August 26, 2019

FASB Testing “Staggered Adoption” Policy for Smaller Reporting Companies

FASB is taking pity on smaller reporting companies – who are finding it especially challenging to implement the slew of recent changes to accounting standards. According to this Proposed Accounting Standards Update, the Board has tentatively approved a new philosophy that will extend how effective dates are staggered between larger public companies and all other entities – including smaller reporting companies, private companies and employee benefit plans. This Deloitte blog explains:

The FASB tentatively decided that – subject to the Board’s discretion – a major accounting standard would become effective for entities in Bucket 2 (SRCs, etc.) at least two years after the effective date applicable to entities in Bucket 1 (large public companies). Further, the FASB indicated that entities in Bucket 1 would apply the new accounting standard to interim periods within the fiscal year of adoption while entities in Bucket 2 would apply it to interim periods beginning in the fiscal year after the year of initial adoption.

Historically, the FASB has issued standards with different effective dates for (1) public companies and (2) all other entities. Note that the Board’s tentative decisions would not affect the relief granted under SEC rules related to the adoption of new accounting standards by emerging growth companies.

For smaller reporting companies, this new philosophy would apply to the standard on current expected credit losses – so the proposal would extend the effective date by three years, to 2023. A lot of companies stand to benefit, especially in light of the SEC’s recent expansion of the SRC definition. But not everyone thinks this new philosophy is a good approach. This “Accountancy Daily” article reports on Moody’s anxiety about the change:

The proposal – initiated to give smaller companies more time to implement the new accounting changes – would hinder the credit analysis process by compromising comparability between public and private issuers and delaying, for adoption laggards, the enhanced disclosures these new standards bring.

New PCAOB Staff Guidance: Auditing Estimates & Use of Specialists

Last week, the PCAOB announced Staff guidance on four requirements that will be effective at the beginning of 2021. Here are the new guidance documents:

1. Auditing Accounting Estimates

2. Auditing the Fair Value of Financial Instruments

3. Supervising or Using the Work of an Auditor’s Specialist

4. Using the Work of a Company’s Specialist

According to the announcement, the first two documents explain aspects of the PCAOB’s new auditing standard for accounting estimates & fair value measurements (AS 2501). That standard enhances the process for auditors to assess the impact of estimates on the risk of material misstatements. The other two documents highlight aspects of new requirements in AS 1201 and AS 1210 that apply when auditors use the work of specialists in an audit and when an auditor uses the work of a company specialist as audit evidence.

Report From the SEC’s “Small Business Capital Formation” Meeting

The SEC held its 38th annual “Small Business Forum” a couple weeks ago, along with a meeting of the “Small Business Capital Formation Committee” the day before. This Cooley blog summarizes some of the happenings – including a tentative timetable for revising the “accredited investor” definition and this background on the SEC’s proposal to change the definition of “accelerated filer”:

Director Hinman said the question was whether to pursue the SEC’s more nuanced approach or to just conform the non-accelerated filer definition with the SRC definition? Is an attestation worthwhile for companies with public floats over $75 million? According to Hinman, the reason the SEC proposed the narrowly tailored exception for low-revenue companies—“fine-tuning” as Hinman characterized it—was that the DERA analysis was more supportive of that approach: the DERA analysis showed that the risk of problems was greater for companies with revenues in excess of $100 million.

In any case, even without the auditor attestation, the auditors still need to review the quality of the controls as part of the audit, he noted, and the management is still required to perform a SOX 404(a) assessment of internal controls. And there are certainly costs associated with the attestation, especially “system upgrades” that are needed when the attestation process commences. A number of comments received on the proposal argued that, while an attestation can add to the company’s cost, it also saves funds by reducing the cost of capital. As structured, the proposal allows low-revenue companies to make that decision.

Chair Clayton observed that, first, it was important to emphasize that high-quality financial statements are the bedrock of our system. But, with more than a decade of experience with SOX 404(b) and over five years of experience with the JOBS Act and its exemption from 404(b) for EGCs, he suggested, the market is telling us something. With many EGCs now starting to “age out” of that exemption, is the market just “rubbing its hands” in anticipation of 404(b) attestations for these post-EGC companies? He wasn’t seeing it (and some of the company representatives later indicated that, although they were aging out of EGC status, their investors were not asking for 404(b) attestations). Was there a “Wild West” premium for non-accelerated filers?

Liz Dunshee