Remarks before the 2016 AICPA Conference on Current SEC and PCAOB Developments
Sean May, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 5, 2016
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
Good morning, it is a pleasure to be here today. I would like to discuss implementation of the new credit losses standard, the importance of consistent accounting policies, and the judgment required to determine if a grant date has been established in connection with a share-based payment award.
New GAAP - Credit losses
First, I would like to talk about the new credit losses standard. Given registrant holdings and the wide range of financial assets that are affected by the new credit losses standard, including loans, debt securities, and trade receivables, virtually every registrant will be affected. I currently lead the topic team in OCA’s Accounting Group that covers financial assets, and we are actively monitoring the implementation of the new credit losses standard. Our efforts include meeting with various members of the accounting profession, including representatives from the FASB, accounting firms, regulators, registrants, and industry groups to obtain an understanding of the various implementation questions that are arising and how they will be addressed.
The standard will be effective for calendar year-end SEC registrants in 2020. That effective date may seem far off, but given the potential significance to a registrant’s financial reporting processes, I encourage registrants to allocate appropriate time and resources to make the most of the implementation time provided. While investors, auditors, regulators, the FASB staff, and members of the FASB Transition Resources Group for Credit Losses all have an important role to play in implementation, registrants are in a unique position to start the process of identifying challenging implementation issues. Management, after all, is responsible for developing a best estimate and communicating that estimate to users of the financial statements. This is especially important to meet the objective of providing investors with an estimate of expected credit losses that is most reflective of a registrant’s expectations.
After considering the standard, registrants from all industries may advance implementation efforts by first assessing how their existing methods and processes for estimating incurred credit losses would need to be adjusted to develop an estimate of expected credit losses. The standard does not specify a one-size-fits-all method for measuring expected credit losses, and different methods will have different implementation issues.
While the standard allows for different methods among registrants, each registrant has the responsibility of developing accounting principles and methods of applying those principles that are then consistently applied from one accounting period to another. Management’s documentation of policies, procedures, methodologies, and decisions will continue to be necessary to support books and records. Given the need to incorporate reasonable and supportable forecasts in applying the new standard, the guidance in FRR No. 28 and SAB No. 102 will continue to be relevant in evaluating whether the key principles of the new credit losses standard have been achieved. Specifically, in planning for implementation of the new standard, registrants engaged in lending activities should be preparing to support their expected credit loss estimates through documentation of a systematic methodology to be employed each period, with rationale supporting each period's determination that the amounts reported are consistent with the principles of the new standard. The systematic methodology employed should ensure that matters affecting loan collectibility are consistently and appropriately identified, and that the findings are considered in an appropriately disciplined manner by persons exercising judgment in determining the amounts to be reported.
Next, I would like to turn my attention to accounting policies and the importance of those policies when evaluating whether a registrant has made a change to its accounting principles. New GAAP, like current GAAP, requires the selection and disclosure of a registrant’s accounting policies. Those accounting policies include a description of the accounting principles followed by the entity and the methods of applying those principles. GAAP has a long-standing established presumption that accounting principles, once adopted, shall be consistently applied to events and transactions of a similar type. Consistent use of the same accounting principle from one accounting period to another enhances the utility of financial statements for users by facilitating analysis and understanding of comparative accounting data.  To that end, information about the accounting policies adopted by an entity is essential to a financial statement user.
I would now like to provide some comments regarding the judgment required to determine if a change a registrant makes to its accounting policies results in the adoption of a new accounting principle that should be evaluated for preferability. Topic 250 provides guidance regarding the accounting for and reporting of changes in accounting principles, including when a change is appropriate and whether an entity must justify whether the change is preferable. Newly issued accounting standards often necessitate registrants to change or adopt a new accounting principle, and such changes do not require an evaluation of preferability. Additionally, Topic 250 also states that events or transactions that are clearly different in substance from those previously occurring may necessitate the adoption of a new accounting principle or modifying an existing accounting principle, and therefore do not constitute a change in accounting principle that required an evaluation of preferability. The selection, documentation, and disclosure of accounting principles provide the foundation for assessing whether the financial statements are in accordance with GAAP.
OCA has had consultations with registrants involving fact patterns in which the registrant decided to put in place an alternative accounting policy for certain new transactions or events. Determining whether transactions or events are clearly different in substance from those occurring in the past requires judgment. Clear documentation regarding the nature of the transactions or events that resulted in the existing accounting policy is the starting point of that analysis. In fact, when a registrant consults with OCA regarding a specific accounting conclusion, we often start by reviewing their documented accounting policies. Also, I observe that identifiable differences between certain transactions or events does not necessarily equate to a clear difference in substance that necessitates a new or revised accounting principle.
Establishing a Grant Date
Finally, I would like to spend a couple of minutes discussing the need for judgment regarding whether a grant date has been established for a share-based payment award. Share-based payment awards may include certain terms or conditions that allow those with authority over compensation arrangements to clawback all or a portion of a share-based payment award. The terms or conditions in an award that permit a clawback may be objective or they may allow those with the authority over compensation arrangements to apply discretion.
Determining whether there has been a grant date is important because Topic 718 notes that the cost of services received from an employee in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the equity instruments issued. However, if the service inception date precedes the grant date, recognition of compensation cost for periods before the grant date shall be based on the fair value of the award at the reporting dates that occur before the grant date. Topic 718 defines a grant date, in part, as the date at which an employer and an employee reach a mutual understanding of the key terms and conditions of a share-based payment award.  The key terms and conditions could be part of a written agreement, an oral agreement, or the entity’s past practice.
If an award includes a key term or condition that is subject to discretion, which may include some types of clawback provisions, then a registrant should carefully consider whether a mutual understanding has been reached and a grant date has been established. When making that determination, a registrant should also assess the past practices exercised by those with authority over compensation arrangements and how those practices may have evolved over time. To that end, registrants should consider whether they have the appropriate internal control over financial reporting to monitor those practices in order to support the judgment needed to determine whether a grant date has been established.
Thank you for your kind attention.
 Accounting Standards Update (ASU) 2016-13 Financial Instruments-Credit Losses (Topic 326), BC 63.
 401.09.b Procedural Discipline in Determining the Allowance and Provision for Loan Losses to be Reported (Added by Financial Reporting Release No. 28).
 ASC 235-10-50-3.
 ASC 250-10-45-1.
 ASC 235-10-50-1.
 ASC Glossary defines a change in accounting principle as “A change from one generally accepted accounting principle to another generally accepted accounting principle when there are two or more generally accepted accounting principles that apply or when the accounting principle formerly used is no longer generally accepted. A change in the method of applying an accounting principle also is considered a change in accounting principle.” ASC 250-10-20.
 ASC 250-10-45-2.
 ASC 250-10-45-1.
 ASC 718-10-30-3.
 ASC 718-10-55-112.
 ASC 718-10-20.
 ASC 718-10-55-81.