Financial Reporting

SEC Chief Accountant on What’s Next for IFRS, Rev Rec and Audit Committees

At Financial Executives International's conference in New York, U.S. Securities and Exchange Commission Chief Accountant Jim Schnurr shared his thoughts on the future path of IFRS, implementation concerns relating to the new revenue recognition standard, and expectations for upcoming efforts to improve Audit Committee disclosures.

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Noting his appearance at FEI’s Current Financial Reporting Issues (CFRI) conference was his second public speaking engagement since taking office, Schnurr did not demure when it came to the topic of revenue recognition and the pace (or lack thereof) of the FASB/IASB’s Transition Resource Group.

Rev Rec – Thoughts on the TRG, and Deferral

Noting that first and foremost, “my interest is to protect U.S. investors,” Schnurr spoke on the question before the FASB on whether it will defer the effective date of its rev rec standard. (Currently, the effective date for  the  rev rec standard,  issued by FASB in May of this year, is for “annual reporting periods beginning after Dec. 15, 2016” for public companies, and a year later for private companies.)

Although he did not explicitly call for FASB to defer the standard, his comments could be seen as pulling for such a decision, based on implementation issues he has been made aware of, raised by “quite a few organizations,” as well as additional issues the SEC has identified.

“I have spoken to [FASB Chairman] Russell Golden and [Vice Chairman] Jim Kroeker about my concerns,” said Schnurr, adding those concerns are focused on topics including what is “distinct” as that term is used in the standard, and questions around “perfunctory” performance obligations. That is a key question, since the new standard requires performance obligations to be identified within contracts and revenue to be recognized as those obligations are satisfied.

Schnurr also implied the number of questions on the TRG’s docket (25 to 30 at its last meeting) may be only a fraction of the actual number of implementation questions constituents have so far. He encouraged preparers to send those questions to the TRG, which would in effect make their ‘inventory’ of implementation issues, as Schnurr referred to it, more reflective of reality.

This in turn, one can surmise, will help FASB reach its decision on whether to defer the standard, a decision that presumably will turn on the extent and depths of implementation issues raised that could not be resolved quickly by discussion within the TRG.

Noting there were “many unanswered questions,” calling for clarity, Schnurr said “I think it’s important these questions be answered on a more timely basis,” with further comments hinting that business as usual won’t be enough. “I would expect there would be more timely activity than what we have seen from the Transition Resource Group.”

Among the most significant issues with the new standard, the chief accountant said, is that companies looking ahead to ‘retrospective adoption’ are looking at contracts they have in place now, and are considering whether they may have to make changes to those contracts due to the pervasive impact of the new standard, which is based on the identification of performance obligations in contracts.

Making it clear he will exercise the SEC’s oversight role over FASB, Schnurr added, “We will be pushing very hard to get questions answered, and allow you to do your job.”

Asked in a session with the press after his panel, when the SEC plans to issue its own guidance on rev rec, Schnurr replied he doesn’t want to pre-empt FASB.

IFRS: Hopes to ‘Expand the Dialogue’ in the Near Future

Turning to the topic of International Financial Reporting Standards (IFRS), Schnurr led off his comments with the fact that SEC Chair Mary Jo White commented last Spring that it was important for her and the commission to address what, if any alternatives, for the use of IFRS by U.S. registrants should be considered by the commission.

“One of the first things Mary Jo asked me to take on is to spend some time with my staff and others getting the benefit of all the research, any analysis [the SEC staff] has done, with respect to a number of alternatives discussed throughout the last six years in terms of the use of IFRS in the U.S. marketplace.”

He added, that for the past few weeks, he has been working with the SEC staff on this issue, and, “In the next few months, hopefully I’ll be in a position in the near term to provide my views to Mary Jo, on the things that she should consider, and then, hopefully move forward with a broader dialogue with the financial reporting and investor community.”

Two criteria would need to be met, stated Schnurr, for an alternative to be deemed viable. The criteria the chief accountant described appear to fall into ‘qualitative’ and ‘quantitative’ categories, as follows:

  • The alternative has to be in the best interest of the U.S. investor community, and
  • There would have to be an economic impact analysis to be done, in order for any rulemaking; that would have to demonstrate there would not be a significant cost associated with that alternative, vs. any perceived benefits

On top of that, Schnurr noted, “there are some significant legal and statutory hurdles… other considerations that have to go into whether or not a particular alternative is viable to go forward.”

What’s Schnurr’s personal position? “At this point I haven’t come to any judgments,” he said, adding, “all I would say is, ‘stay tuned.”

Schnurr closed this section of his remarks reiterating what I believe may become a mantra (at least until the SEC takes some formal action or issues a document formally calling for more input on alternatives:, “I hope that, in the near term, we can begin to expand the dialogue on the alternatives.”

Concept Release Coming on Audit Committee Disclosures

Addressing the issue of ramping up audit committee disclosure requirements, something that the SEC chair recently indicated would be issued in the form of a Concept Release, Schnurr said that “staff are in the process of drafting a Concept Release on Audit Committee disclosures, that would focus on additional required disclosures companies would have to make in their proxy statements.

The objective of this pre-proposal or Concept Release, said Schnurr, was to:

  • Get consistency in Audit Committee Disclosures, and
  • Improve the performance of all Audit Committees

Companies can expect to see this Concept Release in ‘early 2015,’ said Schnurr, adding that his staff has been working diligently on the release, which apparently may take a page (figuratively, if not literally) from recent recommendations made by a private sector collaboration (referred to generically by Schnurr), one such collaboration formed by the Center for Audit Quality, the National Association of Corporate Directors, and other investor and director groups issued recommendations recently.

“Quite a few companies have adopted many of those suggested disclosures in their 2014 proxies,” said Schnurr, adding, “In thinking about disclosures,” companies are benefiting from that exercise, beyond just the disclosure themselves, such that, “Its upped the game of audit committees.”

In other words, based on what Schnurr shared, it appears that at least in some instances, enhanced audit committee disclosures may be impacting the behavior of audit committees, enhancing good corporate governance, and  thereby strengthening the U.S. capital markets.

Questions likely to be addressed, in my view, will fall into cost-benefit considerations, which will incorporate legal liability concerns; for this reason, dialogue between CFOs and chief legal officers or CLOs will likely be useful when the commission’s Concept Release on Audit Committee Disclosure comes out.

To learn more about revenue recognition, tune into tomorrow’s webcast (Nov. 20, 12 noon ET) Revenue Recognition: It’s Here, Are You Ready? Transitioning to the New Revenue Recognition Standard. Featured speakers include Chris Wright, Steve Hobbs and Russ Collins, managing directors at Protiviti, and Angela Stephens, SVP and controller, Dr. Pepper Snapple Group, Inc. And check out the report published earlier this week by PwC and the Financial Executives Research Foundation: 2014 Revenue Recognition Survey. Keep up with new events and publications on this topic at www.financialexecutives.org/revrec.