Public Policy & Technical Alert | January 2020

As part of the Center for Audit Quality’s (CAQ) ongoing effort to keep members and stakeholders informed on significant public policy and accounting matters, we are pleased to offer the Public Policy and Technical Alert (PPTA). Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession. Please note that the PPTA is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages member firms to refer to the rules, standards, guidance, and other resources in their entirety at the hyperlinks provided below. All entities should carefully evaluate which requirements apply to their respective organizations.

In This Issue:

SEC

• SEC proposes amendments to modernize and enhance financial disclosures and issues MD&A metrics guidance
• Commissioner Jackson announces departure
• SEC Division of Corporation Finance updates C&DIs
• OCIE publishes observations on cybersecurity and resiliency practices

FASB

• FASB clarifies the accounting for equity securities

International

• IASB publishes an overview of consultations to be expected in 2020
• Bruce Mackenzie to join the IASB
• IESBA proposes revisions to the International Code for Ethics
• IESBA revises Part 4B of the International Code of Ethics
• FRC launches consultation on revised auditing standard for identifying and assessing risks of material misstatement
• FRC publishes Annual Review of the UK Corporate Governance Code
• IFIAR observes decrease in audits with inspection findings since 2015

AICPA

• AICPA seeks feedback on insurance entities working drafts
• AICPA issues guidance on Global Investment Performance Standards
• AICPA issues criteria for describing a set of data and evaluating its integrity

Other Developments

• World Economic Forum’s IBC issues draft sustainability standards
• Accounting bodies call for improved UN Sustainable Development Goals disclosures
• BlackRock CEO Larry Fink’s 2020 letter to CEOs emphasizes sustainability-related risks

CAQ Updates

• CAQ posts highlights of September 2019 SEC Regulations Committee
• CAQ publishes discussion document on monitoring inflation in certain countries
• 2019 Review highlights CAQ impact

Upcoming Events

SEC

SEC proposes amendments to modernize and enhance financial disclosures and issues MD&A metrics guidance

The SEC issued proposed amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K.

The proposed amendments would eliminate Item 301 (Selected Financial Data) and Item 302 (Supplementary Financial Information) and amend Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations). The proposed amendments to Item 303 include:

• Adding a new Item 303(a), Objective, to state the principal objectives of MD&A;
• Replacing Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A;
• Eliminating Item 303(a)(5), Tabular disclosure of contractual obligations, given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A;
• Adding a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing SEC guidance in this area; and
• Revising the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.

The SEC also issued guidance on metrics in MD&A. The guidance provides that, where companies disclose metrics, they should consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also reminds companies of the requirements in Securities Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and that companies should consider these requirements when disclosing metrics.

The deadline for submitting comments will be 60 days following publication in the Federal Register.

Commissioner Jackson announces departure

Commissioner Robert Jackson announced that he will leave the SEC on February 14 to return to the New York University School of Law, where he is on faculty leave. Jackson joined the SEC as a commissioner in January 2018; his term expired in June 2019, but commissioners can continue to serve for 18 months after their term expires and before their replacement is confirmed by the Senate.

SEC Division of Corporation Finance updates C&DIs

The SEC’s Division of Corporate Finance updated the following Compliance and Disclosure Interpretations (C&DIs):

• Regulation S-K
  • Section 110. Item 303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
    • New Questions 110.02–110.4

OCIE publishes observations on cybersecurity and resiliency practices

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued examination observations related to cybersecurity and operational resiliency practices taken by market participants.

The observations highlight certain approaches taken by market participants in the areas of governance and risk management, access rights and controls, data loss prevention, mobile security, incident response and resiliency, vendor management, and training and awareness. The observations highlight specific examples of cybersecurity and operational resiliency practices and controls that organizations have taken to potentially safeguard against threats and respond in the event of an incident.

FASB

FASB clarifies the accounting for equity securities

The FASB issued Accounting Standards Update (ASU) 2020-1, Investments – Equity Securities (ASC Topic 321), Investments – Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) – Clarifying the Interactions between ASC Topic 321, ASC Topic 323, and ASC Topic 815.

The new ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Accounting Standard Codification (ASC) Topic 323 for the purposes of applying the measurement alternative in accordance with ASC Topic 321 immediately before applying or upon discontinuing the equity method.

The new ASU also clarifies that, when determining the accounting for certain forward contracts and purchased options, a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

International

IASB publishes an overview of consultations to be expected in 2020

The IASB plans to publish a number of consultation documents this year, including a discussion paper in its Goodwill and Impairment project and an exposure draft in its Management Commentary project. The current expected consultations are:

•  Discussion papers
  • Q1: Goodwill and Impairment
  • Q2: Business Combinations under Common Control
• Exposure drafts
  • Q2: IBOR Reform and its Effects on Financial Reporting—Phase 2
  • Q2: Rate-regulated Activities
  • H2: Disclosure Initiative—Targeted Standards-level Review of Disclosures
  • H2: Management Commentary
• Requests for information
  • Q1: Comprehensive Review of the IFRS for SMEs Standard
  • Q2: Post-implementation Review of IFRS 10, IFRS 11 and IFRS 12
  • H2: 2020 Agenda Consultation

Bruce Mackenzie to join the IASB

The Trustees of the IFRS Foundation appointed Bruce Mackenzie as a member of the IASB beginning October 1, 2020. He is a chartered accountant and registered auditor in South Africa. He chairs the Pan African Federation of Accountants’ technical standard-setters forum and has been a member of the Financial Reporting Standards Council of South Africa.

IESBA proposes revisions to the International Code for Ethics

The International Ethics Standards Board for Accountants (IESBA) proposed revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code or International Code for Ethics).

• Proposed Revision to the Code Addressing the Objectivity of Engagement Quality Reviewers is a limited-scope revision to the Code that dovetails with the IAASB’s development of proposed International Standard on Quality Management (ISQM) 2, Engagement Quality Reviews. It includes proposed guidance on the application of the conceptual framework in the Code to address the topic of the objectivity of an engagement quality reviewer (EQR), thereby supporting proposed ISQM 2 in addressing the matter of the eligibility of an individual to serve in an EQR role. In particular, the proposed guidance:
  • Explains the different types of threat to compliance with the fundamental principle of objectivity that might be created in circumstances where an individual is being considered for appointment as an EQR for a given engagement;
  • Sets out factors to consider in evaluating the level of the identified threats; and
  • Suggests actions that might be safeguards to address the threats.

The deadline for submitting comments is March 16, 2020.

•  Proposed Revisions to the Non-Assurance Services (NAS) Provisions of the Code include the following provisions:
  • A prohibition on providing NAS to an audit client that is a public interest entity (PIE) if a self-review threat to independence will be created;
  • Further tightening of the circumstances in which materiality may be considered in determining the permissibility of a NAS;
  • Strengthened provisions regarding auditor communication with those charged with governance (TCWG), including, for PIEs, a requirement for NAS pre-approval by TCWG; and
  • Stricter requirements regarding the provision of some NAS, including certain tax and corporate finance advice.

The deadline for submitting comments is May 4, 2020.

• Proposed Revisions to the Fee-Related Provisions of the Code include the following provisions:
  • A prohibition on firms allowing the audit fee to be influenced by the provision of services other than audit to the audit client;
  • In the case of PIEs, a requirement to cease to act as auditor if fee dependency on the audit client continues beyond a specified period;
  • Communication of fee-related information to TCWG and to the public to assist their judgments about auditor independence; and
  • Enhanced guidance on identifying, evaluating and addressing threats to independence in relation to other fee-related matters, including the proportion of fees for services other than audit to the audit fee.

The deadline for submitting comments is May 4, 2020.

IESBA revises Part 4B of the International Code of Ethics

The IESBA released Revisions to Part 4B of the Code to Reflect Terms and Concepts Used in International Standard on Assurance Engagements (ISAE) 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information. Part 4B of the Code comprises the independence standards for assurance engagements other than audit and review engagements.

The main revisions, developed in coordination with the IAASB, include:

• Changes in key terminology, including a revised definition of the term “assurance client;”
• Amendments to certain independence requirements in light of the revised assurance client definition;
• Greater clarity as to the parties to an assurance engagement and their roles and responsibilities, and the related independence requirements that apply; and
• A clearer distinction between the types of assurance engagement covered in Parts 4A (addressing independence for audit and review engagements) and 4B of the Code.

FRC launches consultation on revised auditing standard for identifying and assessing risks of material misstatement

The UK Financial Reporting Council (FRC) launched a consultation on the proposed revision to International Standard on Auditing (UK) 315 (Revised – June 2016), Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment.

The proposed changes reflect revisions made by the IAASB and are designed to establish a more robust and consistent risk identification and assessment. A more robust risk assessment process enhances the basis upon which auditors design and perform audit procedures that are responsive to the risks of material misstatement and, thereby, obtain sufficient appropriate audit evidence to provide a basis for the audit opinion.

The deadline for submitting comments is April 4, 2020.

FRC publishes Annual Review of the UK Corporate Governance Code

According to the Annual Review of the UK Corporate Governance Code published by the FRC, companies need to improve their governance practices and reporting if they are to demonstrate their positive impact on the economy and wider society. The report has two intended purposes: to give an assessment of corporate governance in the UK by considering the quality of reporting against the 2016 UK Corporate Governance Code; and to comment on any ‘early adoption’ by FTSE 100 companies of the 2018 UK Corporate Governance Code.

IFIAR observes decrease in audits with inspection findings since 2015

The International Forum of Independent Audit Regulators (IFIAR) announced the results of an initiative that began in 2015 to measure the frequency of inspection findings against a goal established by IFIAR’s Global Audit Quality Working Group.

The 2019 survey data indicates that the global audit firm networks collectively achieved a 21 percent reduction over four years in the frequency of audits inspected with findings, resulting in 31 percent of inspected audits with findings.

AICPA

AICPA seeks feedback on insurance entities working drafts

The AICPA’s Financial Reporting Executive Committee (FinREC) issued four working drafts of accounting issues for insurance entities, related to the implementation of FASB ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. FinREC and the AICPA Insurance Expert Panel will continue to develop working drafts on accounting implementation issues that have been identified for the new standard. The issued working drafts of accounting issues are as follows:

• Issue 1 – Claim liabilities associated with long duration traditional insurance contracts.
• Issue 4AB – Market Risk Benefits – Considerations related to transition, including the use of hindsight and clarification on the application of the fair value framework of ASC Topic 820, Fair Value Measurements, to the initial and subsequent measurement of market risk benefits at fair value.
• Issue 8 – Updating cash flow assumptions in the net premium ratio.
• Issue 9ABC – Deferred Acquisition Costs (DAC) amortization including:
  • Considerations for evaluating whether the amortization on a constant-level basis for grouped contracts approximates straight-line amortization on an individual basis;
  • Interaction of the liability for future policy benefits cash flow assumption updates and DAC amortization assumption updates; and
  • Updating of DAC experience as of the beginning of the period or end of the period.

The deadline for submitting feedback is April 10, 2020.

AICPA issues guidance on Global Investment Performance Standards

The AICPA Auditing Standards Board issued guidance for engagements, known as verifications, to examine and report on aspects of an investment firm’s claim of compliance with the 2020 edition of the Global Investment Performance Standards (GIPS).

Statement of Position (SOP) 20-1, Reporting Pursuant to the 2020 Edition of the Global Investment Performance Standards, also provides guidance for another type of attestation engagement, known as a performance examination, to examine and report on any of the investment firm’s composites or pooled funds and their associated GIPS reports.

The new SOP updates SOP 12-1, Reporting Pursuant to the Global Investment Performance Standards, which addresses the 2010 edition of the GIPS standards and remains relevant for engagements that are performed using the 2010 edition.

AICPA issues criteria for describing a set of data and evaluating its integrity

The AICPA Assurance Services Executive Committee published Criteria for Describing a Set of Data and Evaluating its Integrity for use when defining a set of data, documenting that definition in a description to help users understand a set of data and its individual members, and for evaluating the integrity of a set of data relative to its description. There is no requirement to use this set of criteria when measuring or evaluating a set of data.

Other Developments

World Economic Forum’s IBC issues draft sustainability standards

The World Economic Forum’s International Business Council (IBC) released a draft framework for a common, core set of metrics and recommended disclosures that IBC members could use to align their reporting. In adopting this framework, IBC members could reduce fragmentation and encourage faster progress towards a systemic solution, perhaps to include a generally accepted international accounting standard.

To the maximum extent practicable, the discussion draft incorporates well‑established metrics and disclosures for the express purpose of building on the extensive and rigorous work that has already been done by those who have developed the existing standards. The objective is to amplify those standards and more fully harness their synergies rather than create a new standard altogether.

Accounting bodies call for improved UN Sustainable Development Goals disclosures

A new report, Sustainable Development Goals Disclosure (SDGD) Recommendations, calls for corporate and asset owner action and improved reporting on the United Nation’s (UN) Sustainable Development Goals (SDG) in an attempt to hit goals set for 2030.

The report – published by the International Federation of Accountants, Association of Chartered Certified Accountants, Institute of Chartered Accountants of Scotland, Chartered Accountants Australia and New Zealand, International Integrated Reporting Council, and the World Benchmarking Alliance – offers a new approach for businesses and other organizations to address sustainable development issues aligned to the three most influential and popular reporting frameworks. It attempts to establish a best practice for corporate reporting on the SDGs and enable more effective and standardized reporting and transparency on climate change, social and other environmental impacts.

BlackRock CEO Larry Fink’s 2020 letter to CEOs emphasizes sustainability-related risks

Larry Fink, the founder and chief executive of BlackRock, announced that BlackRock believes that sustainable investing creates a strong foundation for client portfolios and sustainability will be at the center of BlackRock’s investment approach.

Mr. Fink’s annual letter to the chief executives of the world’s largest companies said BlackRock would begin to exit certain investments that “present a high sustainability-related risk, such as thermal coal producers.” Further, he championed improved disclosure for shareholders encouraging “more widespread and standardized adoption” highlighting that “while no framework is perfect, BlackRock believes that the Sustainability Accounting Standards Board provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics.”

CAQ Updates

CAQ posts highlights of September 2019 SEC Regulations Committee

The CAQ posted on its website highlights from the September 24, 2019 meeting of the SEC Regulations Committee.

CAQ publishes discussion document on monitoring inflation in certain countries

The CAQ International Practices Task Force (IPTF) developed a framework for compiling inflation data to assist registrants in monitoring inflation statistics in connection with their determination of the inflationary status of countries in which they have operations. The information in the discussion document may be helpful to management in applying ASC Topic 830, Foreign Currency Matters (ASC Topic 830), in conjunction with its internal controls over financial reporting to reach a conclusion on whether a country’s economy should be considered highly-inflationary.

The IPTF compiled cumulative inflation data by country (for those countries for which the International Monetary Fund publishes data), and then categorized the countries based on their cumulative inflation rates and the implementation guidance in ASC Topic 830. In addition, the IPTF identified countries where projected cumulative inflation rates would have been categorized into categories considering the guidance in ASC Topic 830 and in circumstances where there was not consistent reliable data.

2019 Review highlights CAQ impact

The year 2019 was one of action and change for the public company auditing profession and the CAQ. To highlight and recap the CAQ’s key activities and accomplishments in support of audit quality, the CAQ has published its 2019 Review.

Upcoming Events

FEBRUARY 24-28

IASB Board Meeting, London, UK

FEBRUARY 27-28

ICGN Conference, Seoul, Korea

MARCH 3-9

CII Spring Conference and 35^th Anniversary, Washington, DC

MARCH 6

PLI – Corporate Governance – A Master Class 2020, New York, NY

MAY 4-6

AICPA Employee Benefit Plans Conference, Las Vegas, NV

MAY 17-20

CFA Institute Annual Conference, Atlanta, GA

JUNE 9-11

ICGN Annual Conference, Toronto, Canada

JUNE 11-12

PLI 35^th Midyear SEC Reporting & FASB Forum, New York, NY

NOVEMBER 9-10

FEI Corporate Financial Reporting Insights Conference, New York, NY

The Center for Audit Quality is an autonomous, nonpartisan, nonprofit organization dedicated to enhancing investor confidence and public trust in the global capital markets by fostering high-quality public company audits; collaborating with other stakeholders to advance the discussion of critical issues; and advocating policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions. Based in Washington, D.C., the CAQ is affiliated with the American Institute of CPAs. For more information, visit thecaq.org.

The CAQ Public Policy and Technical Alert (PPTA) is intended as general information and should not be relied upon as being definitive or all-inclusive. As with all other CAQ resources, this is not authoritative and readers are urged to refer to relevant rules and standards. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The CAQ makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained herein and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. This publication does not represent an official position of the CAQ, its board or its members.

Questions and comments about the PPTA can be addressed to: info@thecaq.org.