Several significant new accounting standards have refocused the SEC staff’s attention on public company “transition disclosures.” In remarks earlier this year, Wesley R. Bricker, then Deputy Chief Accountant of the SEC, emphasized the staff’s 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. (See this Doug’s Note.) Mr. Bricker encouraged management to communicate to investors:
- what is changing,
- why it is changing,
- how it is changing, and
- the timing of the change.
Then, at a September 22nd meeting of the FASB Emerging Issues Task Force, the SEC staff commented on Staff Accounting Bulletin Topic 11.M (SAB 74), which provides the staff’s view that companies should evaluate ASUs that have not yet been adopted to determine the appropriate disclosures about potential material effects of those ASUs when adopted. While the staff’s comment was specific to ASU Nos. 2014-09 (revenue recognition), 2016-02 (leases), and 2016-13 (financial instruments), the underlying concept should be applicable to all new or updated accounting standards. The staff stated that:
- If a company does not know or cannot reasonably estimate the impact, then the company should make a statement to that effect and consider additional qualitative disclosures to assist the reader in assessing the significance of the impact;
- Such additional qualitative disclosures should include a description of the effect of the accounting polices the company expects to apply and a comparison to the company’s current accounting policies;
- Companies should describe the status of its process to implement the new standard and the significant implementation matters yet to be addressed; and
- Such disclosures should be considered in both the MD&A and notes to financial statements, though the MD&A may contain cross references to the notes to the financial statements.
Finally, earlier this month at the 48th Annual Institute on Securities Regulation in New York, members of the SEC staff warned that companies should expect their transition disclosures in upcoming periodic reports to be reviewed and that inadequate disclosures will draw a staff comment. Companies that simply state “we are currently evaluating the effect on our financial position, results of operations and cash flows” are unlikely to be deemed compliant. They further noted that the company’s internal control over financial reporting must be structured to adequately cover such disclosures since they appear in the notes to the financial statements.
- 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.
- Disclose how the standards might reasonably be expected to affect the company’s corporate policies and practices, for example sales commissions, compensation plans, contracting approaches and tax liability.
- Update these considerations throughout the transition period as new determinations are made.
- As Mr. Bricker advised in his May 2016 speech, be prepared to engage with investors as you progress through the transition period regarding the company’s implementation plans and the possible impact of these often complex accounting standards.
- Expect SEC staff comments if you simply repeat the old “we are currently evaluating” boilerplate in your upcoming periodic reports.