March 28, 2022

Highlights from the December 2021 AICPA Conference

By Nico Thomas, Partner, Assurance Services

Highlights from the December 2021 AICPA Conference Capital Markets

The annual AICPA conference provides insight—to both accountants and investors—on the SEC’s priorities and other themes in the financial world. Below, we’ve highlighted certain topics we believe may be important to consider.

Environmental, Social & Governance (ESG)

Multiple speakers discussed ESG-related initiatives and rulemaking. Paul Munter, acting chief accountant, noted that SEC staff were currently working on a mandatory climate risk disclosure rule, which was subsequently issued as a proposed rule on March 21, 2022. Munter also reminded participants that there was already guidance around required climate risk disclosures embedded within U.S. GAAP and SEC rules, as described in the FASB and IASB educational papers issued in March 2021.

Munter mentioned that the Office of the Chief Accountant (“OCA”) is actively monitoring the progress of the newly formed International Sustainability Standards Board (ISSB). The ISSB’s goal is to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants information about companies’ sustainability-related risks and opportunities to help them make informed decisions.

Investor demand for sustainability reporting (propelled by Larry Fink’s 2020 letter to CFOs) created pressure on the SEC to develop ESG-related disclosure requirements, and on the IFRS Foundation to develop sustainability disclosure standards. While rulemaking and disclosure standards are being developed, several companies are producing external ESG Reports. However, of the companies that have disclosed ESG metrics, the Center for Audit Quality notes that only 11% received independent auditor assurance for their ESG report. Investors may want to consider the reliability of the information included in any ESG reports that were not assured by an independent auditor.

Digital Assets

Representatives from OCA noted that accounting for digital assets has been a frequent topic of discussion and consultation within the SEC. In several consultations, Kevin Vaughn, OCA’s senior associate chief accountant, stated that the SEC did not object to the indefinite-lived intangible asset accounting treatment for digital assets. However, Hillary Salo, FASB’s emerging issues task force chair, mentioned that stakeholders wanted the FASB to discuss the accounting for digital assets, including cryptocurrency. The FASB is still evaluating comments and determining whether to add such a project to the agenda.

Investors may be interested in the accounting for digital assets as they become more mainstream. There is currently no specific GAAP that addresses digital assets, so many digital assets are accounted for under an indefinite-lived intangible asset model (that applies to entities that do not qualify as investment companies under ASC 946). However, there may be a market for digital assets with an observable traded price. The accounting model for indefinite-lived intangible assets requires the asset to be recorded at cost and tested for impairment when triggering events occur. Note that this impairment model only allows for decreases in value. It does not allow for increases in value if the observable market for digital assets increases. Therefore, the fair value of digital assets on the balance sheet may be higher than what is disclosed.

Chinese Reporting Companies

A couple of presenters discussed complexities related to reporting for Chinese companies. OCA Deputy Chief Accountant John Vanosdall described a scenario in which a U.S. shell company may control a China-based variable interest entity (“VIE”) under the consolidation standards and may therefore consolidate the VIE. However, Vanosdall emphasized that transparent disclosure around the nature of the relationship between the issuer and the VIE would be required, especially if the enforceability of the contract that conveys the power was not tested in a court of law. Division Director Renee Jones also mentioned that the SEC is focused on proper disclosures around China-based VIEs.

Munter mentioned that the Holding Foreign Companies Accountable Act (HFCAA) was adopted by the SEC on December 2, 2021. Under this rule, the SEC prohibits U.S. exchanges from trading on companies audited by foreign jurisdictions if the PCAOB has not been able to inspect them for three sequential years.

Reference Rate Reform

Speakers referenced the SEC’s statement on transitioning away from LIBOR, which encourages companies to provide detailed disclosures about the transition.

Investors should inquire with companies about the business risk the LIBOR transition could pose and how the company is addressing that risk. Investors may want to consider any impact on valuation measurements that used LIBOR as an input, as well as any operational complexities or significant IT system changes.