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.”
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.”
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 letters from some 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 procyclical, 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.”