SEC, FASB prepare for semi-annual reporting option

The Securities and Exchange Commission and the Financial Accounting Standards Board discussed the SEC's proposal for a semi-annual reporting option along with new accounting standards at a conference at Baruch College in New York.

"We have issuers coming in to talk to us either about semi-annual reporting or annual reporting," said SEC chief accountant Kurt Hohl. "People always invariably say, 'Well, I present this information every period, even though there's not a material change because it's either a FASB requirement or I've been doing it every quarter. Maybe there's an expectation that I continue to show it, or I just put it in, because then I don't have to worry about if there isn't really a material change, and it's there anyway.' There's a whole lot of opportunity for people to take a really hard look at the disclosures they present every single period and really focus investors on what's material rather than overload them with information. Because what happens when you give somebody so much information? They don't read it, or they can't really designate or focus on matters that are material."

He sees an opportunity to focus on the information that especially matters to investors. FASB chair Richard Jones referred to the FASB's Accounting Standards Codification. "Obviously, in our codification, we're pretty clear that you don't have to disclose immaterial items," he said. "Sometimes we hear it's easier to disclose it than to argue it's immaterial. If that's a concern. I would say, start raising that as well, because I don't think the intention is to make the analysis of materiality so burdensome that it cannot be used."

Panel moderator Marc Siegel, a former FASB board member, pointed out that ASC 105 had that guidance of not needing to disclose immaterial items. "For those of us old enough, it was the box that used to be on the front cover of the FASB standards," he said. "It's now been codified as just one sentence in Topic 105, but I think it's extremely important, because if it is something that's not material to you, don't wait for the FASB to try to X out the standard."

Heather Rosenberger, chief accountant in the SEC's Division of Corporation Finance, noted that the proposed rule will provide greater flexibility. "We're trying to allow companies to determine the frequency that best serves both them and their investors, and that's what the rule does," she said. "It's a fairly simple rule in terms of some of the stuff that comes out from the SEC. That said, we were still able to stretch it to 279 pages. Companies have this option. What are you going to do if you don't want the option? You do nothing."

She noted that companies will be able to check a box on their Form 10-K to give notice to the market that they're opting to become semi-annual reporters in the next fiscal year. A similar checkbox will also be on the registration statement for new registrants. There will also be a new Form 10-S where companies can file semi-annual reports as opposed to the traditional Form 10-Q quarterly reports.

"There's benefits to companies that will be filing like lower compliance costs," said Ro Sokhi, a partner at UHY, in an interview. "The idea is that companies will be able to focus on long-term strategic growth, rather than this quarterly cadence."

"It's optional, so companies will still have the option to do quarterly filings," he added. "Many companies may not even take the option, and then the other thing is that companies do start to take the option because it's just cheaper to do so. Compliance costs and overheads are lower."

At the conference, SEC and FASB officials also discussed some of their recent standards, such as paid-in-kind dividends and accounting for government grants, and upcoming standards and projects, including digital assets that act as cash equivalents such as stablecoins, and hedge accounting using the portfolio layer method. FASB's Emerging Issues Task Force is also working on a project related to electricity contracts at data centers.

FASB technical director Jackson Day discussed the project on disaggregation of income state expenses, or DISE, which he said is a major project. However, he noted that FASB has not yet received enough feedback, so it's planning to hold a roundtable discussion on May 27 at its offices. 

Officials also discussed the growing use of artificial intelligence by companies and auditors. "Probably the hottest emerging issue right now is artificial intelligence and how that's being used," said Hohl. "Rarely does a day go by that we don't hear that word used multiple times."

He noted that the SEC is looking at how issuers are using artificial intelligence in the financial reporting models to generate financial information and disclosures, and how that interplays with the federal securities laws, the disclosure rules and procedures, and internal controls over financial reporting. 

"Some of these tech companies are a lot further ahead than others, but people are experimenting, and this is an area that's moving incredibly fast, so we want to make sure we stay up to speed on what's going on, the risks associated with that, and making sure that's being properly addressed," said Hohl. 

The SEC is also looking at how AI is used by auditors. "Auditors are doing some great things in terms of using tools to increase the quality of the work that they do, going beyond generative AI, but now using AI agents to do tasks that you and I probably used to do when we were staff accountants many decades ago," he added. "This is another area that's moving rapidly."

Hohl noted that the Big Four firms have invested billions of dollars in AI tools, and the SEC is working with firms of all sizes to make sure the SEC understands what they're doing and the benefits, as well as how auditors use AI in their system of quality management. 

He said the SEC is also working with audit regulators such as the Public Company Accounting Oversight Board and others around the world to make sure they stay up to speed to make sure that regulatory interaction at this stage doesn't hinder the ability to develop innovative tools that are going to enhance quality, while also making sure the proper guardrails are in place.

He is encouraging FASB to work more closely with the International Accounting Standards Board, as in the earlier convergence effort, and the PCAOB to work more closely with the International Auditing and Assurance Standards Board. He said there would be a revised version of the QC 1000 quality control standard coming out from the PCAOB to address some of the implementation challenges raised by some stakeholder groups. FASB has worked with the IASB on some earlier convergence projects.

"I think we've tried, with varying levels of success," said Jones. "Revenue recognition is probably more closely aligned than leasing was, and which was more closely aligned than our credit loss standard. I think sharing information is great. I think recognizing that ultimately investors probably should be considering the same information, but how they do can vary from jurisdiction to jurisdiction."

He believes the priority should be minimizing differences. "Joint standard-setting takes a long time," he added. "When I talk to investors, their concern is, hey, I'm looking for this, but I'm looking for it now, I'm not looking for it in 10 years. You have to think about those things, but I do think a lot can be accomplished simply by leveraging each other's work, sharing each other's work, and to the extent that somebody is opening up standard-setting in an area, looking at what the other board has done, and attempting to bring those as close as possible. And I think that there's an ability to do that. I think sometimes you have to compromise, but I do think that's possible."

Hohl said he doesn't use the word "convergence." 

"We use the word coordination and cooperation," he added. "English is not the first language of most countries that are applying these standards. There's different customs and rules in various jurisdictions that are [taken] into account. Making sure that we coordinate, cooperate, because 50% of the world's market capitalization is in the United States, so we want to be a strong voice in the international standard-setting community."