This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On March 29th, 2024, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2024-02, Codification Improvements – Amendments to Remove References to the Concepts Statements. This ASU removes references to FASB Concept Statements, which are nonauthoritative guidance issued by the FASB to help users understand the objectives, concepts, and development of Generally Accepted Accounting Principles (GAAP), from the Accounting Standards Codification, which is the sole authoritative guidance for GAAP. ASU 2024-02, which is applicable to all entities that report under GAAP, modernizes the Codification by removing 16 specific references to the Concepts Statements across a range of topics within the Codification. The FASB anticipates that these updates will not substantially impact existing accounting practices because the amendments, in most instances, eliminate superfluous references to Concept Statements that are not necessary for comprehending or implementing the guidance. Nevertheless, the FASB has offered transition guidance in case the application of the updated guidance leads to accounting modifications for certain entities.
The modifications in ASU 2024-02 will be effective for public business entities for fiscal years commencing after December 15, 2024. For all other entities, the modifications will take effect for fiscal years beginning after December 15, 2025. All entities have permission to adopt the revised guidance early for any fiscal year or interim period for which financial statements have not yet been issued or made available for issuance. If an entity applies the modifications in an interim period, it must do so from the beginning of the fiscal year that encompasses that interim period. An entity can choose to adopt ASU 2024-02 either on a prospective basis to all new transactions recognized on or after the date that the entity first applies the modifications, or retrospectively to the beginning of the earliest comparative period presented in which the modifications were first applied.
The FASB board is scheduled to meet on May 8th to discuss several relevant topics, including the proposed ASU on disaggregation of income statement expenses, post-implementation feedback for ASC 606, Revenue from Contracts with Customers, and a proposed chapter in the Concept Statements on Conceptual Framework for Measurement.
Securities and Exchange Commission
On April 4th, 2024, the Securities and Exchange Commission stated that they would be postponing their execution of the new climate disclosure rule that was adopted on March 6th, 2024. That rule would require public companies to disclose climate risks and emissions figures to investors as part of regulatory financial reporting. The SEC made this decision as an appeals court ordered a “temporary stay” that blocked the rule from being enforced. The SEC is choosing to defend the rule in court, as they believe that the rule is within the limits of their power, stating in part that they would like to “focus on defending the rule’s merits against legal challenges.”
This is not the first time the climate disclosure rule has faced scrutiny. According to the Wall Street Journal Article found here, the rule has faced fierce opposition since it’s proposal in March 2022. Critics of the rule stated that the original requirements to report the emissions from a company’s supply chain were excessive, which caused the SEC to remove the Scope 3 emissions reporting requirements from its proposal. Even after the rule was finalized in March 2024, they were sued by multiple states, various business groups, environmental advocates, and the U.S. Chamber of Commerce. When speaking about the rule, the executive vice president of the U.S Chamber of Commerce, Tom Quaadman, stated that, “These changes will only create more confusion and undermine investor confidence in our public company system.” The rules are not going into effect until 2026 if the temporary stay is lifted, but the future of the rule is now uncertain as the legal battle has just begun.
American Institute of Certified Public Accountants
On April 3rd, 2024, the AICPA and 54 state CPA societies wrote to the director of the Financial Crimes Enforcement Network (FinCEN), as well as Treasury Secretary Janet Yellen, requesting that the “enforcement of beneficial ownership information (BOI) reporting requirements be suspended until one year after court cases have been resolved.” BOI reporting was introduced as part of the Corporate Transparency Act (“CTA”) in 2021, which requires companies to disclose information about individuals that either directly or indirectly own or control a company in an effort to identify “bad actors” who may be hiding benefits and ill-gotten gains through shell companies and complex ownership structures (more information on BOI can be found on the FinCEN website here). BOI reporting went into effect on January 1, 2024.
However, the CTA has been controversial and has left entities confused on what they are required to report. Several lawsuits were brought by a variety of organizations, including the National Small Business Association (NSBA) representing 65,000 members, and the law has subsequently been ruled unconstitutional. The AICPA and the CPA societies stated that they “are still concerned that small businesses will be caught off guard with the new filing requirement and failure to file could result in steep civil and criminal penalties.” The penalties that come along with BOI reporting requirements are substantial – willful violations face fines of up to $591 a day, up to $10,000, and two years in prison. The AICPA and other organizations have committed to ensuring that their voices are heard regarding their concern around this requirement and will continue to lobby Congress regarding the issue. Until these lawsuits and objections are settled, BOI reporting will remain a topic of conversation among business leaders.
Public Company Accounting Oversight Board
On April 9th, 2024, the PCAOB issued proposals on public reporting of standardized firm and engagement metrics and a PCAOB framework for gathering information from audit firms. The first proposal presents a framework of standardized metrics at both the organizational and engagement levels. These metrics aim to offer a beneficial dataset for investors and other stakeholders, enabling them to perform effective comparative analyses. The metrics include various elements such as the involvement of partners and managers, workload, audit resources, the experience and industry knowledge of audit personnel, retention and tenure, audit hours and risk areas (only at the engagement level), allocation of audit hours, quality performance ratings and compensation (only at the firm level), internal monitoring by audit firms, and restatement history (only at the firm level). The proposal enforces an annual reporting of these organizational-level metrics through a new Form FM, which is an obligation applicable to firms that act as the primary auditor for at least one accelerated filer or large accelerated filer. For audits of accelerated filers and large accelerated filers, engagement-level metrics would be reported via a revised Form AP, proposed to be renamed as “Audit Participants and Metrics.”
The second proposal seeks to bolster the reporting duties on the PCAOB’s public Annual Report Form (Form 2) and the Special Reporting Form (Form 3) in several important areas. It mandates all registered firms to disclose additional fee information, as well as requiring the largest firms to confidentially submit their yearly financial statements to the PCAOB. It also necessitates firms to provide more insights into their leadership, legal structure, ownership, and other governance factors, including any changes in organizational form. The proposal also calls for a comprehensive description of any network arrangements a registered firm is part of, encompassing the network’s legal and ownership structure, financial obligations, information-sharing agreements, and governing entities. It shortens the reporting timeframe on the Special Reporting Form from 30 days to 14 days and introduces a new mandate for confidential reporting of events significant to a firm’s organization, operations, liquidity, financial resources, or audit services. In addition, the proposal enforces confidential reporting of substantial cybersecurity incidents within five business days and periodic public reporting of the firm’s strategies and procedures for managing cybersecurity risks. Lastly, the proposal includes amendments to back a provision under the QC 1000 proposal, which would require firms to report their revised quality control policies and procedures if QC 1000 is adopted.