Progress Is Being Made: Continued Focus on Addressing Implementation Matters
Remarks before the 37th Annual SEC and Financial Reporting Institute Conference<br>Los Angeles, CA
June 7, 2018
The Securities and Exchange Commission (“SEC” or “Commission”) disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
Good morning and thank you for the kind introduction.
Before I begin, let me remind you that the views expressed are my own and not necessarily those of the Commission, the Commissioners, or other members of the staff.
Please let me first express a word of gratitude to the accounting group (“Accounting Group”) within the Office of the Chief Accountant (“OCA”) for all of their work including their efforts on revenue recognition, leases, and measurement of credit losses on financial instruments (“new GAAP standards”) that we will be discussing today. I also want to specifically acknowledge Michael Berrigan, Andrew Pidgeon, Brian Staniszewski, Sheri York, and Rahim Ismail for their assistance in today’s remarks.
The focus of my remarks today will be 1) to discuss the work our group has been involved with on the financial reporting implications of the new tax law, and 2) to provide an update on the implementation of the new GAAP standards from previous comments made by our office.
SEC staff guidance on reporting implications of Tax Reform and New GAAP Standards
The observations I will discuss today are derived from the experience we have had on our recently issued Staff Accounting Bulletin No. 118 (“SAB 118”) and the implementation of the new GAAP standards.
Before I delve into specifics, I did want to note that during the last few months we have seen the adoption of the new revenue standard by calendar year-end public business entities. First and foremost, I want to thank those involved in the financial reporting process for all of their hard work regarding the implementation of the new revenue standard. The efforts to date have been a true collaboration between preparers, auditors, audit committees, standard setters, and regulators, and have been done both domestically and internationally. It is an encouraging sign as the effective dates for leases, and measurement of credit losses on financial instruments nears. I will speak more on revenue recognition shortly.
Let’s now specifically discuss tax reform (and specifically SAB 118) and the ongoing implementation efforts for each of the new GAAP standards.
Let’s start by sharing some observations on tax reform and the related financial reporting implications. Last year, on December 22, 2017, as you know, an Act was signed into law that represented the most comprehensive overhaul of the United States (“U.S.”) tax law since 1986.
Prior to the Act being signed into law, we observed that the income tax accounting guidance addresses the accounting for a change in tax laws or tax rates. This guidance, however, did not appear to address certain circumstances that could arise in accounting for the income tax effects of the Act.
One of the many challenges OCA staff started to hear from various stakeholders—leading up to December 22, 2017—was on timing. Specifically, registrants indicated they could encounter situations in which the accounting for certain income tax effects of the Act would be incomplete by the time financial statements are issued for the reporting period that includes the enactment date. OCA staff also became aware that registrants could approach accounting for the Act differently which in turn, could give rise to uncertainty or diversity of views in practice regarding the application of the income tax accounting guidance for purposes of reporting the effects of the Act.
So, given that background when the Act was enacted on December 22, 2017, the staff issued SAB 118 on that same day to clarify and address any uncertainty or diversity of views in practice in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act.
I will plan to touch on SAB 118 in more detail, but I first want to thank all of the stakeholders that provided feedback to OCA and the Division of Corporation Finance during the periods leading up to December 22, 2017. Such feedback was extremely helpful as the staff considered potential paths forward to address this matter.
Now, I’d like to share a few observations regarding SAB 118.
Let me start by clarifying that SAB 118 is not providing an option to defer application of the income tax accounting guidance. While some stakeholders requested a deferral option, the staff opted to not follow that approach. Instead, we believe that the approach highlighted in SAB 118 provides investors with better and more timely information and addresses the financial reporting concerns raised by various stakeholders leading up to the enactment of the Act. The approach ensures investors receive decision useful information related to the income tax effects of the Act in a timely manner. A deferral option would not have yielded such results for investors and therefore, the staff opted not to follow such an approach.
A second observation of SAB 118 is that it categorizes the accounting for the income tax effects of the Act into one of three “buckets.”
- Bucket 1 represents the income tax accounting effects of the Act that an entity is able to complete. Some entities, however, may not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. This brings us to the next bucket – Bucket 2.
- Bucket 2 represents the specific income tax accounting effects of the Act that are not yet complete, but for which an entity can determine a reasonable estimate. The reasonable estimate should be reported as a provisional amount in the first reporting period a reasonable estimate can be determined. Additionally, there may be certain situations in which a reasonable estimate cannot be determined. This brings us to the last bucket – Bucket 3.
- Bucket 3 represents those specific income tax effects for which a reasonable estimate cannot be determined. In such cases there should be no provisional amount included in the financial statements for those specific income tax effects for which a reasonable estimate cannot be determined.
For the specific income tax effects that fall into Bucket 2 or Bucket 3, the SAB notes that an entity should be acting in good faith to complete its accounting during the measurement period. Let me clarify a point about the measurement period and the expectation to be acting in good faith. SAB 118 states that the measurement period ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting required under ASC 740 and in no cases should the measurement period extend beyond one year from the enactment date. This should not be interpreted as a window to put pencils down until we are close to one year from the enactment date to get started on the accounting. Instead, entities should continue to keep moving in good faith to complete the accounting. The measurement period ends when an entity has completed the process described above, which for certain income tax effects of the Act could be well before the one year mark.
So to be clear, some entities depending on their facts and circumstances and for specific income tax effects may complete the accounting in the early to middle parts of the measurement period, while other entities may not be able to complete the accounting for certain income tax effects until the end of the measurement period. There are no bright lines as to when the accounting for a specific income tax item should be completed during the measurement period; when the accounting is completed will clearly vary depending on an entity’s facts and circumstances. The key is to simply be progressing in good faith when looking to the staff’s guidance in SAB 118.
The last observation I’d like to highlight regarding SAB 118 is the included disclosures. I want to emphasize that the disclosure guidance in SAB 118 should not be overlooked. Such disclosures provide important information to financial statement users about the financial reporting impact of the Act where the accounting is incomplete and are a meaningful component of SAB 118. The staff has been monitoring—and will continue to monitor—SAB 118 disclosures.
Next, I’d like to share a few observations on implementation issues.
- First, the comprehensive overhaul to the U.S tax law may present unique application issues when applying the income tax accounting guidance to certain provisions of the Act. I want to highlight that OCA staff stands ready to continue to address application issues on an as needed basis. To date, OCA has already received consultations related to accounting considerations arising as a result of the Act.
- Second, the Financial Accounting Standards Board (“FASB”) staff issued five Staff Q&A documents in January 2018. The FASB also issued guidance in February 2018 to address a matter related to the Act.
My takeaway for practice is to ensure any application issues in applying the income tax accounting guidance related to the Act are raised, which can, for example, be through continued consultations with OCA staff.
Next, I would like to provide an update on revenue recognition.
The implementation of the revenue recognition standard required a significant effort from many stakeholders and OCA was active in supporting the implementation efforts. You may recall OCA outlined our plans for the transition period back at the 2015 BNA Conference on Revenue Recognition, and I am proud to say we continued to execute this strategy throughout the last few years.
A few examples of the significant efforts include:
- Active monitoring of implementation groups such as the Transition Resource Group (“TRG”) for revenue and AICPA Task Forces;
- Participating in a wide variety of meetings with preparers, industry groups, and accounting firms, to provide insights on application issues;
- Providing the views of the staff to a significant number of registrants through the consultation process;
- Delivering over 20 published OCA staff speeches with the goal of sharing the results of our active monitoring and consultations in order to create institutional knowledge across the profession.
- Providing training to support the education of several accountants within the SEC.
As we progressed over these few years from broad implementation efforts to company specific finalization of accounting positions, registrants consulted with OCA on a wide variety of topics. Over this time period, consultations related to revenue recognition represented the most commonly consulted topic within OCA.
While consultations received to date have related to a number of topics, several of which have been communicated in previous speeches, the most frequently discussed issues related to the identification of performance obligations and the application of the principal versus agent guidance.
As I mentioned earlier, last year we shared observations from the experiences we had with the implementation of the new revenue standard. We have heard from many constituents that these observations were useful and allowed them to focus their efforts in key areas as they worked towards a high quality implementation of the new standard.
For those companies that are still working on adoption, we encourage you to keep the momentum going. As a reminder, OCA staff continues to be available for consultation on a formal or informal basis to both domestic and foreign registrants.
The new leases standard is the next new GAAP standard from which investors will benefit from widespread adoption. For those registrants that are not early adopters, the 2019 adoption of the new leases standard is quickly approaching. The new leases standard has been a significant focus of OCA, and our focus is naturally increasing as the effective date nears.
In my view, the new leases standard will result in improved transparency and consistency in accounting for lease arrangements. Users of lessee financial statements will benefit from lessee recognition of an asset and a liability for nearly all of their leases, not just capital leases. Said differently, operating leases will no longer be “off balance sheet” in many cases. Similar to the new revenue standard, the new leases standard will also enhance the quality and transparency of information disclosed in the notes to the financial statements. The disclosures will aid in investor understanding of the amount, timing, and uncertainty of cash flows arising from leases.
Experience, such as that gained during implementation of the new revenue standard, has taught us that high quality implementation of a new accounting standard takes time, and that doing anything for the first time can be challenging.
With respect to guidance on lease implementation, I will echo what we have previously stated: for those underway, keep going, and for anyone else, get going. Implementation will require (among other steps): understanding the accounting and disclosure requirements of the new standard; identifying relevant arrangements and leases within those arrangements; determining appropriate accounting policies, including applicable transition elections; applying the new standard to arrangements within the scope of the standard; preparing transition and ongoing disclosures; and establishing adequate and appropriate processes and controls to support implementation and application of the standard, including the preparation of required disclosures.
I want to expand on an item I just mentioned: the identification of an entity’s leases. It is important for registrants to ensure their implementation plans include sufficient time to identify arrangements that include leases subject to Topic 842. I am emphasizing this point because it may require time to complete; registrants should carefully evaluate all of their arrangements and transactions to evaluate the appropriate accounting literature. A thorough and complete process to identify arrangements subject to the new standard will enable investors to fully benefit from transparency about a registrant’s leases.
In contrast to the new revenue and credit losses standards, the FASB did not establish a transition resource group (“TRG “) to support the implementation process for the new leases standard. We support that decision. In the absence of a TRG, the FASB has been active in listening and responding to stakeholder feedback, with the objective of ensuring “a smooth transition” to the new standard. To date, the FASB efforts have resulted in the issuance of an Accounting Standard Update (ASU), and two proposed ASUs. The issued ASU clarifies the application of the new leases guidance to land easements and eases adoption efforts related to land easements. One of the proposed ASUs would simplify transition requirements and, for lessors, provide a practical expedient for the separation of lease and non-lease components in an arrangement. The other proposed ASU would clarify certain aspects of the new standard, including transition. The FASB has also added a project to its agenda to address issues related to lessor accounting for certain lessor costs, such as sales taxes and property taxes and insurance. I commend the timely FASB actions to balance investor benefits and stakeholder concerns related to the smooth transition to, and application of, the new standard. I believe the real-time responsiveness of the FASB is a superior approach relative to waiting to aggregate potential issues and dealing with those potential issues closer to the effective date.
Without a TRG, the onus to promote a smooth transition of course rests with several different parties. I believe that registrants, auditors, and audit committees all of course have key roles to play. Registrants and their auditors should be actively working to identify and resolve any application and transition issues related to the new standard. Registrants, with the oversight of their audit committees, should ensure any issues related to adopting and applying the new standard are identified and resolved. As I have stated in previous remarks, audit committees should also understand management’s implementation plans to help achieve a high quality implementation.
Implementation of the new leases standard continues to be top of mind to OCA. We have previously spoken about the new leases standard on several occasions, and, as I mentioned earlier, our focus on leases continues to naturally increase as the adoption date nears.
We are actively monitoring implementation efforts. We have been meeting with various stakeholders, including preparers, industry groups, standard setters, and accounting firms, to better understand application issues identified to date. Thus far, the application questions we have addressed have primarily related to scoping and transition issues. We continue to welcome dialogue with any interested stakeholders. Consistent with our past practices, we will continue to accept reasonable judgments put forth in consultations that we handle related to the new leases standard.
The FASB’s new standard on credit losses (“CECL”) is another major standard that will require careful planning, implementation, and oversight for successful adoption. The new standard will be effective beginning in 2020 for calendar year end public business entities that are SEC filers. As a reminder to all entities, although much of the focus has been on banks and other financial institutions, the impact goes well beyond any particular industry group and we encourage all reporting entities to assess the scope of CECL.
OCA continues to be very active in overseeing the implementation of the CECL standard, and we have spent considerable time monitoring implementation activities to date. We continue to have dialogue with various members of the accounting profession, including representatives from financial institutions, registrants, accounting firms, other regulators, and industry groups. These stakeholder discussions have been productive.
The dialogue we are having has moved towards a focus on implementation and we have noted meaningful progress to date being made by the institutions that have engaged with us. Registrants and their auditors are actively working to identify and resolve accounting and implementation issues related to the new standard.
As questions arise, there are a number of forums for which implementation questions are being discussed. In addition to the FASB’s TRG for credit losses which will be meeting again soon, the AICPA Depository Institutions Expert Panel (“DIEP”), banking regulators, and other groups are working to educate constituents on the application of the new standard. I would encourage you to familiarize yourselves with these resources as you continue your implementation activities. The implementation process operates best when all stakeholders engage in raising and resolving important issues under consideration.
We have also seen the level of consultation submissions regarding CECL pick-up this year, and have previously spoken about observations from several of the consultations. While I am pleased by the increase in CECL related consultations, our doors remain open, of course, and we continue to welcome dialogue with stakeholders on both a formal and informal basis.
Reminder on Other New GAAP
While the focus of my remarks so far has been on SAB 118 and specific new GAAP standards, companies have implemented other new GAAP standards whose effective dates for calendar year companies was January 1, 2018, such as the new guidance on the statement of cash flows and recognition and measurement of financial assets and liabilities (to name just a couple of the several new areas of GAAP that became effective on January 1, 2018).
Companies need to also look ahead to other standards whose effective dates are coming up soon, including, for example, targeted improvements to hedging. While I appreciate the focus for companies has been and will continue to be on SAB 118 and the new GAAP standards such as revenue, leases, and credit losses, companies should appropriately consider and implement the other new GAAP standards that either are or will also be effective soon. We are actively monitoring and answering questions related to the implementation of all new standards and are of course available for consultation.
Couple of General Observations
As I mentioned earlier, in addition to providing our detailed feedback on the new GAAP standards, I wanted to provide a couple of general observations on the implementation of the new GAAP standards.
Give Yourself Enough Time
Last year I noted the significant amount of progress that had been made by many companies on the new standards. Again, I want to applaud and thank companies for the work they have invested in their implementation. I encourage each of you to build on the implementation of the revenue standard and keep the momentum going on leases, credit losses and other standards that have effective dates that are coming up soon. The work and progress you have made is a great example of companies who will be providing investors with enhanced financial reporting.
We have also highlighted the meaningful benefits of having adequate time to make reasonable judgments, having sufficient time to identify accounting questions, and having adequate time to implement appropriate internal controls. All of these items are critical and those who have gone through the implementation of revenue recognition will attest to the importance of giving yourself enough time in order to implement these new GAAP standards.
OCA staff will continue to accept reasonable judgment in the application of the new GAAP standards. Our consultations on revenue recognition are evidence of this, where as I mentioned earlier we have already answered numerous pre-filing consultation questions and have accepted reasonable judgments. This same framework applies to all of our consultations and will continue as well on leases, credit losses, and other standards. This point underscores the importance for companies to put in place a good implementation process that enables them to apply sound judgment. As noted above, we note that well reasoned judgments frequently require the important element of time in order to gather the facts, consider the accounting alternatives, and make a judgment on the conclusion.
In closing, I want to thank preparers, auditors, audit committees, and other stakeholders for all the effort to date in the implementation of the new GAAP standards. The new GAAP standards will provide investors with enhanced financial reporting and disclosure. Implementation of the new revenue standard and major progress on SAB 118 are efforts that all stakeholders should be proud of and I have no doubt the parties will continue to meet the challenge as we look ahead to the implementation of the other new GAAP standards. We in OCA will continue to do our part and will be available to help. I want to thank you again for the opportunity to be with you today.
 FASB Accounting Standards Update (“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.
 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
 See, e.g., Sagar Teotia, Deputy Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Addressing Implementation Matters to Improve Financial Reporting (Sept. 21, 2017), available at https://www.sec.gov/news/speech/speech-teotia-2017-09-21.
 Included in the Codification of Staff Accounting Bulletins Topic 5.EE, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.
 See An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, Pub. L. No. 115-97, 131 Stat. 2054 (2017) (the “Act”).
 ASC 740, Income Taxes.
 ASC paragraph 740-10-25-47 notes that “the effect of a change in tax laws or rates shall be recognized at the date of enactment.”
 FASB ASU No. 2018-02, Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Feb. 2018).
 See Wesley R. Bricker, Deputy Chief Accountant, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks at the Bloomberg BNA Conference on Revenue Recognition (Sept. 17, 2015), available at https://www.sec.gov/news/speech/wesley-bricker-remarks-bloomberg-bna-conf-revenue-recognition.html.
 See supra note 4.
 See, e.g., FASB, Leases Educational Resources – Amendments to the Standard, available at: http://www.fasb.org/cs/ContentServer?d=Touch&c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FCompletedProjectPage&cid=1176170005741.
 FASB ASU No. 2018-01, Leases: Land Easement Practical Expedient for Transition to Topic 842 (Jan. 2018), which is codified in ASC Topic 842, Leases.
 FASB, Proposed ASU, Leases (Topic 842): Targeted Improvements (Jan. 5, 2018), available at: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176169751791&acceptedDisclaimer=true.
 FASB, Proposed ASU, Technical Corrections and Improvements to Recently Issued Standards (Sept. 27, 2017), available at: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176169358459&acceptedDisclaimer=true.
 See FASB, Tentative Board Decisions – Board Meeting (March 28, 2018), Leases—Implementation Requests, available at: http://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176170269741&d=&pagename=FASB%2FFASBContent_C%2FActionAlertPage.
 See supra note 4.
 See, e.g., Wesley R. Bricker, Chief Accountant, U.S. Securities and Exchange Commission, Statement in Connection with the 2017 AICPA Conference on Current SEC and PCAOB Developments (Dec. 4, 2017), available at https://www.sec.gov/news/speech/bricker-2017-12-04; Michael P. Berrigan, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (Dec. 4, 2017), available at https://www.sec.gov/news/speech/berrigan-aicpa-2017-conference-sec-pcaob-developments; and Ruth Uejio, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks Before the 2016 AICPA National Conference on Current SEC and PCAOB Developments (Dec. 5, 2016), available at https://www.sec.gov/news/speech/uejio-2016-aicpa.html.
 See Michael P. Berrigan, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (December 4, 2017).
 ASC 326-10-20 defines Securities and Exchange Commission (SEC) Filer as “an entity that is required to file or furnish its financial statements with either of the following: a) The Securities and Exchange Commission (SEC), b) With respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section.
 Currently scheduled for Monday June 11, 2018, see, http://www.fasb.org/cs/ContentServer?c=Page&cid=1176168064117&d=&pagename=FASB%2FPage%2FSectionPage.
 See Robert B. Sledge, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (December 4, 2017), available at: https://www.sec.gov/news/speech/sledge-aicpa-2017-conference-sec-pcaob-developments
 FASB ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments which is codified in ASC 230 Statement of Cash Flows (Aug. 2016).
 FASB ASU No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Jan. 2016) which is codified in ASC 825-10 Financial Instruments — Overall.
 FASB ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities which is codified in ASC Topic 815, Derivatives and Hedging (Aug. 2017).
 See supra note 4.