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From Securities Regulation Daily, September 12, 2017

SEC’s chief accountant discusses financial reporting, new standards and initial coin offerings

By Jacquelyn Lumb

SEC Chief Accountant Wesley Bricker spoke at the AICPA annual conference on banks and savings institutions where he touched on the role of financial reporting in the capital markets, recent accounting and auditing standard setting, broker-dealer compliance, and initial coin offerings. He noted that banks are both users and providers of financial information. Managing and pricing a bank’s risks depends, in part, on reliable financial information, which in turn relies on high quality accounting and auditing standards, he said.

Credit loss standard. Bricker views FASB’s new credit loss standard as an improvement over the current standard because it will provide more decision-useful information about expected credit losses. The new standard more closely aligns an entity’s financial reporting with management’s estimate of expected credit losses, he explained. Both FASB and the IASB expended significant efforts to arrive at the new standard, including field work, meetings and workshops to obtain input from preparers.

Bricker said the new standard will result in an earlier measurement of credit losses; provide greater transparency with respect to the extent of expected credit losses held at the reporting date; and improve users’ ability to understand the status of assets held at each reporting date, changes in expected credit losses that occurred during a given period, and financial assets with credit deterioration.

The standard setters adopted an approach that should help minimize the costs and complexity of implementation, according to Bricker. For example, entities may use their current internal credit risk approaches and systems as a framework of measurement. Entities may use their own judgment in developing estimation methods as long as they are appropriate, practical and consistent with the principles of the guidance. The standard does not change interest income reporting for originated loans, he added, because investors want to know the credit risk and interest income risk separately. According to Bricker, the standard addresses the timing of recognition of losses, but does not increase, decrease, or change the amount of a credit loss on a loan.

Transition to new standard. Some of the Commission’s and staff guidance will continue to apply in the development, documentation, and application of the methodology for determining an estimate of current expected credit losses. Bricker cited FRR 28 and SAB 102, which will continue to apply when determining the allowance and provision of current expected credit losses.

The Office of the Chief Accountant is actively monitoring the transition to the new standard, according to Bricker. He said the staff will continue to respect well-reasoned, practical judgments as long as they are consistent with SEC requirements and staff guidance. The staff is also available for consultation to address any questions that arise during the implementation. Bricker added that he is encouraged by the review planned by the prudential regulators at the recommendation of the Treasury Department in an effort to harmonize the application of the standard with their regulatory efforts.

Bricker reminded registrants that their transition plans should include the identification and implementation of any necessary changes to their internal control over financial reporting. Companies that use the COSO framework for their system of ICFR should look to all of its five components and related principles, he advised, beginning with the identification and assessment of risks of material misstatement and designing controls to mitigate those risks.

PCAOB initiatives. The staff is currently evaluating the comments submitted in response to the PCAOB’s proposed revisions to the auditor reporting model. Bricker said the SEC must take action statutorily by October 26. He encouraged all stakeholders in the audit process to comment on the PCAOB’s pending proposals relating to estimates and the use of specialists. He also urged all parties to take a broad view of the results of the PCAOB’s inspection findings and enforcement actions related to the audits of broker-dealers.

Initial coin offerings. On his final topic of initial coin offerings, Bricker said the SEC’s recent report of investigation made clear that the federal securities laws apply to the offer and sale of securities regardless of whether the issuer is a traditional company or a decentralized autonomous organization, whether the securities are purchased with dollars or virtual currencies, or whether they are distributed in certificated form or through distributed ledger technology. An entity that is involved in initial coin or token offering activities must consider the accounting, disclosure, and reporting guidance based on the nature of its involvement, he advised.

SAB 74 disclosure. Following his prepared remarks, Bricker responded to a question about the staff’s expectations with respect to SAB 74 disclosures regarding the anticipated effects of the new standard. Bricker said the SAB 74 disclosure is important so the market can absorb the change. He said registrants should disclose the information that is relevant that they know, but they should not say more than they know about the anticipated effect. The disclosure can be quantitative regarding the size and nature of the change if it is known, or it can be qualitative if registrants have a directional sense of the change.

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