Accounting and Financial Reporting Insights from the 2023 AICPA Conference
For public companies and accounting professionals, here are key takeaways from the 2023 AICPA & CIMA Conference on Current SEC and PCAOB Developments
The AICPA reconvened in Washington, DC for its annual forum, revealing the key accounting and financial reporting themes that will shape the year ahead.
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Uncertain economic conditions remained top-of-mind this year for conference presenters, including economists and experts from the US Securities and Exchange Commission. The current landscape presents challenges for company accounting teams and auditors as key financial reporting issues are increasingly subjective, and investors continue to seek improved transparency, clarity, and consistency in disclosures and financial reporting. Additional AICPA conference focal points included new guidance on segment reporting, cash flow statements, consultation trends, audit quality, internal controls, the impact of artificial intelligence and ESG reporting, and ways to address accounting talent shortages.
Key takeaways from comments by the SEC
Conference presenters included SEC Chief Accountant Paul Munter, who underscored that the goal of financial reporting is to communicate accurate and comprehensive results to investors, a challenging task during a period of ongoing volatility in the economy.
Looking toward 2024, the new segment standard, non-GAAP measures, and views on the importance of cash flows represent topics that will impact financial reporting teams. Other staff discussion topics included clawback policies, the pay versus performance final rule, backstop agreements related to SPACs, and the new requirement for reporting cybersecurity breaches.
Segment reporting updates: How ASC 280 affects decision-making, profit and loss, and non-GAAP considerations
Segment reporting is an essential component of the way financial reporting professionals convey information to investors, company decision-makers, and auditors regarding an organization’s key business units or groupings of activities.
The new segment standard, ASC 280, which is required to be applied retrospectively for all reporting periods presented, provides a number of updates to segment reporting, including requiring entities to disclose significant segment expenses by reportable segment if they are regularly provided to the chief operating decision maker (CODM) and included in each reported measure of segment profit or loss. The standard requires interim disclosure of all segment profit or loss information that historically had only been presented annually, and entities with a single reportable segment must adhere to the segment reporting guidance within ASC 280. It allows companies to present more than one measure of profit or loss within the financial statements for each of its reportable segments.
ASC 280 and profit and loss reporting considerations
Historically, only one measure of profit or loss was required for each reportable segment. Now, the new standard provides companies with the option to disclose more than one measure of profit or loss within the notes to the financial statements if these measures are used by the CODM to assess performance and allocate resources, with the caveat that the organization must disclose the measure that is most in line with US generally accepted accounting principles (GAAP). Further clarification was provided that any measure that is not calculated directly in accordance with US GAAP will be considered a non-GAAP measure.
The SEC cautioned against the presentation of more than one measure of profit or loss. Although companies are allowed to present additional non-GAAP measures used by the CODM, these measures will be subject to the SEC’s rules on the use of non-GAAP measures, including that they are not typically able to be presented within the notes to the financial statements. If a company elects to present these non-GAAP measures within the financial statements, they must not be misleading, which is up to the interpretation of the SEC’s staff, and the company must ensure all required disclosures are provided for each of the non-GAAP measures.
When presenting additional measures of profit or loss, conference representatives from the Office of the Chief Accountant (OCA) encouraged any early adopters to consult with the OCA on the specific fact patterns and measures to be presented. CFOs and accounting professionals should also look for any further clarifying guidance that may be issued prior to the effective date of the new accounting standards update, which is effective for public entities for fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024.
The impact of non-GAAP measures on segment reporting
The discussion around non-GAAP measures as it relates to segment reporting was also a focus of a comment letter panel, during which the Division of Corporate Finance noted that non-GAAP measures continue to be a frequent topic of SEC staff comment letters. Comment letters have consistently referenced the C&DI issued last year regarding the reporting of non-GAAP measures.
The SEC also stressed that a key area of judgment and continued focus area relates to what constitutes a normal or recurring operating expense. Building upon last year’s conference example of a company opening multiple retail stores, such assessments should be made at a consolidated level rather than at an individual subsidiary level. For example, if a corporation that operates medical centers opens a new location, the costs would be one-time for that location but would be normal and recurring for the corporation as a whole. The SEC staff stressed the importance that non-GAAP measures should not be misleading, and the adjustments being made to results should not change the recognition and measurement principles required by GAAP.
The importance of the statement of cash flows
Throughout the conference, Munter echoed the importance of the statement of cash flows, which is a face financial statement of equal importance to investors, as it provides insights into historical cash flows and allows investors to form judgments about future cash flows. This has consistently been a leading area of restatements, which shows that issuers and auditors may not have an appropriate level of processes and controls around cash flows. Munter also said that the presentation of cash flows is primarily about classification and emphasized that classification errors can be material. Evaluation of materiality applies equally to the cash flow statement and should consider all related facts and circumstances, both qualitative and quantitative.
FASB update and accounting trends
Each year, the priorities of CFOs, accounting professionals, and auditors are shaped by the accounting standards and the evolving technical agenda set forth by the Financial Accounting Standards Board (FASB). Presenting a conference update on the agenda, FASB Chair Rich Jones remarked on a change in the standard-setting process. The FASB will utilize the Emerging Issues Task Force (EITF) to help research and identify issues for addition to the FASB’s agenda. While the EITF will set its own research agenda, the final output of EITF research projects will be a recommendation to the FASB for topics that should be added to the FASB Technical Agenda.
As noted above, significant discussion centered on the FASB’s new segment reporting disclosures, where the SEC emphasized that any incremental non-GAAP measures disclosed as part of an early adoption effort as a measure of segment profit should be discussed with the SEC first before adding that measure of profit. Beyond the new segment reporting guidance, other notable technical topics and status items on the FASB agenda include: income tax disclosures, disaggregation of income statement expenses, induced conversions, environmental credits, statement of cash flows, software costs, interim reporting, crypto assets, and government grants. While the latter items may impact fewer companies, many of the topics highlighted by the FASB at this year’s conference have the potential for a significant adoption effort.
Standards with significant impacts (and expected completion dates, if available) include:
Income tax disclosures: Requires incremental disclosure of items in the tax rate reconciliation; the final standard was issued after the conference.
Disaggregation of income statement expenses: May require footnote disclosure of the nature of components that make up income statement expenses; public roundtable held on December 13.
Targeted cash flow statement improvements: Mainly relevant for financial institutions to make the cash flow statement more relevant to that industry since investing and financing activities are financial institutions’ operating activities.
Software costs: Board deliberations continue on this item and have been focused to date on capitalizing all direct costs after a project becomes probable.
Interim reporting: The intention of this project is to put down in one place all that is required at interim reporting periods.
Other trending consultation topics
A panel of senior leaders from national accounting firms’ technical groups presented a session on trending consultation topics, including the following:
- Equity payments between customers and vendors (the FASB has signaled that it may add this topic to its agenda in 2024)
- Issues in business combinations, including identifying the accounting acquirer and contingent consideration
- Lease accounting considerations, including embedded leases and identification of lease and non-lease components
These areas continue to present challenges and complexity for financial statement preparers, and in-house accounting and finance teams may need to engage the support of third-party advisors in order to navigate these matters.
Audit quality in focus and impact on financial reporting teams
Regulators and industry experts placed a consistent focus on audit quality during the 2023 AICPA Conference, concerning independence, critical judgmental areas, internal controls, and walkthroughs. PCAOB Chair Erica Williams noted that the findings and results of inspections have shown declines in audit quality. Some of this may stem from the challenges of remote work and professionals who may have lost the benefit of in-person learning as a result of starting during the pandemic.
Gearing up for audits as quality issues impact companies and auditors alike
As much as audit quality is a focus for auditors, the AICPA reiterated that quality financial reporting is a responsibility for everyone in the financial reporting ecosystem. While PCAOB audit quality inspection findings were specific to execution of audit engagements, financial reporting teams should expect the impacts of those findings to cascade down to the execution of year-end reporting tasks. Financial reporting teams should consider how critical accounting assessments have been documented and whether that documentation will meet the increased rigor expected in this year’s audits. An example of a judgmental area that always receives a significant amount of rigor is a company’s goodwill impairment analysis. Companies should evaluate whether the judgments applied in preparing forecasts are reasonable and the controls over the underlying data used to prepare those projections are well documented and able to be verified. Overall, financial reporting teams should be prepared for a very rigorous audit cycle.
How accounting professionals can engage with ESG and artificial intelligence
Amidst the technical accounting and reporting discussions, two pivotal areas emerged throughout the conference: environmental, social, and governance (ESG) reporting and the adoption of artificial intelligence (AI) in accounting.
Enhancing ESG reporting quality is a fundamental responsibility
In an early conference session, former SEC Commissioner Elad Roisman fielded questions about ESG disclosures and noted the high level of interest in the SEC’s proposed climate rule, especially regarding the inclusion of Scope 3 emissions. He urged companies to prepare for the implementation of this rule and to consider the global regulatory landscape, including Europe’s advancements in ESG regulation such as the Corporate Sustainability Reporting Directive (CSRD).
The emphasis on ESG reporting reflects a growing recognition of its impact on investment decisions and company reputation. The conference highlighted that the focus should not just be on ESG as a strategic element but, more importantly, on the quality and integrity of ESG reporting. One panel included the Chief Auditor at the AICPA, the CFA Institute’s leader of global advocacy, and senior accounting leaders at various companies, providing ESG insights.
For companies of all sizes, here are specific considerations for accounting leaders when engaging with ESG:
Accuracy and reliability: Ensuring that ESG data is accurate and reliable is paramount. This involves rigorous data collection, verification processes, and internal controls akin to controls over financial data. Reporting professionals should consider whether robust data collection systems are in place to capture and analyze ESG data accurately and ensure it meets the same standards as financial data.
Adherence to standards: Aligning ESG reporting with established standards like GRI and SASB is essential for consistency and comparability across industries, as is monitoring the global regulatory landscape, including CSRD. These standards have low thresholds when determining applicability. Aligning with such international standards ensures not only compliance but also enhances global reporting consistency and investor confidence in their financial disclosures. To learn more, watch the replay of a related webinar on ESG standards.
Materiality and Relevance: ESG reporting should focus on factors materially impacting the business and stakeholders, highlighting the direct link between ESG performance and financial outcomes. Performing a materiality assessment is often the most tangible way to kick-start an ESG program.
Embracing AI in accounting: A strategic imperative
The conference also delved into the potential transformative impact of AI in accounting and the considerations for implementation. A panel of senior members of several boards of directors weighed in on the role audit committees and boards are playing in preparing for the oversight of expanding technology use, including AI. This includes the importance of establishing guidelines and understanding the potential risks and opportunities posed by these technologies. Some discussions explored AI’s impact on the accounting profession and how CFOs, accounting leaders, and auditors are currently engaging with AI.
The use of AI in accounting primarily revolves around automating routine tasks, enhancing data analysis, and improving decision-making processes. Most AI tools used in accounting are not based on large language models (LLMs) but focus more on machine learning algorithms and automated workflows. These tools efficiently handle tasks like transaction categorization, invoice processing, and anomaly detection in financial records. Machine learning, a subset of AI, is particularly influential, enabling systems to learn from data patterns and improve over time, thereby optimizing processes like audit risk assessments and financial forecasting. Companies with high transaction volumes, complex data sets, or those already on a digital transformation journey are well-positioned to benefit from early AI adoption.
As accounting leaders consider how to begin to work with AI, here are the takeaways from the AICPA conference:
Educate and build awareness: Start by educating yourself and your team about AI and its potential applications in accounting. Understanding the basics of AI, including machine learning and automation, and how these can be applied to accounting tasks is crucial. This education phase can involve attending workshops, webinars, and conferences or bringing in external experts for training sessions.
Assess current processes and needs: Conduct a thorough assessment of your current accounting processes to identify areas that could benefit from AI integration. Look for tasks that are repetitive, time-consuming, and prone to human error. This step will help you pinpoint where AI can add the most value, such as in data entry, transaction categorization, fraud detection, or financial forecasting.
Develop a strategic plan: Once you understand the potential applications of AI in your accounting functions, develop a strategic plan for implementation. This plan should include objectives, expected outcomes, timelines, resource allocation, and a risk assessment. Importantly, consider how AI will interact with existing systems and processes, and how it will affect your team’s workflow.
Focus on data quality and governance: Ensure that your data infrastructure is robust and capable of supporting AI technologies. High-quality, well-organized data is essential for effective AI implementation. Establish strong data governance policies to maintain the integrity and security of financial information, including compliance with relevant regulations and standards.
Adapting to the accounting landscape in 2024
While not a core focus of this year’s conference, the AICPA also noted the ongoing need for recruiting and developing accounting talent via the Pipeline Acceleration Plan, which features changes to the CPA exam, the Experience, Learn & Earn program, and an educational initiative to include accounting as a STEM subject.
From non-GAAP considerations and segment reporting updates to the impact of audit quality on the year-end readiness cycle, the 2023 AICPA Conference illuminated many key themes that will shape the year ahead. Join Riveron experts for an upcoming webinar that will explore related insights for accounting and finance professionals.