SEC looking at Trump proposal on quarterly financial reporting

Securities and Exchange Commission Chairman Jay Clayton said the SEC is looking at a proposal from President Trump to change the quarterly financial reporting cycle for public companies.

In August, Trump tweeted, “In speaking with some of the world’s top business leaders, I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!”

Clayton indicated Monday that the SEC is taking the proposal seriously. “The president was right to raise this issue,” he said during Financial Executives International’s Current Financial Reporting Issues conference in New York. “He touched a nerve because I don’t think any of us want our very important private sector enterprises to be run on a short-term quarter to quarter basis. That’s important. I hope that most management teams have a strategic plan that goes out two, three or four years and are looking to invest over that horizon. Look, there are people in this room that have industries where your investment horizon is 10, 15, 20 years. You can’t be running your organization for December 31 of this year exclusively.”

SEC Chairman Jay Clayton at Financial Executives International's Current Financial Reporting Issues conference in New York

However, Clayton also pointed to some of the benefits of quarterly reporting for investors. “That said, you can see the other side of it, which is that our capital markets thirst for information,” he said. “They thirst for reliable, comparable regular information. That’s a reality. So the president raised a very good point, and we’re looking at it.”

Clayton noted that oftentimes, investors pay more attention to the earnings press releases than the 10-Q quarterly financial reports and 10-K annual reports. “I can give you some observations that are informing the way I think about it,” he said. “You go through the Q process times a year and then the K process. There was a time when in many cases the earnings release would come out before the Q. If the stock moved after the Q came out and not when the earnings release came out, you had a big problem. You had a huge problem, which meant really all of the quarterly information that was necessary for the market was in the earnings release. So one of the questions I’ve been asking myself is do we need that Q process every quarter, or do we need it every six months with something that is less voluminous, but still provides all of the quality information that investors need? It’s a good question, but in terms of a quarterly reporting cycle, I think we all have to recognize that whether it’s your credit agreement or indentures, all of these other parts of your corporate ecosystem, they’re based around this concept. But I very much support the president’s question of are we managing too much for the short term and what can we do about it?”

SEC chief accountant Wesley Bricker noted that the question of dispensing with quarterly financial reports has been on the SEC’s radar for years now, pre-dating Trump’s tweet. “This has been on an agenda through the Reg S-K concept release where we got valuable input in 2015,” he said during a press conference. “That input in 2015 has contributed to our thinking on our Regulatory Flexibility Agenda, which is where the commission and all other government agencies describe their outlook for the next 12 months. On that agenda, which is available online, it includes an entry for looking at the frequency of reporting and the nature of internal reporting. That’s designed as a request for comment, not a specific proposal, and certainly not a final rule. It’s a request for comment to continue to gather input from how the balancing of information in our marketplace and the thirst for information has changed with the duplication that may arise with an earnings release and a 10-Q quarterly filing.”

Tax Reform Guidance

Clayton and Bricker also discussed how companies have been providing other disclosures, including how they responded to the SEC’s Staff Accounting Bulletin No. 118, which came out shortly after the Tax Cuts and Jobs Act passed last December. It offered guidance on how companies could account for income taxes after the far-reaching changes in the corporate tax code under the legislation.

“For many of you, you understand related to the timely disclosure of information about income taxes, particularly where income tax law had changed days before many companies were closing their books,” said Bricker. “So the way we thought through that circumstance was balancing how to get timely information to the marketplace consistent with the normal reporting cycle, but also to reflect the practicability of getting the change in tax law digested into the accounting records. So I think the approach they landed on was one of letting management describe to the marketplace where they are.”

Clayton praised the work of the SEC’s Office of the Chief Accountant and the Division of Corporation Finance in releasing the guidance on the new tax law. “It happened right near the end of the year, and they came out with guidance very quickly, and the guidance had this very practical element to it,” he said. “It was ‘OK, you know the rules, you know the calculations are going to be difficult, but we expect you to do what you can reasonably do in the time allotted for it, and inform us along the way of how you’re looking at it.’ That’s pretty simple, but it took a lot of engagement, a lot of foresight and many times at the commission you measure success by the number of complaints. We haven’t received any complaints from the investment community, the preparer community or the audit community, so my hat is off to our chief accountant and his team and the head of the Division of Corporation Finance and his team did a terrific job on this.”

Brexit Disclosures

Clayton and Bricker were asked whether similar staff accounting bulletins might be released by the SEC about other issues, and they cited Brexit as an important area for companies.

“One of the areas that probably doesn’t need a SAB 118, but does benefit from continued focus by this group is a topic like Brexit,” said Bricker. “For many of you, or many of your companies, you have activities with integrated supply chains, integrated financing around the globe, that all depend upon or are impacted by the negotiations between Britain and the EU. That’s an area where disclosure has come along, but I’ll say this year-end should deepen as you understand the connectedness of your businesses to those issues on things like the assumptions that go into asset valuations, the assumptions that go into income, the assumptions that even go into the basis of presentation, whether it’s a going concern basis or a liquidation basis, the assumptions that go into your financing, and the narratives that bring all of that together so that investors understand that circumstance and how companies are managing.”

Clayton believes companies should be providing more disclosure about their plans for Brexit, especially if there’s a “hard Brexit” in which the EU and the U.K. fail to come to terms on an agreement for a smooth transition.

“Wes described this at the preparer level,” said Clayton. “Let me just say at the disclosure level more generally, we are focused on Brexit disclosure and we are going to be more focused on it going forward. We have seen a wide range of disclosure in the same industries — Company A with a fairly detailed discussion of how management is looking at the issue of Brexit and the impact for its company, and Company B with what I would say is a macro policy statement that Brexit is coming and it presents a risk. I want to see the disclosure to the extent that it’s material and appropriate gravitate toward Company A. My personal view is that the potential impact of Brexit has been understated, and that those impacts will start to manifest themselves before the current Brexit ‘go live’ date. If you add together I would say the more cautious disclosure in the marketplace, you start to get greater unease as to the knock-on effects of a no deal or a hard Brexit. I would expect companies to be looking at this closely and sharing their views with the investment community.”

CECL Implementation

Financial Accounting Standards Board vice chairman James Kroeker discussed the current expected credit losses standard at the conference, and whether there are plans to modify it in response to comment letters from some banking groups.

“Accounting standards should reflect how the business is run, both from the eyes of management, but then to reflect that in a way that is aligned with economic activity,” he said during a press conference. “To the extent that accounting wasn’t doing that in the past, that was the incurred loss approach, which is disconnected from the risk. There were criticisms about does that in and of itself build an economic pattern that risk becomes much more apparent right at the time when you enter into a crisis. If you recall at the time, there was a lot of discussion about how the incurred loss approach was pro-cyclical, so figuring out whether or not providing that information to investors better aligns with risk management, my view would be that actually provides at least from the investors’ investing of capital greater stability that you have that insight. Of course, the letter talks about that interaction with regulatory capital, which is separate and apart from the information that investors get for making their decisions.

He noted that FASB is continuing to monitor the progress of a Transition Resource Group that has been set up to help companies make the transition to the new standard. “The number of questions that are out there on CECL have decreased and the volume hasn’t been significant even to start with,” he noted. “But in terms of understanding a reasonable application of CECL and people’s readiness to implement it, we continue to get positive messages. That is, people aren’t behind the curve. CECL is the enacted standard, so I would urge people to continue to move forward, expecting to implement it on the effective date.”

A FASB spokesperson added, "Based on lessons learned from the 2007-2009 financial crisis, the FASB embarked on its project to require more timely recording of credit losses on loans and other financial instruments held by all entities, including financial institutions. As part of that process, we conducted hundreds of meetings and other outreach with regulators, banking institutions, and other stakeholders to analyze and develop a standard that meets that objective. As we articulated at our Credit Losses Transition Resource Group meeting on Nov. 1, 2018, we will carefully review the proposal submitted by the banks and determine if further action is warranted."

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