This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On June 26th, 2024, the Financial Accounting Standards Board (FASB) held a board meeting to finalize their discussion on the proposed Accounting Standards Update (ASU), Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The board made two clarifications related to the disaggregation of relevant expense captions that contain purchases of inventory. According to the board, entities that disclose the “purchases of inventory” category will only have to include any amounts that are recognized in line with Topic 330, Inventory. These entities will also be required to exclude any purchases of inventory that are “recognized in (a) a business combination, (b) a joint venture formation, and (c) an initial consolidation of a variable interest entity that is not a business combination.” The FASB decided that entities can provide a written explanation for purchases or materials that fall under Topic 330, rather than fully disaggregated amounts for such items. In addition, FASB stated that entities are allowed to use different accounting estimating techniques to determine the exact amounts to disaggregate and disclose. The proposed ASU will also require that all disclosures are submitted during interim reporting, with the sole exception being an entity’s definition of selling expenses. The proposed ASU is scheduled to become effective for fiscal years that begin after December 15th, 2026, and required for interim reporting periods in fiscal years that begin after December 15th, 2027.
Securities and Exchange Commission
On June 27th, the Securities and Exchange Commission’s Office of the Investor Advocate delivered its Report to Congress on the Office’s objectives for fiscal year 2025. The report details the Investor Advocate’s priorities for the upcoming fiscal year, which include: assisting investors victimized by fraud; enhancing Ombuds services to resolve questions and complaints about the SEC and self-regulatory organizations (SROs); evaluating the impact of technological changes on broker and adviser standards of conduct; exploring ways to increase transparency in private markets; encouraging innovative and effective disclosure through investor testing of existing and proposed disclosures; and increasing investor engagement and input on matters of significance to retail investors.
The Office of the Investor Advocate is an independent office established by Congress to assist retail investors in resolving problems with the Commission and SROs, identify areas where investors would benefit from changes in SEC and SRO rules and regulations, identify investor problems with financial service providers and investment products, analyze the potential impact on investors of proposed regulations and rules of the SEC and SROs, and propose regulatory or legislative changes to the Commission and to Congress that might mitigate investor problems and promote investor interests. The office claims that this report reaffirms its commitment to identifying and addressing the unique challenges faced by retail investors, as well as advocating for transparency, mitigating fraud schemes, and supporting the interests of all investors.
American Institute of Certified Public Accountants
The American Institute of CPAs (AICPA) recently updated its practice aid on the accounting for and auditing of digital assets. This update includes new guidance on auditing the valuation of digital assets and auditing procedures regarding their existence, rights, and obligations. The practice aid, titled “Accounting for and Auditing of Digital Assets”, is intended to provide nonauthoritative guidance under GAAP for nongovernmental entities and GAAS. It is designed to be most useful to practitioners who prepare financial statements and auditors with a fundamental knowledge of blockchain technology.
The updates to the practice aid include Chapter 5, which contains considerations for auditing the existence, rights, and obligations of digital assets, and Chapter 6, which contains considerations for auditing the valuation of digital assets. An updated appendix B has also been added, which includes an auditing Q&A specific to the SEC’s Staff Accounting Bulletin No. 121 (SAB No. 121). This Q&A expresses the staff’s views on how an entity that has an obligation to safeguard digital assets for another party should account for that obligation. The practice aid has switched from a narrative structure to a Q&A format to provide more focused guidance on key topics. It was also updated to align with two Statements on Auditing Standards that recently became effective, SAS No. 143 and SAS No. 145.
Public Company Accounting Oversight Board
The Public Company Accounting Oversight Board (PCAOB) recently adopted a significant change to Rule 3502, which has been in place for nearly two decades. This rule governs the liability of an associated person of a registered public accounting firm who contributes to that firm’s violations of the laws, rules, and standards that the PCAOB enforces. The amendment tightens the standard of liability from “reckless” to “negligent” for an associated person who contributes to a firm’s violations. This means that if an associated person’s negligence directly and substantially contributes to the firm’s violations, the PCAOB now has the tools to hold them personally accountable.
The update to Rule 3502 aligns the rule with the same standard of reasonable care auditors are required to exercise anytime they are executing professional duties. Previously, Rule 3502 allowed the PCAOB to hold associated persons liable only when they contributed “recklessly” to a registered firm’s violation, even when the firm committed the violation negligently. The updated rule maintains Rule 3502’s requirement that an associated person must have contributed to the firm’s violation both “directly and substantially” to be held liable.
In addition to the amendment to Rule 3502, the PCAOB also approved amendments to two auditing standards: AS 1105 (Audit Evidence) and AS 2301 (The Auditor’s Responses to the Risks of Material Misstatement). These amendments address procedures involving technology-assisted analysis of information in electronic form. The aim is to provide detail and clarity that will reduce the risk that auditors using technology-assisted analysis might issue an opinion without obtaining sufficient appropriate audit evidence. These actions taken by the PCAOB reflect their commitment to updating auditing standards and procedures, tightening liability standards, and keeping pace with technological advancements.