Public Policy and Technical Alert | October 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.

Statement from the Acting Chief Accountant: The importance of high quality independent audits and effective audit committee oversight to high quality financial reporting to investors

Paul Munter, the Acting Chief Accountant of the SEC, issued a statement emphasizing the importance of high quality audits “that are decision-useful to investors and maintain the public trust in our capital markets.” Munter mentioned that the 20th anniversary of the Sarbanes-Oxley Act of 2002 (SOX) is approaching, and suggested that “n integral part of the faithful implementation of SOX is for audit firms to remain independent of their audit clients and for audit committees to take ownership of their oversight responsibilities with respect to the independent auditor.”

Forum for Auditors of Small Businesses and Broker-Dealers

The PCAOB posted pre-recorded resources in place of an in-person Forum for Auditors of Small Businesses and Broker-Dealers. The video resources cover such topics as information for auditors of small businesses, updates from the Division of Enforcement and Investigations, updates from the Division of Registration and Inspections, illustrative examples for auditors of small businesses, and more.

New FASB standard improves consistency in accounting for acquired revenue contracts with customers in a business combination

The FASB issued an Accounting Standards Update (ASU) that addresses diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, Revenue from Contracts with Customers, at fair value on the acquisition date. To address some questions about contract liabilities and timing of payments, the new ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. It also seeks to improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

Gabriela Figueiredo Dias to lead the IESBA

The International Ethics Standards Board for Accountants (IESBA) announced that as of January 1, 2022, Gabriela Figueiredo Dias will become its first chairwoman. She has extensive experience in international standard setting, legal and regulatory structure and governance, and academia. Figueiredo Dias is currently the president of the CMVM (Portuguese Securities Market Commission), the authority responsible for regulating and supervising the markets of financial instruments, covering listed companies, asset managers, auditors, and investment firms.

FRC review of Alternative Performance Measures by UK companies finds room for improvement

The Financial Reporting Council (FRC) announced that UK-listed companies using Alternative Performance Measures (APMs) need to be more transparent about their use and linkage to their International Financial Reporting Standards (IFRS) or UK GAAP results. The FRC said it conducted a review that found that, while companies generally provided good quality APM disclosures, their context needs to be better explained, particularly as profit-based APMs tended to be more favorable than their GAAP results. Other aspects of APM reporting the FRC expects companies to improve include:

• Providing an even-handed treatment of gains and losses when classifying amounts as adjusting items;
• Ensuring APM reconciliations and calculations are complete and transparent;
• Explaining terms used in describing APMs, such as providing “underlying results” or adjusting for “non-recurring” items; and
• Providing more detailed information about the cash and tax impact of adjusting items and on the potential impact of adjustments for multi-year restructuring programs on future results.

FRC review of IAS 37 ‘Provisions, Contingent Liabilities, and Contingent Assets’

The FRC published the findings of its review into IAS 37 ‘Provisions, Contingent Liabilities, and Contingent Assets’, which has been identified as a recurrent problem area by the FRC. The FRC’s review considered how a sample of 20 companies’ annual reports had met relevant reporting requirements, identified examples of good practice, and outlined its expectations for future disclosures. The review found scope for improvements in several areas, in particular in:

• Explaining how the amounts of expected outflows have been estimated, identifying the key assumptions applied, and describing the associated uncertainties;
• Disclosing the phasing of outflows companies expect to see as they use their provisions; and
• Describing the underlying costs for which companies make provisions.

IESBA: Now available: 2021 handbook

The IESBA released the 2021 Edition of the Handbook of the International Code of Ethics for Professional Accountants (including International Independence Standards). The new edition contains recently approved revisions to the Code, including the revisions to Part 4B to align terms and concepts used in the Code to those in the International Auditing and Assurance Standards Board’s International Standard on Assurance Engagements (ISAE) 3000 (Revised). Additionally, approved revisions that are not yet effective have been included in the back of the handbook.

FRC publishes oversight responsibilities and independent supervisor reports

The FRC published its annual report to the UK Secretary of State for Business, Energy, and Industrial Strategy on how it has discharged its oversight responsibilities in 2020/21. The FRC also published its Report of the Independent Supervisor on Auditors General. Both reports were laid in the UK Parliament on October 21.

FRC to focus on climate-related reporting as new disclosure requirements beckon

The FRC published its Annual Review of Corporate Reporting, which outlines the FRC’s “top ten” areas where improvements to reporting are required. These include reporting on judgments and estimates, revenue, and cash flow statements. In addition, the FRC has also published its year-end bulletin of key corporate reporting matters for companies which sets out the FRC’s areas of focus for the coming year. From next year, premium listed companies will be required to disclose their compliance with the Taskforce for Climate-related Financial Disclosures recommendations on a comply-or-explain basis. The FRC also expects material climate change policies, risks, and uncertainties to be included in narrative reporting and appropriately considered and reflected in the financial statements.

FRC publishes latest major local audit quality inspection results

The FRC published its inspection findings into the quality of major local body audits in England, including large health and local government bodies, for the financial year ended March 31, 2020. The FRC reviewed 20 major local audits performed by six of the largest audit firms and found that six audits, or 30%, required improvements. This marked an improvement on the prior year inspection results, which saw 60% of audits requiring either improvements or significant improvements.

AICPA issues new standard on auditor’s risk assessment

The AICPA’s Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, to supersede SAS No. 122, as amended, section 315 of the same title, and to amend various AU-C sections in AICPA Professional Standards. SAS No. 145 addresses the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements. The SAS enhances the requirements and guidance on identifying and assessing the risks of material misstatement, in particular the areas of understanding the entity’s system of internal control and assessing control risk.

​​​​The Center for Audit Quality (CAQ) is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high-quality performance by public company auditors; convenes and collaborates with other stakeholders to advance the discussion of critical issues that require action and intervention; and advocates policies and standards that promote public company auditors’ objectivity, effectiveness, and responsiveness to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs.

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 Public Policy & Technical Alert can be addressed to Matt Sickmiller, Senior Manager, Professional Practice (msickmiller@thecaq.org).