Public Policy and Technical Alert | May 2021

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 Commissioner Allison Herren Lee: Speech on the myths and misconceptions about ‘materiality’
• SEC Chair Gary Gensler: Testimony before the Subcommittee on Financial Services and General Government, U.S. House Appropriations Committee

PCAOB

• PCAOB proposes rule to create framework for Holding Foreign Companies Accountable Act determinations

FASB

• FASB issues standard clarifying the issuer’s accounting for certain modifications of freestanding equity-classified written call options
• FASB proposes to improve and expand hedge accounting
• FASB virtual credit losses roundtable recap

International

• IAASB issues updated framework for activities to guide selection and prioritization of actions
• IASB clarifies the accounting for deferred tax on leases and decommissioning obligations
• IOSCO sees strong support for its vision for an International Sustainability Standards Board under the IFRS Foundation
• FRC scenario analysis research project
• IESBA: Five ethics challenges that will intensify as the pandemic wanes
• FRC issues amendments to FRS 101
• FRC issues revised UK auditing standard for the auditor’s responsibilities relating to fraud
• IASB consults on a new framework for management commentary reflecting changes in corporate reporting landscape

AICPA

• Audit risk assessment guidance added to AICPA and CIMA digital assets practice aid

CAQ Updates

• Auditor and audit committee considerations relating to SPAC IPOs and mergers
• The ongoing challenge of effective ESG reporting and data disclosure

Upcoming Events

SEC

SEC Commissioner Allison Herren Lee: Speech on the myths and misconceptions about ‘materiality’

SEC Commissioner Allison Herren Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted jointly by the CAQ, AICPA and the Chartered Institute of Management Accountants, and the Sustainability Accounting Standards Board (SASB). During her remarks, she urged accountants, auditors, attorneys, and other professionals to share their advice, thoughts, and expertise with the SEC as it begins to craft a rule proposal for climate and ESG disclosures. Herren Lee also addressed what she believes are four myths and misconceptions related to materiality as it pertains to climate and ESG disclosures. They are summarized as follows:

• Myth #1: ESG matters (indeed all matters) material to investors already are required to be disclosed under the securities laws. Herren Lee believes that this is a myth and stated that climate and ESG information important to a reasonable investor is not necessarily required to be disclosed simply because it is material.
• Myth #2: Where there is a duty to disclose climate and ESG matters, we can rest assured that such disclosures are being made. In contrast to this myth, Herren Lee believes that a disclosure system that lacks sufficient specificity and relies too heavily on a broad-based concept of materiality will fall short of eliciting information material to reasonable investors.
• Myth #3: SEC disclosure requirements must be strictly limited to material information. In contrast to this myth, Herren Lee believes that the idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in SEC rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG.
• Myth #4: Climate and ESG are matters of social or “political” concern, and not material to investment or voting decisions. Herren Lee believes that this is a myth and stated that the SEC is increasingly seeing all manner of market participants embrace ESG factors as significant drivers of decision-making, risk assessment, and capital allocation precisely because of their relationship to firm value.

SEC Chair Gary Gensler: Testimony before the Subcommittee on Financial Services and General Government, U.S. House Appropriations Committee

SEC Chair Gary Gensler addressed the Subcommittee on Financial Services and General Government of the U.S. House Appropriations Committee. Gensler discussed the breadth and scope of the SEC’s work and the state of the capital markets. He also identified several key capital market trends that he believes will impact the SEC’s resource needs moving forward.

Specifically, related to initial public offerings (IPO) and special purpose acquisition companies (SPAC) Chair Gensler intends to explore whether SPAC investors are being appropriately protected, and whether retail investors are getting appropriate and accurate information at each stage of the SPAC process.

Given the recent growth in private funds, Chair Gensler also highlighted the introduction of new risks for markets and investors and noted the importance of the SEC growing and evolving with the industry. The other trends highlighted within Chair Gensler’s testimony included crypto assets, fintech, and data analytics.

PCAOB

PCAOB proposes rule to create framework for Holding Foreign Companies Accountable Act determinations

The PCAOB issued for public comment a proposed rule related to its responsibilities under the Holding Foreign Companies Accountable Act (HFCAA). The proposed rule provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The proposed rule would establish:

• The manner of the PCAOB’s determinations;
• The factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted;
• The form, public availability, effective date, and duration of such determinations; and
• The process by which the PCAOB can modify or vacate its determinations.

Comments are due July 12, 2021.

FASB

FASB issues standard clarifying the issuer’s accounting for certain modifications of freestanding equity-classified written call options

The FASB issued an Accounting Standards Update (ASU) that is intended to clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU provides guidance on how an issuer would measure and recognize the effect of these transactions. Specifically, it provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or as an expense.

FASB proposes to improve and expand hedge accounting

The FASB issued a proposed ASU intended to better align hedge accounting with an organization’s risk management strategies. The proposed ASU would expand the current single-layer model to allow multiple-layer hedges in certain situations. Additionally, the proposed ASU endeavors to clarify what are eligible hedging instruments in a single-layer strategy, provide additional guidance on the accounting for and disclosure of fair value hedge basis adjustments that would be applicable to both the current single-layer model and the proposed multiple-layer model, and indicate how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

Comments on the proposed ASU are due July 5, 2021.

FASB virtual credit losses roundtable recap

On May 20, 2021, FASB hosted a virtual roundtable debriefing on the implementation of the current expected credit losses (CECL) standard and any related technical issues with the implementation. Roundtable participants included a broad group of investors, preparers, practitioners and regulators. Participants shared perspectives on how CECL performed for large public institutions amid the COVID-19 crisis; observations of applying purchased financial assets with credit deterioration accounting during the initial year of CECL adoption; and the relevance of troubled debt restructurings as a measure of troubled loans.

International

IAASB issues updated framework for activities to guide selection and prioritization of actions

The International Auditing and Assurance Standards Board (IAASB) published its new Framework for Activities. The Framework describes the IAASB’s operating processes and procedures for advancing standard setting and other related activities. The IAASB developed Framework is intended to support a more agile standard-setting process and provide additional public transparency around the IAASB’s prioritization activities.

IASB clarifies the accounting for deferred tax on leases and decommissioning obligations

The International Accounting Standards Board (IASB) issued targeted amendments to International Accounting Standard (IAS) 12, Income Taxes, to specify how companies should account for deferred tax on transactions such as leases and decommissioning obligations. In specified circumstances, companies are exempt from recognizing deferred tax when they recognize assets or liabilities for the first time. Previously, there had been some uncertainty about whether the exemption applied to transactions such as leases and decommissioning obligations, but the amendments clarify that the exemption does not apply and that companies are required to recognize deferred tax on such transactions. The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted.

IOSCO sees strong support for its vision for an International Sustainability Standards Board under the IFRS Foundation

The International Organization of Securities Commissions (IOSCO) issued an update revealing that it believes there is strong support for the key elements of its vision for an International Sustainability Standards Board (ISSB) under the International Financial Reporting Standards (IFRS) Foundation. During two recent roundtable meetings with senior representatives from a wide range of stakeholder groups, including accounting firms, a broad agreement was reached to work collaboratively with IOSCO and the IFRS Foundation to deliver the vision of the ISSB. Among the key themes that emerged from the roundtables, IOSCO stated that participants were united in their support for globally aligned reporting standards to promote comparability of sustainability-related disclosures across jurisdictions and to avoid market fragmentation.

FRC scenario analysis research project

The FRC commissioned a project to explore the use of scenario analysis by FTSE 350 companies. The objective is to learn more about the processes through which companies develop their scenario analyses, how these processes shape the outcomes produced, and how those outcomes in turn influence companies’ strategic planning and decision making. The project will investigate both climate and non-climate applications of scenario analysis.

IESBA: Five ethics challenges that will intensify as the pandemic wanes

The International Ethics Standards Board for Accountants (IESBA) published an examination of several ethics considerations that it believes will be tested during the period of recovery from the COVID-19 pandemic. The considerations include:

• Pressures from an uneven economic recovery;
• Demands for greater support and efficiency;
• Risks regarding rapid digitalization;
• Burnout and mental health of teams and talent; and
• Predisposition to focus on the past.

FRC issues amendments to FRS 101

The FRC issued amendments to FRS 101 – 2020/21 cycle, which brings to a close the 2020/21 annual review of FRS 101 Reduced Disclosure Framework. The amendments to Financial Reporting Standard 101 are limited, and predominantly provide a disclosure exemption in relation to IAS 16 Property, Plant and Equipment and maintain consistency with IAS 1 Presentation of Financial Statements.

FRC issues revised UK auditing standard for the auditor’s responsibilities relating to fraud

The FRC issued a revision of its UK auditing standard on the responsibilities of auditors relating to fraud – ISA (UK) 240 (Revised May 2021), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The revisions to the standard are designed to provide increased clarity as to the auditor’s obligations. The revisions include updates to the requirements for the identification and assessment of risks of material misstatement due to fraud and the procedures to respond to those risks.

IASB consults on a new framework for management commentary reflecting changes in corporate reporting landscape

The IASB published for public comment a proposed comprehensive framework for companies preparing management commentaries aligned with investors’ information needs. The proposed framework represents an overhaul of IFRS Practice Statement 1, Management Commentary. It seeks to build on innovations in narrative reporting and enable companies to bring together in one place the information investors need to assess a company’s long-term prospects — such as information about the company’s intangible resources and relationships and about sustainability matters that affect the company.

Comments on the exposure draft are due November 23, 2021.

AICPA

Audit risk assessment guidance added to AICPA & CIMA digital assets practice aid

The AICPA & CIMA updated its practice aid, Accounting for and Auditing of Digital Assets, to include nonauthoritative guidance in the auditing areas of risk assessment, processes and controls, laws, regulations and related parties. The new material was developed to complement the digital asset accounting and auditing guidance the AICPA & CIMA issued last year.

CAQ Updates

Auditor and audit committee considerations relating to SPAC IPOs and mergers

The CAQ published an alert that provides an overview of what a SPAC is and some key considerations for auditors and audit committees related to the unique risks and challenges of a private company entering the public markets through a merger with a SPAC. There were more than 300 SPAC IPOs in the first few months of 2021. The creation of a SPAC and subsequent merger of a SPAC and a target company often raises complex accounting, financial reporting, and governance issues.

The ongoing challenge of effective ESG reporting and data disclosure

Margot Cella, the vice president of research and anti-fraud initiatives at the CAQ, participated in a webcast exploring the challenges of effectively reporting ESG information, how companies can increase effective reporting, and how the standards and frameworks can be applied today. The other panelists included:

• Kate Brennan, deputy general counsel and chief compliance officer at Marsh & McLennan Companies;
• Brian Lewallen, chief sustainability officer and assistant general counsel at Schnitzer Steel Industries; and
• Marc Siegel, financial accounting advisory services partner with EY and current SASB board member.

Upcoming Events

JUNE 14-18, 2021

IAASB Quarterly Board Meeting, Virtual

June 21-25, 2021

FRC Culture Conference, Virtual

June 24, July 29, August 5 and 18, 2021

IAASB Quality Management Webinar Series, Virtual

August 2-5, 2021

AAA Annual Meeting, Virtual

SEPTEMBER 13-17, 2021

IAASB Quarterly Board Meeting, Virtual

SEPTEMBER 22-24, 2021

CII Fall 2021 Conference, Chicago

October 4-8, 2021

NACD Summit 2021, Virtual

November 2-18, 2021

Corporate Financial Reporting Insights Conference, Virtual

NOVEMBER 15-16, 2021

AICPA and CIMA National Tax Conference, Washington, DC

DECEMBER 6-8, 2021

AICPA & CIMA Conference on Current SEC and PCAOB Developments, Washington, DC

December 6-10, 2021

IAASB Quarterly Board Meeting, Virtual

 

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.