This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On July 12th, 2024, the Financial Accounting Standards Board (FASB) released a statement regarding the newest chapter of their Conceptual Framework. The Conceptual Framework is a collection of various interrelated objectives and fundamentals that the FASB utilizes to create, deliberate upon, and set standards. The new chapter, which is Chapter 6 of Statement of Financial Accounting Concepts No. 8, titled Conceptual Framework for Financial Reporting, specifically pertains to the measurement of items recognized in financial statements and provides guidance around the entry price system and the exit price system being used when measuring the value of an asset or a liability. The chapter also provides insight into the necessary considerations when deciding whether to use the entry or exit pricing system. – the entry price system is used when accounting for the value of an asset or liability at its original transaction price, and the exit price system is used to determine the fair value of an asset or liability based on current market conditions. According to the FASB, the chapter is in line with existing framework chapters and, “provides the Board with a framework for developing standards that meet the objective of financial reporting and enhance the understandability of information for existing and potential investors, lenders, donors, and other resource providers of a reporting entity.” With the release of this chapter, the FASB has completed the Conceptual Framework that will be used for the foreseeable future.
On July 24th, 2024, the FASB proposed an Accounting Standards Update (ASU) related to the scope of ASC 606, Revenue From Contracts with Customers and 815, Derivatives and Hedging. The changes to ASC 606 were proposed to clarify any variations in treatment when accounting for share-based payments that are used in consideration of the transfer of goods or services. This update would provide investors with more comparable information while simultaneously reducing the cost and complexity of the accounting process related to share-based payments. The proposed ASU would have a greater impact on ASC 815, particularly concerning the application of derivative accounting to contracts with features tied to the operations or activities of one of the contract’s parties. The FASB’s goal is to enhance the depiction of the economics of derivative contracts, increase the standardization of the accounting practices surrounding derivative contracts, and to reduce the overall complexity and cost of determining if a particular contract is a derivative contract. Comments on the proposed ASU are due to the FASB by October 21, 2024, after which the board will review the feedback received and revise the ASU as it deems necessary.
Securities and Exchange Commission
The Securities and Exchange Commission (SEC) has recently announced the formation of the Interagency Securities Council (ISC). This new council is designed to foster collaboration and information sharing among federal, state, and local agencies to combat fraud and scams. The ISC, which is expected to convene quarterly, has launched with over 100 different departments and agencies represented, which includes federal agencies, state offices of attorneys general and state police, and local police departments and sheriff’s offices. The ISC serves as a platform for law enforcement and regulatory agencies to connect and exchange information. Gurbir S. Grewal, the chair of the ISC and director of the SEC’s Division of Enforcement, emphasized the council’s role in enabling front-line investigators to stay informed about emerging threats and patterns related to securities fraud, thereby enhancing protection for communities. Through case studies and discussions, the ISC aims to provide comprehensive understanding of securities law violations, and members will benefit from insights shared by investigators who are actively conducting and supervising investigations. The initiative is also seen as an opportunity for agencies that deal less frequently with securities law to engage with the broader law enforcement community and strengthen their approach to these types of legal violations. This announcement, along with numerous recent rulings and charges brought by the agency against numerous companies, firms, and individuals, furthers the SEC’s commitment to cracking down on securities fraud.
American Institute of Certified Public Accountants
The American Institute of CPAs (AICPA) has submitted comments to the IRS and the Treasury Department on proposed regulations regarding reporting transactions with foreign trusts, receiving large foreign gifts, and dealing with loans and property from foreign trusts. The AICPA’s recommendations aim to simplify filing for taxpayers and practitioners, reduce the administrative burden on the IRS, and ensure consistency with AIPCA’s prior comments on foreign trust and foreign gift reporting issues. Comments provided by the AICPA last year argue that the IRS should create a separate form for reporting large foreign gifts and inheritances along with instructions that clearly outline the requirements to the public; they also requested to testify at the upcoming IRS hearing on the proposed regulations. In response to stakeholder feedback, which helps shape and influence IRS policies, procedures, and regulations, the IRS has assembled a working group to evaluate its penalty processes related to Forms 3520 and 3520-A, which are used for reporting transactions with foreign trusts and large foreign gifts. The goal is to identify opportunities for improvement, reduce burden, and incentivize voluntary compliance. The Treasury Department and the IRS have released proposed regulations addressing these concerns, and further details on the working group’s recommendations are expected in the coming months.
Public Company Accounting Oversight Board
The Public Company Accounting Oversight Board (PCAOB) recently issued its annual report on broker-dealer audits, which revealed that at least one deficiency was identified in 70% of the 103 audit engagements reviewed in 2023. In this instance, a deficiency is when the tax liability or amount declared to the IRS by an individual is lower than the sum reported by independent entities. This high deficiency rate raises significant concerns about the quality and effectiveness of broker-dealer audits, and the PCAOB’s report highlights several areas where improvements are needed, including professional skepticism, engagement quality reviews, and low-ball fees. As regulatory scrutiny continues, auditors must prioritize enhancing their practices to maintain the integrity of broker-dealer audits. Maintaining independence is also crucial for auditors to objectively assess a broker-dealer’s financial statements. The report emphasizes that auditors must be vigilant in identifying and mitigating any threats to their independence, ensuring that their judgments remain unbiased and free from conflicts of interest. The board discovered that the largest number of deficiencies were in auditor communications, auditors’ reports on the financial statements and supplemental information, auditor independence, and auditor documentation (which was the area with the most deficiencies). Firms and practitioners performing broker-dealer audits will be under greater scrutiny regarding their application of general auditing standards to minimize compliance failures.