Representatives from the Office of Chief Accountant discussed new accounting standards. The Staff commented on the implementation of the new revenue recognition standard, which requires companies to provide a comprehensive view of revenue arrangements in their financial statements, including their disclosures. The Staff intends to continue to monitor, and comment on, the implementation of the revenue standard. The Staff noted that nearly all companies will be affected by the adoption of the new lease accounting standard, which will soon be effective. To that end, representatives of the Staff have provided guidance on implementation of the standard, which, representatives of the Staff caution require significant time and effort. Various representatives noted that steps for lease accounting implementation include: understanding the accounting and disclosure requirements of the new standard; identifying relevant arrangements and leases within those arrangements; determining appropriate accounting policies, including applicable transition elections; applying the guidance to arrangements within the standard’s scope; preparing transition and ongoing disclosures; and establishing adequate and appropriate processes and controls to support implementing and applying the new standard, including preparing required disclosures. Representatives noted that “it is crucial for each registrant to ensure its implementation plans include sufficient time to identify arrangements that are leases in their entirety or that include embedded leases….[i]t is also critical for companies to identify and resolve transition, application, and other implementation issues arising from the new leases standard. A lesson learned from the implementation of the new revenue standard is that entities benefit from an early and thorough discussion of implementation issues with their auditors and audit committees.”
Audit Committee Oversight
Various Staff members noted the important role of the audit committee in connection with the implementation of new accounting standards. To that end, the Staff noted that the audit committee should exercise oversight over management’s approach to implementation of new accounting standards, should establish appropriate controls and procedures over the transition; maintain appropriate controls and procedures over ongoing application of the new accounting standard; and should understand how the effects of the new standard are communicated to investors at transition and on an ongoing basis.
Internal Control over Financial Reporting
Various speakers addressed internal control over financial reporting. In this regard, the speakers again emphasized the important role of audit committees. Audit committees should have discussions of ICFR in all areas—from risk assessment to design and testing of controls, as well as the appropriate level of documentation. The Staff noted the importance of identifying and communicating material weaknesses before these manifest in the form of a financial statement restatement. The Staff noted there has been progress in the evaluation of the severity of internal control deficiencies. The Staff encouraged audit committee training regarding “the adequacy of and basis for a company’s effectiveness assessment, particularly where there are close calls in the assessment of whether a deficiency is a significant deficiency (and reported to the audit committee) or a material weakness (and reported also to investors).” Speakers also emphasized that the assessment of ICFR is especially important this year-end as a result of the implementation of new accounting standards, which also affects a company’s internal controls.
Material Weakness Disclosures
Representatives of the Staff noted improvement in the disclosures of a material weakness; however, suggestions were offered that are intended to make the disclosures more useful to investors. One of the speakers suggested considering the following questions in evaluating the proposed disclosure:
- Does the disclosure allow an investor to understand what went wrong in the control that resulted in a material weakness?
- Is it sufficiently clear from the disclosure what the impact of each material weakness is on the company’s financial statements? For example, is the material weakness pervasive or isolated to specific accounts or disclosures?
- Are management’s plans to remediate the material weakness sufficiently clear? For example, does disclosure of the remediation plans provide sufficient detail that an investor would understand what management’s plans are and how the remediation plans would address the identified material weakness?
Implementation Activities for Communicating Critical Audit Matters
The Staff also addressed implementation activities related to the CAM standard. In order to prepare for the CAM standard implementation, the Staff encourages auditors and registrants to conduct a dry run this year with the auditors and audit committees, share implementation questions and issues with the Staff, and begin to focus on the differing disclosure requirements for MD&A critical accounting estimates and CAMs.