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Financial Reporting and Regulatory Update

Fourth Quarter 2018

From the SEC

AICPA Conference on Current SEC and PCAOB Developments

The annual AICPA Conference on Current SEC and PCAOB Developments took place in Washington, D.C., on Dec. 10-12, 2018. The following SEC representatives delivered remarks:

  • Wesley Bricker, chief accountant – Statement on matters discussed with Julie Erhardt, Jenifer Minke-Girard, Marc Panucci, and Sagar Teotia during a deputy chief accountant panel, including those related to the financial reporting structure, FASB standard-setting activities, PCAOB oversight, accounting consultations, monitoring the International Financial Reporting Standards Foundation’s activities, and monitoring the Public Interest Oversight Board’s activities
  • Tom W. Collens, professional accounting fellow – Remarks on internal control over financial reporting (ICFR), specifically on the evaluation of control deficiencies
  • Emily L. Fitts, professional accounting fellow – Remarks on ICFR, including the evaluation of operating effectiveness of controls and preparation of material weakness disclosures
  • Sarah N. Esquivel, associate chief accountant – Remarks on revenue recognition consultations, including identifying performance obligations and evaluating the existence of a significant financing component
  • Sheri L. York, professional accounting fellow – Remarks on revenue recognition consultations, including the application of the principal versus agent guidance and the identification of performance obligations
  • Andrew W. Pidgeon, professional accounting fellow – Remarks on lease accounting, including lessee transition for minimum rental payment composition policies, lessee transition for minimum rental payment measurement policies, and certain lessee and lessor costs
  • Rahim M. Ismail, professional accounting fellow – Remarks on CECL implementation and a consultation on the shift away from the London Interbank Offered Rate (LIBOR)
  • Kevin L. Vaughn, senior associate chief accountant – Remarks on accounting consultations in general and subsequent events in the CECL model

Public statements and announcements

Public statement on U.S.-listed companies with significant operations in China

On Dec. 7, 2018, SEC Chairman Jay Clayton, SEC Chief Accountant Wesley Bricker, and PCAOB Chairman William Duhnke issued a public statement in light of current information access issues to entities in China. According to the statement, “One of the most significant current issues relates to the ability of the PCAOB to inspect the audit work and practices of PCAOB-registered auditing firms in China (including Hong Kong-based audit firms, to the extent their audit clients have operations in mainland China) with respect to their audit work of U.S.-listed companies with operations in China.” The statement covers information access issues in more detail as well as remedial measures that have been used in the past to address those issues.

Public statement on digital asset transactions

On Nov. 16, 2018, the SEC’s Divisions of Corporation Finance, Investment Management, and Trading and Markets released “Statement on Digital Asset Securities Issuance and Trading.” It covers recent enforcement actions and the interaction of existing federal securities laws with the innovative technologies used for digital asset securities transactions. Specifically, it addresses offers and sales of digital asset securities, investment vehicles investing in digital asset securities (such as managers of hedge funds that invest in digital asset securities). For those involved in trading digital asset securities, the statement addresses both exchange and broker-dealer registration requirements.

Website for innovation and technology engagement

The SEC on Oct. 18, 2018, launched its Strategic Hub for Innovation and Financial Technology (FinHub), which will serve as a resource for issues such as distributed ledger technology (including digital assets), automated investment advice, digital marketplace financing, and artificial intelligence and machine learning.

In its press release, the SEC outlined five FinHub activities:

  • “Provide a portal for industry and the public to engage directly with SEC staff on innovative ideas and technological developments; 
  • “Publicize information regarding the SEC’s activities and initiatives involving [financial technology] on the FinHub page; 
  • “Engage with the public through publications and events, including a FinTech Forum focusing on distributed ledger technology and digital assets planned for 2019;
  • “Act as a platform and clearinghouse for SEC staff to acquire and disseminate information and FinTech-related knowledge within the agency; and
  • “Serve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.”

Clayton said, “The FinHub provides a central point of focus for our efforts to monitor and engage on innovations in the securities markets that hold promise, but which also require a flexible, prompt regulatory response to execute our mission.”

Reports and strategic plan

Division of enforcement – annual update

On Nov. 2, 2018, the SEC’s Division of Enforcement released its annual update for 2018 in which the co-directors qualitatively evaluate the performance of the division against five priorities:

  • Focus on the Main Street investor
  • Focus on individual accountability 
  • Keep pace with technological change 
  • Impose remedies that most effectively further enforcement goals 
  • Constantly assess the allocation of resources

In addition, the annual report provides discussion and analysis of enforcement actions on a quantitative basis.

Investigative report on cyberthreats

On Oct. 16, 2018, the SEC released an investigative report with a recommendation: “public companies should consider cyber threats when implementing internal accounting controls.” The report analyzes the SEC Enforcement Division’s investigations of nine public companies that experienced financial losses as a result of cyberfraud. It emphasizes the need to consider cyberthreats as part of a public company’s obligation to maintain internal accounting controls.

Strategic plan

The SEC announced its new strategic plan on Oct. 11, 2018. It features three goals:

  • “Focus on the long-term interests of our Main Street investors. … Initiatives under this goal will include modernizing disclosure and expanding investor choice.”
  • “Recognize significant developments and trends in our evolving capital markets and adjust our efforts to ensure we are effectively allocating our resources. … by analyzing market developments, evaluating existing rules and procedures, understanding the continually changing cyber-landscape and ensuring the appropriate resources are dedicated to each area.”
  • “Elevate the SEC’s performance by enhancing our analytical capabilities and human capital development. The SEC will invest in data and technology ... ”

Rules and guidance

Quarterly reports and earnings releases – request for comment

On Dec. 18, 2018, the SEC released a request for public comment, “Request for Comment on Earnings Releases and Quarterly Reports,” on potential changes to earnings releases and quarterly reports. The SEC is exploring ways to promote efficiency in periodic reporting by reducing unnecessary duplication that companies disclose and examining how such changes could reduce costs and affect capital formation while enhancing, or at least maintaining, appropriate investor protection.

The release also seeks comment on whether the SEC should provide companies, or certain classes of companies, with flexibility as to the frequency of their periodic reporting. Last, the SEC is seeking comment on how the existing periodic reporting system, earnings releases, and earnings guidance may affect corporate decision-making and strategic thinking, whether positive or negative, and whether the result is an inefficient outlook by focusing on short-term results.

The comment period closes on March 21, 2019.

Exchange Act reporting companies and Regulation A exemption

On Dec. 19, 2018, the SEC adopted final rules to allow Exchange Act reporting companies to apply the registration exemption offered by Regulation A. This will allow those companies to complete Securities Act offerings of securities up to $50 million in a 12-month period without separately registering those offerings with the SEC and without additional reporting obligations.

The final rules are effective upon publication in the Federal Register.

Disclosure updates and simplifications

The SEC previously voted, on Aug. 17, 2018, to amend its disclosure requirements in order to simplify them and make them consistent with GAAP and other SEC guidance, by issuing its Disclosure Update and Simplification rule (DUSTR). On Oct. 4, 2018, DUSTR, was published in the Federal Register, and the effective date for the rule is Nov. 5, 2018. However, the new interim requirement to present changes in stockholders’ equity in Form 10-Q is not required until the interim period beginning after Nov. 5, 2018, pursuant to staff guidance in Compliance and Disclosure Interpretation (C&DI) 105.09. Therefore, a calendar year-end institution must first comply with the new stockholders’ equity disclosure in its March 31, 2019, Form 10-Q.

Mining disclosures

On Oct. 31, 2018, the SEC adopted amendments to modernize property disclosure requirements for mining registrants. The amendments require a registrant with material mining operations to disclose specified information in its SEC filings concerning its mineral resources, in addition to its mineral reserves. Currently, nonreserve estimates are permitted to be disclosed only in limited circumstances.

The final rules provide a two-year transition period. Compliance is required in a registrant’s first fiscal year beginning on or after Jan. 1, 2021.

The press release includes a fact sheet that summarizes the new rules.

Revised smaller reporting company (SRC) definition

On Nov. 7, 2018, the SEC’s Division of Corporation Finance updated its interpretive guidance to reflect recent changes in the SRC definition: