Featured Podcast
Our newest podcast this month features Jimmy Thompson, Audit Partner, as he discusses one of the FASB updates featured in this newsletter, Topic 230, which pertains to amendments regarding the restricted cash on the statement of cash flows. Jimmy also provides information on who this update affects and when it will go into effect. Please
see below for the full summary of the Topic 230 update.
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Missed Our January Recap of 2016 and
Look Ahead to 2017?
Visit our
website for the January 2017 newsletter, which highlights the
FASB updates that went into effect in 2016 as well as the
updates
you can expect to
become effective in 2017.
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June 2017
We are pleased to release MaloneBailey's June 2017 newsletter highlighting recent SEC and FASB updates and proposals. Please note that the updates provided in this newsletter are not a comprehensive list. We have selected the updates and proposals that we believe may be of relevance to you. Our goal is to provide you with resources to keep you informed of the ever-changing rules and regulations related to regulatory and accounting matters.
We encourage you to visit the SEC and FASB websites for more information as well as a complete list of updated rules, regulations and proposals. We invite you to contact us should you have any questions about the information provided in this issue. You can find a list of MaloneBailey partners and their contact information at the end of this newsletter.
For easy navigation, please refer to the 'In This Issue' section, which contains a hyperlinked table of contents of rule regulation proposals and updates that may affect you. We invite you to visit our website to review archived versions of this newsletter containing past SEC and FASB updates and proposals.
The MaloneBailey Team
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In This Issue
SEC Updates & Proposals
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 FASB Accounting Standards Update No. 2016-18, Statement of Cash Flows (230): Restricted Cash
Click on the video below to hear Jimmy Thompson, Audit Partner, explain Topic 230, as well as who is affected by this update and when it will go into effect.
Summary -
The FASB has issued Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows. The amendments address diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows.
The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented.
For more information, click here.
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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Summary -
The SEC staff has issued a Small Entity Compliance Guide, Intrastate Offering Exemptions. This guide summarizes and explains the SEC's final rules issued to modernize how issuers can raise money to fund their businesses through intrastate offerings while maintaining investor protections.
The final rules were issued in October 2016 and amended Securities Act Rule 147 to modernize the safe harbor under Section 3(a)(11) so issuers may continue to use state law exemptions that are conditioned upon compliance with both Section 3(a)(11) and Rule 147. The final rules also established a new intrastate offering exemption, Securities Act Rule 147A, that further facilitates intrastate offerings by allowing offers to be accessible to out-of-state residents and making the exemption available to issuers that are incorporated or organized out-of-state.
For more information, click here.
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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Summary -
SEC Acting Chairman Michael Piwowar recently discussed the important role international securities regulators play in "protecting investors, maintaining fair and orderly markets, and facilitating capital formation." At the SEC, Mr. Piwowar noted that disclosure is "our most effective tool - it is the sunshine that grows our markets. Perfect disclosure would lead to a perfect allocation of capital to the most efficient industry and services. While we will never achieve perfection, our primary role is to promote the disclosure of material information. Disclosure protects investors and it lowers the cost of capital."
Other topics discussed by Chair Piwowar included:
- Encouraging the use of financial technology and managing its risks;
- Appropriate securities enforcement efforts; and
- International cooperation.
For more information, click here.
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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Summary -
SEC Chief Accountant Wesley R. Bricker recently spoke about advancing the role and effectiveness of audit committees in financial reporting, noting that audit committees "play a critical role in contributing to financial statement credibility through their oversight and resulting impact on the integrity of a company's culture and internal control over financial reporting ("ICFR"), the quality of financial reporting, and the quality of audits performed on behalf of investors. The importance of the audit committees' work cannot be overstated."
Highlights of Mr. Bricker's remarks included:
- Fulfilling its oversight responsibilities places the audit committee at the center of the relationship between management of a public company and its independent auditor. Investors look to audit committees with high expectations to establish and maintain the appropriate tone, capacity, and competence to oversee the quality of the financial reporting system.
- Audit committees should understand the businesses they serve and the impact of the operating environment on corporate strategies. This understanding establishes a frame of reference in which the audit committee considers the scope of its charter, its agendas, education needs, advisory needs, and ultimately the exercise of its business judgment in assessing the information about the accounting and financial reporting.
- One size doesn't fit all when it comes to audit committees. Within broad parameters, each audit committee develops its charter and agenda. The committee's job is one of oversight and monitoring, and in carrying out this job, it acts in reliance on senior management, the external auditor, and any advisors that the committee might engage.
- Periodic examination of the audit committee's capacity, which supports any committee's ability to perform its responsibilities effectively, is necessary. While audit committees may be equipped to play a role in overseeing risks that extend beyond financial reporting, such as cybersecurity and portions of enterprise risk management, I believe it is important for audit committees to not lose focus on their core roles and responsibilities.
- The control environment influences the control consciousness of its people. It is the foundation for effective ICFR, providing discipline and structure. A company's control consciousness is significantly influenced by those on the board and audit committee.
- A strong control environment is especially critical for company management and personnel as accounting judgments are increasingly required to be formed by many levels of individuals in the organization and disclosed in the financial statements to meet the objectives of the new GAAP standards. A strong control environment also supports the audit committee's work.
- It is important for both audit committees and management to perform assessments on the adequacy of the control environment, including tone at the top. One way audit committees can focus on tone and culture is by working with management to obtain a clear and common understanding of what tone means, why tone is important, and what mechanisms are in place to assess the adequacy of control environment, including across any relevant divisions and geographies.
- Over the next several years, updating and maintaining ICFR will be particularly important as companies work through the implementation of the significant new accounting standards.
- Audit committees are well positioned to exercise healthy oversight by understanding management's process and controls to calculate the non-GAAP and other key operational measures. As part of considering management's disclosure controls and procedures it is important for audit committees to understand corporate policies in this area and if such a policy does not exist to understand the reasons why. It can also be useful to understand who is responsible for administering the policy - how many times have they approved changes in reporting, why, and should the change be communicated to investors through disclosure.
- Audit committees should not underestimate the importance of their role overseeing the external auditor. Auditors are accountable to the company's shareholders, through the board of directors and its audit committee, not to management.
- While strides are being made by audit committees to help investors better understand and evaluate audit committee performance, I encourage audit committee members of listed companies to continue to consider reviewing their audit committee disclosures and consider whether providing additional insight into how the audit committee executes its responsibilities would make the disclosures more effective in communicating with investors.
For more information, click here.
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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SEC Issues Staff Speech, Remarks Before the Annual Life Sciences Accounting & Reporting Congress:" Advancing Effective Internal Control and Credible Financial Reporting" by Wesley R. Bricker, Chief Accountant, Office of the Chief Accountant
Summary -
SEC Chief Accountant Wesley R. Bricker recently spoke on advancing effective internal controls and credible financial reporting as it relates to the new revenue recognition standard. Mr. Bricker provided his thoughts on implementation of the new revenue recognition standard, including thoughts on transition disclosures and potential changes in internal controls.
Highlights of Mr. Bricker's remarks regarding implementation of the new revenue standard included:
- Timely implementation of the new revenue standard is important. The standard, including the disclosures in accordance with the standard, is an important step forward in financial reporting, both domestic and foreign, and when implemented, it is designed to enhance the comparability of companies' reported revenues.
- In the encouraging column, some public companies have indicated that they plan to apply the new revenue standard in preparing their first quarter 2017 financial statements, as permitted by the transition guidance in the new standard. In the worrisome column, however, some companies need to make significant progress this year in their implementations. In a survey of public companies released in October 2016, eight percent of respondents at that time had not started an initial assessment of the new revenue recognition standard, while an overwhelming majority of the others were still assessing the impact.
- Particularly for companies where revenue recognition implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information. Successful implementation requires the engagement of senior management throughout an organization.
- A company must support its presentation, whether gross or net, according to the core principles in the standard, so that investors can understand the nature of the revenue transaction. The new revenue standard does not eliminate all of the judgment required in this area of financial reporting.
- Today's revenue recognition guidance is primarily a risk and rewards based model, while the new standard is focused on control. While registrants may determine that, as a result of applying the new guidance, the presentation of revenue is the same as under today's revenue guidance, the evaluation will need to be based on the new standard, which has new concepts.
- Additional judgments may be needed in applying the new standard, and in some cases those judgments may necessitate changes to internal control over financial reporting.
- Regarding transition disclosures, if a company does not know, or cannot reasonably estimate the expected financial statement impact, that fact should be disclosed. But, in these situations, the SEC staff expects a qualitative description of the effect of the new accounting policies, and a comparison to the company's current accounting to aid investors' understanding of the anticipated impact. It should also disclose the status of its implementation process and significant implementation matters yet to be addressed.
- From a preliminary look at recent Forms 10-K and 10-Q filings, a number of companies have enhanced their transition disclosures, although for others there is still more work to do. For example, some companies indicate that the impact of the new revenue standard is not expected to be material. The changes in the new standard will impact all companies. Even if the extent of change for a particular company is slight, the related disclosures to describe revenue streams may not be. The basis of any statement that the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation, and disclosure for revenue transactions.
Mr. Bricker also discussed potential impacts to internal controls as a result of the new revenue recognition standard and noted:
- The new revenue standard may require changes to relevant business processes and the control activities within them. However, it might also require a refresh of the other components of internal control over financial reporting, including professional competence. Expectations related to the control environment and the other components of ICFR are reflected in the principles of the COSO (2013) framework.
- An aspect of the COSO framework emphasizes the importance of being able to attract, develop and retain competent individuals in alignment with the financial reporting objectives. All companies must have appropriate resources to evaluate revenue arrangements and properly apply the principles of the new standard. While those resource needs might be satisfied, for example, through a designated accounting policy function or through a relationship with a qualified service provider, having resources with sufficient training and competence is fundamental to the effectiveness of a company's overall control environment. With a general movement towards more principles-based accounting frameworks, companies need to assess and continually reassess the impact to their existing accounting and financial reporting competencies and make adjustments as appropriate to their training, retention, and recruitment programs.
- The new revenue standard will require judgments. This highlights the importance of another element of a company's control environment, setting the right "tone at the top" and expectations for responsible conduct throughout the organization. Appropriate tone at the top is the foundation for the consistent application of the sound judgments required by the new standard. Management should consider whether the existing controls support the formation and enforcement of sound judgments or whether changes are necessary.
- Companies may also need to consider any changes they may make to their established business practices as they transition to the new standard. For example, companies may amend or tailor their contracts with customers. Application of the new standard, including preparation of the required disclosures, may also require gathering and analyzing new information and sharing such information with relevant parties. Management should consider whether its reporting systems are designed to accurately capture the effects of changes to customer contracts and other information required for compliance with the new standard and ensure the integrity of such information throughout the financial reporting process. Therefore, it will be important to take a fresh look at the information and communication component of ICFR and the related controls over a company's information technology.
- It is important to keep in mind that the effectiveness of any changes to internal controls are predicated on a comprehensive and timely assessment of risks that may arise as a result of applying the standard. Such risks may exist at various levels and in different areas of a company and their appropriate identification and assessment may require involvement of management and employees from both the accounting and financial reporting function and other functional areas of a company.
For more information, click here.
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.
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