SEC chief accountant warns against mischief in non-GAAP reporting
Wesley Bricker, the chief accountant at the Securities and Exchange Commission, cautioned an audience of accountants against any mischief with non-GAAP financial measures.
“With non-GAAP and other disclosures, our rules require that companies must have disclosure controls and procedures, which typically would include appropriate governance practices regarding the measures and policies and controls that prevent error, manipulation, or mischief with the numbers, including a policy that addresses how any changes in the non-GAAP measure will be reported and how corrections of errors will be evaluated,” he told the attendees at Baruch College’s Financial Reporting Conference in New York on Thursday.
Noting that there can be a “mischievous quality to non-GAAP reporting," Bricker said that a company’s audit committee can play an important role in understanding how company management might be using any supplemental scorecards in understanding and tracking results, and how that supplemental information can be used in addition to GAAP financial statements in the company’s public reporting.
The SEC is keeping a close watch on how companies are dealing with the new accounting standards like revenue recognition and leasing. The first 10-Q quarterly filings under the new standard recently arrived at the SEC.
“Calendar year-end public companies are now reporting their revenue from contracts with customers under the new revenue recognition standards issued by both the FASB and IASB,” said Bricker. “The reporting includes a substantial step forward for corporate reporting, including additional disclosures, and for greater consistency between the information reported and the underlying economics of contracts with customers. Across companies this has been a substantial, though manageable effort, which is a testament to the level of coordinated planning for the implementation, including from the FASB, AICPA, and other industry groups.”
He noted that the leasing standard is the next major standard taking effect soon, followed by the credit loss standard. “Stakeholders must also continue their focus on successful implementation of the new leases standards for next year, and implementation of the new credit losses standard after that,” said Bricker. “I am confident this period of accounting change will leave our financial reporting system stronger.”
Tax reform issues
He acknowledged that companies are also dealing with the new tax reform law in addition to the new accounting standards. “Companies, auditors and others have also responded swiftly to the significant changes brought about by the passage of income tax reform in December,” said Bricker. “The SEC staff released guidance on reporting the effects of income tax reform on the day the bill was signed by the president. The FASB and its staff also provided guidance.”
He pointed out that the SEC staff guidance clarified that the staff would not object to a company, when accounting for the effects of the tax reform, using a measurement period that ends when an entity has obtained and analyzed the information it needs in order to do the accounting, which shouldn’t take more than 12 months. “The staff expects companies to act in good faith to complete the accounting, and as they do so, investors should receive insight through the disclosures described in SAB 118 about the status of a company’s accounting for the effects of income tax reform during the measurement period,” said Bricker.
Kyle Moffatt, chief accountant in the SEC’s Division of Corporation Finance, later appeared on a panel alongside Bricker. He noted that tax reform is on the staff’s radar. A frequent question directed at the staff is whether a company can use the new 21 percent corporate tax rate for prior periods, but Moffatt confirmed they can’t. He also assured the audience that the SEC “won’t beat up” on companies during the first year of adoption of the revenue recognition standard. However, it is starting to review the 10-Q filings for the first quarter and has already sent out comment letters to some early adopters from last year. It has had close to 20 training sessions for its staff on dealing with the new rev rec standard.
Charles Wright, a senior legal advisor in the SEC’s Division of Enforcement, said the commission has already been pursuing some revenue recognition cases, including one case last year against the Mexican homebuilder Homex in which it used satellite imagery to examine allegations that the company had reported sales revenue for unbuilt homes (see "Mexican homebuilder charged in $3.3B accounting fraud exposed by satellite images, SEC says").
On top of that, audit firms are dealing with the Public Company Accounting Oversight Board’s new audit reporting model. Bricker noted that auditors can do a dry run this year with the new audit report format before it becomes a requirement.
On a later panel, FASB board member Marc Siegel, who is nearing the end of his second term in June, discussed the lease accounting standard. He noted that the standard mainly affects lessees, but there are some nuances that lessors will need to think about. Still, FASB is hoping that the outcomes won’t be all that different under International Financial Reporting Standards compared to U.S. GAAP.
“The balance sheet will be the same on day one, but the P&L will be a bit different as they go through,” he said.
However, another panelist, Scott Taub, managing director at Financial Reporting Advisors, warned that the results under U.S. GAAP and IFRS are likely to diverge more after the first year of adoption. “We are going to have differences here,” he said. “Yes, leases will be on the balance sheet by and large between the FASB and the IASB. The liability number will be the same, and the asset number will be the same initially, but after that the asset numbers will be different because the amortization will be handled differently.”
Many companies are still getting their systems in place for the new leasing standard. Amie Thuener, chief accountant at Google, noted that there isn’t an end-to-end solution available yet for doing the entire task of identifying all the leases and accounting for them properly under the new standard.