We recently attended the AICPA & CIMA Conference on Current SEC and PCAOB Developments in Washington D.C. on December 4-6, 2023. GAAP Dynamics was an underwriter for the conference, specifically the music underwriter. Although we didn’t have anything to do with the playlist (it was selected by the AICPA), it was quite good. As an underwriter we had a table where we hawked our wares and gave out cool GAAP swag. We met a ton of people. Many were friends from the past, but we met a lot of new friends too. Our GAAPologist t-shirts were a hit, so I expect to see fellow GAAPologists proudly sporting their t-shirt around the world!
The conference is a “Who’s Who” of the accounting world. All the big names were there: Munter, Grewal, Williams, Jones, and many others. We affectionately refer to it as the “Woodstock of Accounting.” According to the post-attendee conference list we received from the AICPA, there were over 2,200 people that attended either online or in-person. It is quite the production, and the AICPA did a fantastic job has the host.
In this post, Bob Laffler and Chris Brundrett each share a key takeaway from the conference. Not surprising their takeaways were accounting focused. Next week Vicky and I will share ours, which relate to auditing.
Statement of Cash Flows Get Some Love (Bob Laffler)
The statement of cash flows (SOCF) received a decent amount of attention during the conference, starting with Paul Munter, the SEC’s Chief Accountant, discussing his recent statement highlighting the importance of this financial statement. Although there has been relatively little focus on it in terms of new standards and amendments, the SOCF remains a very important primary financial statement and is a critical component of high-quality financial reporting. In particular, Munter noted that there have been recent observations of preparers and auditors not always applying the same level or rigor to the SOCF, resulting in a number of recent restatements. These recent restatements call into question the due professional care applied to the SOCF, the effectiveness of internal controls over the statement, and the quality of audit procedures being performed on the statement.
When evaluating materiality of both the SOCF and the internal controls over financial reporting of the statement, it is important to consider both quantitative and qualitative factors. Specifically, proper classification of cash flows as operating, investing, or financing is critical to the SOCF and, therefore, an error should not be deemed immaterial simply because it relates to reclassification.
Clear communication was also an emphasis, including careful consideration of how cash versus non-cash information is presented and whether application of the direct method or addition disclosures of gross cash receipts and payments would improve the statement.
The FASB did not want the SOCF discussion to end with the SEC. During a Q&A session, Hillary Salo, the FASB’s Technical Director (and soon to be member of the Board), discussed a current FASB project on the SOCF. The project focuses on the SOCF for financial institutions, specifically, as the existing guidance that outlines operating, investing, and financing cash flows fails to effectively reflect the complexities of such institutions’ operations. The project hopes to reorganize and disaggregate the information on the SOCF for banks and other financial institutions, such as requiring banks to separately disclose cash interest income received during the period. In addition to the project specifically geared to financial institutions, a FASB research project has been launched to broadly explore other SOCF improvements impacting all types of institutions.
The focus on the SOCF is likely an indication that the SEC and PCAOB have this statement on their radar and will be looking closely at its compliance by preparers, and that auditors are properly examining this statement during their audits.
Who Knew the Segment Reporting Standard Would Cause So Much Drama? (Chris Brundrett)
Drama ensued at this year’s conference over the new ASU 2023-07 Improvements to Reportable Segment Disclosures. Interestingly, no one seemed too bothered by the significant expense principle and the new required significant expense disclosures, which is the main focus of the standard. Nor did anyone seem all that interested in the new requirement to disclosure the title and position of the CODM. The excitement was around a smaller change related to the disclosure of segment profit or loss measures. Under the current version of ASC 280, an entity must disclose only one measure of segment profit or loss, and this measure must be the one used by the CODM that is closest to GAAP. Under the new guidance, this is still required, however, and entity may disclose additional measures of segment profit or loss if the CODM uses those additional measures.
This provision, which was highlighted by the FASB and the SEC’s Office of Chief Accountant (OCA) staff during their speeches, generated lots of questions and comments in the conference’s chat room. The “tone” of these questions elicited a strong reaction from the SEC, both from OCA staff and from other members of the Division of Corporation Finance. It seemed that they became increasingly concerned that entities would try to use this new guidance to disclose non-GAAP performance measures in the financial statements, something that is usually a big “no-no”. While they didn’t go against the FASB’s guidance, they did clarify how their guidance on non-GAAP measures interacts with the guidance in the new ASU.
Normally, entities are prohibited from presenting non-GAAP information in their financial statements. There is an exception to this if the information is required by an accounting standard, such as the single measure of profit or loss required by current ASC 280. In addition, entities do not have to apply the SEC’s requirements for non-GAAP measures, again since the measure is required by GAAP. The SEC clarified that this is still the case for the required disclosure of the measure of segment profit or loss that is closest to GAAP. However, if an entity chooses to disclose additional measures of segment profit or loss because they are used by the CODM, they must apply all the non-GAAP rules in Reg G and Reg S-K Item 10(e) to these measures.
Don’t forget to check back next week for Vicky and Mike’s key takeaways on the conference focusing on auditing, specifically new auditing standards, audit quality, and the future of the profession.
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