Private companies will not know when coming FASB disclosure rules that are aimed at incorporating certain SEC disclosures into U.S. GAAP will take effect until after public companies adopt the provisions, but that date is not yet clear, according to Private Company Council (PCC) discussions on June 22, 2023.
Further, public companies will not know when to adopt certain of the FASB disclosures until whenever the SEC removes its disclosures from its own literature—an unclear process that makes private company accountants uneasy.
The FASB rules will be issued in early fall. Private companies have to adopt the guidance two years after public companies do.
“So how am I going to know if I’m a private company and I don’t follow the SEC – how am I going to know when that two years is for each one of these?” PCC Chair Candace Wright asked the board. “Because I think private companies don’t necessarily monitor the codification on a regular basis either unless they know that they need to go there to look for something,” she said.
Wright, a director with Louisiana-based Postlethwaite & Netterville, stressed that there is the potential for privately held companies to miss the effective dates, if they apply, and thus the disclosures could fall under the financial reporting radar. “If it does apply hopefully somebody’s paying attention,” she observed.
The issue hinges on stringent monitoring by FASB staff – potentially for years, the discussions indicated. If there are any disclosures that the SEC does not remove by June 30, 2027, for example, the FASB amendments will expire and the disclosures will not become effective, and which point the board will have to revisit the topic.
In the meantime, “we’ll certainly make sure that we have communications on it well in advance; there’s a lot of channels there, there are different webcasts, press releases, PCC in addition to updating the date in the codification,” a staff member said.
The topic was also flagged during FASB redeliberations on the proposal last month. “That was a point that was raised to say that we need to be sensitive that we need to make sure that there’s a mechanism to get the word out,” FASB member Susan Cosper added. “So it was definitely acknowledged that that was something that we need to make sure we do somehow.”
The 12-member PCC is composed of financial statement users, preparers, auditors and academics that work with the FASB to develop U.S. GAAP for privately owned companies.
Dates Hinge on SEC Action
The issue is specific to Proposed Accounting Standards Update (ASU) No. 2019-600, Disclosure Improvements, Codification Amendments in Response to the SEC ’s Disclosure Update and Simplification Initiative, which was developed stemming from the SEC’s move in July 2016 to propose amendments to certain of its disclosure requirements that it identified as duplicative, overlapping, or outdated in light of other SEC disclosure requirements, the GAAP Codification or changes in the information environment.
In 2018, the SEC voted to adopt the proposed amendments as part of Release No. 33-10532 and formally referred 27 disclosure requirements to the FASB to be considered for incorporation into the codification as GAAP.
The amendments in the SEC’s final rule are intended to simplify compliance with GAAP and SEC rules without significantly altering the total mix of information provided to investors. The SEC has not yet removed the disclosure requirements referred to the FASB because that would have resulted in disclosures being removed that are incremental to what is currently required by the Codification. “The SEC indicated that it will review the Board’s decisions in future rulemaking to reduce duplicative guidance between the SEC and the FASB,” according to board meeting papers.
The FASB’s proposal was issued in 2019 focused on 19 of the 27 referred SEC disclosures. Last month, the board voted to finalize 14 of the proposed disclosures of which 11 are relevant to privately owned companies. Among revisions, the board said it would revise a disclosure item around derivative accounting policies so that it is only required annually; and keep but exempt private companies from having to provide a weighted average interest rate disclosure in relation to repurchase agreements. New disclosures will need to be applied prospectively.
“The board decided that each disclosure will be effective as the SEC removes the applicable disclosures from their requirements and this is because the board was concerned about interpretation challenges,” FASB staff explained to the PCC. “So the wording in the wording in the SEC guidance versus the wording that will be in the codification are not word for word the same but the intent is the same so we’re just trying to avoid some duplication challenges,” she said. “So companies that are currently complying with the SEC disclosure requirements will be required to adopt the disclosures when the disclosures are effectively removed from the SEC guidance.”
In addition, companies that are not applying those disclosures today will have two years to adopt the disclosures once they are effective for the entities currently applying it. “So simplistically and if I can generalize, it will be effective for private companies two years after public companies adopt,” she said. “However, this does not preclude private companies from providing these disclosures earlier to the effective date as companies are allowed to provide voluntary disclosures.”
Rules Won’t be Onerous but Two Disclosures Flagged
In general, the disclosures appear to be operable and would not be onerous or costly to prepare, several PCC members said. However two disclosures were flagged that might prove contentious.
The preferred shares disclosure is “a little confusing to me in some respects as far as the parenthetical disclosure needed for involuntary liquidation,” and therefore hope “there’s additional perspective on that,” Douglas Uhl, principal team leader, corporate accounting policy at Chick-fil-A, Inc., said.
Moreover, in relation to derivatives, the requirement to disclose realized gains and losses and where in the cash flows statement could raise a potential debate around how decision-useful it is versus cost benefits, he said.
This article originally appeared in the June 26, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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