This Financial Reporting Update highlights key developments and issues that are relevant to finance and accounting personnel.
Financial Accounting Standards Board
On November 22nd, the Financial Accounting Standards Board (FASB) issued a proposed new chapter of its Conceptual Framework related to the recognition of an item in financial statements. The proposed chapter would become Chapter 5 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. This chapter sets forth recognition and derecognition criteria as well as guidance on when items should be incorporated into and removed from financial statements. Stakeholders are asked to provide input on three proposed recognition criteria an item should meet to be recognized in financial statements:
- Definitions – the item meets the definition of an element of financial statements.
- Measurability – the item is measurable and has a relevant measurement attribute; and
- Faithful Representation – the item can be depicted and measured with faithful representation.
The Board is also seeking input on whether derecognition should occur when an item no longer meets any of the recognition criteria. The deadline to submit comments is February 21, 2023.
Securities and Exchange Commission
On October 26th, the Securities and Exchange Commission (SEC) proposed a new rule under the Investment Advisors Act of 1940 to prohibit registered investment advisors from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers. The proposal would require advisers to satisfy specific due diligence elements before retaining a service provider that will perform certain advisory services or functions, and to subsequently carry out periodic monitoring of the service provider’s performance. The proposal would also require advisers to monitor all third-party recordkeepers and obtain reasonable assurances that the recordkeepers will meet certain standards. Finally, the proposal requires advisers to maintain books and records related to the new rule’s oversight obligations and to report census-type information about the service providers covered under the rule. The proposal will remain open for comment for 60 days after publication on SEC.gov or 30 days after publication in the Federal Register, whichever period is longer.
American Institute of Certified Public Accountants
On October 31st, the American Institute of Certified Public Accountants (AICPA) issued an Exposure Draft titled, Proposed Criteria for a Description of the Content of Quality Control Materials (QCM) and the Content of QCM Related to the Relevant Standards and Interpretive Guidance. The proposed criteria will be used to evaluate QCM content in a new assertion-based examination to be performed under the Statements on Standards for Attestation Engagements (SSAEs). A QCM provider may engage a practitioner to examine its QCM content (examination) as it relates to the relevant standards and interpretive guidance. The examination will help CPA firms that use QCM, and their peer reviewers, address the risks associated with the use of QCM and monitor their practices. The full Exposure Draft can be found here.
Public Company Accounting Oversight Board
On November 30th, the Public Company Accounting Oversight Board (PCAOB) announced the formation of the Technology Innovation Alliance (TIA) Working Group, a group of external professionals with expertise in emerging technologies, including technologies used by financial statement auditors and preparers. The TIA Working Group will serve two main purposes:
- Advise the Board on the use of emerging technologies by auditors and preparers relevant to audits and their potential impact on audit quality; and
- Make recommendations to the Board regarding how the Board’s oversight programs might address the use of emerging technologies.
According to PCAOB chair Erica Y. Williams, “It is critical for the PCAOB to remain current on technological advancements and their role in enhancing audit quality.”