Remarks before the 2018 AICPA Conference on Current SEC and PCAOB Developments
Kevin L. Vaughn
Senior Associate Chief Accountant
Dec. 10, 2018
The Securities and Exchange Commission disclaims responsibility for any private publication or statement by any SEC employee or Commissioner. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.
Good morning. It is an honor to be here today.
I would like to start this morning by sharing with you a little bit about my role as a Senior Associate Chief Accountant in the accounting group of the Office of the Chief Accountant (“OCA”). I have the privilege of sharing this role with my colleague Jonathan Wiggins. Jonathan and I oversee a team of nineteen dedicated professionals who collectively have a wide range of technical accounting experience as preparers, auditors, regulators, and academics.
We primarily spend our time in three major areas: oversight and monitoring of standard setting, evaluating accounting issues through our consultation process, and communicating key messages. Today, I will give you some further thoughts on our consultations work in general, followed by discussion of a recent consultation relating to the new credit losses standard.
The accounting group spends a large part of our time on our accounting consultation process. At some point, you may have heard us say “OCA is available for consultation.” While those of you who have consulted with us before may be nodding your head in agreement, I suspect there may be some that wonder why so many consult with us on accounting issues.
We view consultation submissions to our office as the initiation of a constructive dialogue between the company, including its auditor and audit committee, and us as the regulator. Consultations often arise after proactive identification of accounting matters by a company and thorough discussion of the issues with the auditor and the audit committee.
Leveraging from our recent consultations experience, I wanted to share with you today a few scenarios where a company may find it useful to consult with us.
The first example is derived from our recent experience in connection with new accounting standards, such as revenue, leases, and credit losses. In connection with implementation efforts, companies have identified significant accounting judgments and/or interpretations. As companies have progressed on implementation efforts, they have identified issues where they reached a conclusion after careful consideration, but recognized there may be alternative conclusions. Although not required, some entities have opted to seek OCA’s views in order to provide greater certainty that their conclusions comply with GAAP.
Similarly, we sometimes receive a consultation from a registrant on a significant transaction that it has entered into but that has not yet been reflected in its financial statements. A company may seek OCA’s views in situations where it identifies a material accounting judgment or conclusion in connection with the transaction, and recognizes the costs involved should the company’s conclusion be found to not comply with GAAP.
Thus far, my remarks have focused on individual companies consulting with OCA on accounting issues, but it is not uncommon for a group of companies to submit a joint consultation to our office. These consultations often have a significant impact as they may involve a pervasive accounting issue, or an accounting issue where there is diversity in views. We have observed recent consultation examples where registrants’ proactive efforts and collaboration in implementing new standards has led to the realization that multiple entities were facing similar issues. In some instances, those groups of registrants decided to collectively consult with our office. Shortly, you will hear about one such consultation relating to the new leases standard, but there have been numerous similar examples in connection with other GAAP standards. In connection with these and other consultations, we frequently hear that registrants find the consultation process to be beneficial.
Of course, there are also other situations where voluntarily consulting with OCA is useful. If you have any questions, please contact us.
Evaluating Subsequent Events in the Current Expected Credit Losses Model
Next, I would like to discuss a recent consultation we received relating to the application of subsequent events guidance following adoption of the new credit losses standard. The consultation submission presented three specific fact patterns that illustrated the unique challenges in applying the subsequent events guidance to the forward-looking estimate of expected credit losses.
As background, with respect to each of these fact patterns, the referenced information was received after the balance sheet date but before the financial statements were issued or were available to be issued. Further, in each fact pattern, the information received was significantly different from management’s expectations.
The staff shared its views regarding the appropriate application of US GAAP on the three specific fact patterns as follows.
The first fact pattern related to the receipt of a servicer report that showed the effects of payment experience (e.g., delinquencies and prepayments) that occurred on or before the balance sheet date. The second fact pattern related to the receipt of an appraisal report that showed information about the fair value of loan collateral as of the balance sheet date. In both of these fact patterns, the staff indicated we would object to a registrant not considering this information in its estimate of expected credit losses. An important consideration in both of these fact patterns was that this information was loan-specific information about factual conditions that existed at the balance sheet date.
The third fact pattern related to the U.S. government’s announcement of unemployment rates for a period that includes the balance sheet date. The staff indicated that we would not object to a registrant either considering or not considering such rates in its estimate of expected credit losses.
In connection with these three conclusions, we shared our view that in connection with the forward-looking estimate of expected credit losses, there can be recognized and nonrecognized subsequent events.
I understand registrants and auditors have continued to engage in discussions to evaluate how a registrant will consider other potential fact patterns that could arise. While registrants will ultimately of course need to consider materiality and their specific facts and circumstances, I thought it might be helpful to share my views regarding how certain types of information received after the balance sheet date but before financial statements are issued or are available to be issued could be evaluated:
- Loan-specific information about factual conditions that existed at the balance sheet date, such as the servicer reports and appraisal reports I mentioned earlier, would be recognized;
- Information relating to forecasting assumptions used in establishing expected credit losses that is received before the registrant has completed an appropriate estimation process would be permitted to be included in the estimate, unless such information indicates a weakness or a deficiency in the registrant’s estimation process, in which case the information would be recognized; and
- Information relating to forecasting assumptions used in establishing expected credit losses that is received after the registrant has completed an appropriate estimation process would not be recognized, unless such information indicates a weakness or a deficiency in the registrant’s estimation process, in which case the information would be recognized.
As a reminder, Topic 855 includes required disclosures for nonrecognized subsequent events.
Thank you for your time today.
 See FASB Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (June 2016) which is codified in ASC Topic 326, Financial Instruments – Credit Losses.
 See FASB ASU No. 2014-09, Revenue from Contracts with Customers (May 2014) which is codified in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, FASB ASU No. 2016-02, Leases (Feb. 2016) which is codified in ASC Topic 842, Leases, and FASB ASU No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (June 2016) which is codified in ASC Topic 326, Financial Instruments – Credit Losses.
 Examples could include, but are not limited to, a new financing arrangement with characteristics of debt and equity, or a business combination transaction.
 See Andrew W. Pidgeon, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2018 AICPA Conference on Current SEC and PCAOB Developments (December 10,2018) available at: https://www.sec.gov/news/speech/speech-pidgeon-121018
 ASC Topic 855.
 ASU No. 2016-13 included amendments to Topic 855 to reflect the change from an incurred loss model to an expected credit loss model. These amendments did not change the principle for determining a subsequent event that should be recognized in the financial statements.
 See ASC 855-10-50-2 and 855-10-50-3