form 10-Q for the nine months ending Sept. 30, 2018.

The revised SRC definition was summarized in the second quarter accounting and financial reporting update, in “From the SEC.”

Disclosure simplifications for guarantor registered debt offerings

On July 24, 2018, the SEC proposed amendments to Rules 3-10 and 3-16 of Regulation S-X to simplify the requirements for financial disclosure that apply to registered debt offerings for guarantors and issuers of guaranteed securities and for affiliates whose securities collateralize a registrant’s securities. The proposed simplifications are intended to result in the registration of additional debt offerings and, in turn, provide additional investor protections as compared with unregistered offerings.

Comments are due Dec. 3, 2018.

Compensatory securities offerings

On July 18, 2018, the SEC issued a final rule for nonreporting companies that amends Securities Act Rule701(e) as mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The rule expands the securities registration exemption for compensatory securities issued by nonreporting companies by increasing the value of exempt equity securities from $5 million to $10 million. It was effective on July 23, 2018.

Also, the SEC issued a concept release to request feedback on whether the rules for compensatory offerings (employee benefit plans) should be expanded further for reporting and nonreporting companies as well as modernized.

Comments on the concept release were due by Sept. 24, 2018.