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Accounting Standard Transition Disclosures–A Reminder from the SEC

    Client Alerts
  • May 09, 2016

New accounting standards appear with metronomic regularity. Some are minor and technical, while others clearly will have major consequences once they take effect. Recent additions include new standards for revenue recognition, lease recognition and financial instrument classification and measurement. And according to Wesley R. Bricker, Deputy Chief Accountant of the SEC, in his recent remarks before the 2016 Baruch College Financial Reporting Conference, the FASB will soon issue a new standard for credit impairment of financial instruments.

Most new accounting standards include a “transition period,” meaning the time between FASB adoption and their effective date. Usually, it is something like “effective for annual periods beginning after December 15, [year] and interim periods within that period.” Sometimes early adoption is permitted, and sometimes not.

As Mr. Bricker points out, the SEC staff has long taken the position that companies should disclose the impact that a recently issued accounting standard will have on its financial statements when that standard is ultimately adopted. Almost invariably, companies follow the practice of stating that “we are currently evaluating the effect on our financial position, results of operations and cash flows.” And sometimes that language stays in the company’s SEC filings right up until the period that the standard is adopted and reflected in the company’s financial statements.

Mr. Bricker reminds us in his speech, however, that boilerplate disclosure may not get the job done:

“Without adequate transition disclosures, investors may not be prepared to fully understand changes in the company’s financial performance from one period to the next and the impact of adopting a new accounting standard. Investors should expect the level of disclosures to increase as companies make further progress in their implementation plans for adopting the new standard and, when necessary, engage with company management to understand these disclosures.”

He also cited an example of a company whose failure to provide adequate transition disclosures so surprised the market once the new standard was adopted that trading had to be halted to give investors time to digest the news.

Mr. Bricker encourages management to understand and to communicate to investors:

  • what is changing,
  • why it is changing,
  • how it is changing, and
  • the timing of the change.

Disclosure should cover the changes to be made to the company’s accounting policies and the potential impact of those changes on financial results and trends. Also, “[h]ow will the standards affect the company’s corporate policies and practices, such as sales commissions, compensation plans and contracting approaches.” And is a material tax impact contemplated? These and other questions should be considered throughout the transition period and updated as new determinations are made.