Key Takeaways from the 2020 AICPA Annual Conference
The annual AICPA Conference on Current SEC and PCAOB Developments took place on December 7-9, convening thousands of auditors, regulators, and industry practitioners to discuss the top trends and developments shaping the accounting and finance world today. Typically held live in Washington, DC, this year’s virtual event provided a unique opportunity for conference participants to engage with fellow attendees through a variety of innovative platforms, including virtual booths and an online networking lounge. Riveron attended the conference as an event sponsor, meeting with participants and other sponsor firms to discuss the challenges and opportunities of this unprecedented year and what we can expect to see moving forward.
While COVID-19 and its immediate impacts topped the agenda, other important themes emerged for practitioners to keep in mind as they prepare for the upcoming year and beyond. Here are our key takeaways from the 2020 AICPA Conference.
COVID-19 and the financial reporting ecosystem
Despite the challenges of the pandemic and pivoting to a remote environment, resulting in a significant number of COVID-related consultations in Q1 and Q2, SEC staff observed that the bulk of recent consultations has reflected those seen in previous years. In addition to the repository of SEC views and guidance available on its COVID-19 response website, Chief Accountant Sagar Teotia offered a set of reminders to consider as we head into year-end reporting season.
According to Teotia and the SEC staff, companies should revisit COVID-19 impact disclosures to focus on both the short- and long-term impacts of the pandemic, including their ability to repay incrementally drawn debt and impacts on their real estate footprint. Non-GAAP measures related to COVID-19 should be directly attributable, incremental, and supportable. Non-GAAP measures that lack specificity are likely to elicit a comment from the staff.
A panel of Big Four national office representatives highlighted certain accounting hot topics that preparers will need to consider as they head into year-end, including impairment, restructuring accruals, revenue estimates, stock option modifications, lease modifications and financing transactions. Many of these items will either be new to preparers or incorporate additional complexity because of the pandemic. The panel also noted that certain critical items, like impairment evaluations and going concern analyses, should be discussed with registrants’ audit committees.
Throughout the conference, regulatory bodies reiterated the importance of focusing on and supporting stakeholders, particularly in the current environment. In the wake of COVID-19, the FASB intentionally slowed standard setting from March through July and reprioritized its agenda to focus on technical inquiries as preparers confronted emerging issues related to the pandemic. During the second half of the year, however, the board began to return to its pre-pandemic priorities. One such priority is post-implementation review of recently issued accounting standards, including ASC 326, the new credit loss standard (CECL), and ASC 842, the new lease accounting standard. Although this guidance has been finalized and implemented by public and many private companies, preparers continue to work through the complexities of both implementation and the ongoing accounting.
Hillary Salo, FASB technical director, discussed the challenges companies have faced when implementing CECL, including the difficulty determining which purchased financial assets qualify for accounting as purchased financial assets with credit deterioration, commonly known as PCD accounting. Some companies encountered more foundational challenges, such as gathering and cleaning up historical data to assist in estimating credit losses. Salo also commented on the new lease accounting standard and how the board is addressing the implementation challenges private companies are facing when determining incremental borrowing rates for various classes of assets with more limited time and resources than larger, public companies.
The appropriate accounting for revenue under ASC 606 continues to generate significant discussion, as preparers encounter complex scenarios such as determining distinct performance obligations and concluding whether gross or net revenue presentation is appropriate when considering the principal versus agent guidance.
While the board continues to monitor these implementation efforts and support stakeholders in the current environment, new FASB Chair Richard Jones is moving forward with over 40 projects on his standard setting agenda. These projects include further guidance on reference rate reform as LIBOR is phasing out as well as a proposed update to remove the requirement to recognize the fair value of deferred revenue acquired in a business combination, eliminating common “haircuts” to these amounts. Perhaps of most interest to preparers, an update to goodwill guidance is on the horizon. Jones tipped his hand when discussing this, noting that the board is leaning towards a model that incorporates goodwill amortization while maintaining an impairment assessment.
Simplifying SEC reporting requirements
Continuing the theme of supporting stakeholders, throughout the conference, SEC staff highlighted the importance of engaging with the SEC and its rule-making process, a notion that is reinforced each year. As a result of that engagement, three notable revisions to long-standing SEC policies were announced and implemented in 2020:
- Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (2020-52 – March 2, 2020)
- Amendments to Financial Disclosures About Acquired and Disposed Businesses (2020-118 – May 21, 2020)
- Amendments to Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information (2020-290 – November 19, 2020)
Revising any one of these individual SEC rules in a calendar year would normally constitute a major policy shift; however, revising all three is monumental. These changes imply that the SEC is listening to the needs and concerns of its constituents, acknowledging that the way companies do business must evolve to meet the pace of innovation. These updates also underscore the SEC’s prioritization on transparency, simplification, and usefulness of information to investors.
Each of these rule-making changes anticipates a reduction of required information from registrants, which in turn, should reduce the complexity and cost of becoming and continuing as a public company.
Auditor independence and ESG reporting
Aside from the more usual topics related to accounting and financial reporting, other key themes from this year’s conference included auditor independence and environmental, social, and governance (ESG) reporting. While both topics have been discussed during previous conferences, each received greater attention this year.
Speakers from both the SEC and PCAOB noted auditor independence as an important area of focus, given that regulators continue to identify deficiencies that suggest audit firms lack the processes and procedures needed to adequately comply with independence requirements. The PCAOB noted four specific areas of focus related to auditor independence requirements: documented firm policies; compliance with independence preapproval rules for significant non-audit services; review of communications with audit committees on independence matters; and review of audit firms’ responses to past violations.
Independence is not just the auditors’ responsibility; it falls to management and boards as well. Companies should ensure that appropriate policies and procedures are in place to monitor auditor independence when looking to their auditors for assistance with new accounting standards, capital markets transactions, or other non-audit services.
ESG reporting also emerged as a topic of interest for both users of financial statements and accounting standard setters. Analysts noted that ESG reporting has recently transitioned from a low- to high-priority topic. As investors are increasingly concerned about ESG issues, companies will feel pressure to disclose more information around the environmental and social impacts of their business. To support both preparers and users of financial statements, the IASB and FASB have topics on their technical agendas related to ESG reporting matters.