Spring is here, and that means one thing for financial reporting: the annual financial reporting conference at Baruch College in New York, where SEC chief accountant Wes Bricker shows up and tells us what issues are on his team’s mind as they read all your SEC filings.
This year was no exception. The conference happened last week, where Bricker opened with the usual, “Standard-setting is not, and cannot become, focused on maintaining the status quo in the face of evolving needs.” (Like a chief accountant would ever open a speech without a line like that.)
Then Bricker got into the good stuff: recent changes that he believes will, ultimately, strengthen the quality of financial reporting.
Here come the new standards. The new accounting standard for revenue recognition went into effect at the start of this year — to be followed by the new standard for lease expenses next year; and the new standard for credit losses in 2020. That’s a lot of change for financial reporting functions and the internal controls companies create to assure accurate reporting.
Radical Compliance has done extensive work over the last year with Calcbench, a financial data firm, to study what companies have been saying about their efforts to implement the new revenue standard and how it might transform revenue reporting for at least some firms (software firms in particular). Check out Calcbench’s blog for deeper coverage on these topics.
Bricker diplomatically said, “Across companies this has been a substantial, though manageable effort, which is a testament to the level of coordinated planning for the implementation… Stakeholders must also continue their focus on successful implementation of the new leases standards for next year, and implementation of the new credit losses standard after that. I am confident this period of accounting change will leave our financial reporting system stronger.”
Consequences of tax reform. Bricker also touched on the disclosures companies must make this year about the tax reform act Congress adopted last year. In this first year, companies are reporting some truly weird-looking reconciliations between statutory and effective tax rates, thanks to revaluation of tax-deferred assets and liabilities plus this year’s deemed-repatriation tax.
That’s led to effective tax rates sometimes well above the statutory rate of 35 percent, and others well below that rate — like, negative 100 percent or more. Calcbench has some specific examples.
Our question here is more about the second year of financial reporting under tax reform, in 2019. If these estimates in Year 1 later prove to be wildly off, because your ICFR or disclosure controls were less effective than you thought, what will that mean for Year 2? We look forward to Bricker addressing that in next year’s Baruch speech.
Non-GAAP metrics, plus market risks. It wouldn’t be a financial reporting conference without a regulator frowning over non-GAAP accounting metrics, so Bricker hit that note, too.
When a company uses a non-GAAP metric to gauge financial performance (“supplemental scorecards,” Bricker called them) audit committees should understand why and how those scorecards are being used. The audit committee’s involvement with management to review the preparation and integrity of the metrics is a good indicator of a strong compliance culture, Bricker said.
Bricker also gave a shout to disclosure of market risks — especially disclosures about changing macroeconomic conditions, now that the Fed is raising interest rates again. Rising rates can have a dramatic effect on some firm’s balance sheets or cash flows, so what companies say about risks like that can carry much weight with investors concerned about liquidity.
Again with a regulator’s gift for phrasing, Bricker said, “I encourage those involved in the disclosure preparation and oversight process to be attentive to disclosures regarding changes in market risks.”
That’s what is on the mind of Bricker and his team as they read your filings this year. Corporate finance and internal control executives should plan accordingly if you want to avoid any comment letters.