April 2022 financial reporting, governance, and risk management

FASB updates credit losses guidance for troubled debt restructurings and vintage disclosures

On March 31, 2022, the FASB issued Accounting Standards Update (ASU) 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” to respond to feedback received from post-implementation review of Topic 326. The amendments eliminate the troubled debt restructuring (TDR) recognition and measurement guidance and now require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosures and include new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. To improve consistency for vintage disclosures, the ASU requires that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20.

For entities that have adopted ASU 2016-13, the amendments are effective for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years. For entities that have not adopted ASU 2016-13, the effective dates for the amendments are the same as the effective dates in ASU 2016-13. Early adoption is permitted if ASU 2016-13 has been adopted, including adoption in an interim period, and the amendments can be early adopted by topic. If an entity elects to adopt the amendments in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period.

For more information on the ASU, see the Crowe article “FASB Tweaks CECL: TDR Accounting and Vintage Disclosures.”

On March 25, 2022, the FASB received an agenda request from the AICPA to consider a practical expedient to not apply the TDR guidance for all entities. At its April 6, 2022, meeting, the board decided not to add this project to its technical agenda.

FASB issues guidance on portfolio layer method of hedge accounting

On March 28, 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method,” to expand the scope of assets eligible for portfolio layer method hedging to include all financial assets. The update also expands the current last-of-layer method that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. The last-of-layer method is renamed the portfolio layer method, because more than the last layer of a portfolio could be hedged. In accounting for hedge basis adjustments, the amendments require an entity to:

• Maintain basis adjustments in an existing hedge on a closed portfolio basis (that is, not allocated to individual assets)
• Immediately recognize and present the basis adjustment associated with the amount of the dedesignated layer that was breached in interest income
• Disclose the breach amount and circumstances that led to the breach
• Disclose the total amount of the basis adjustments in existing hedges as a reconciling amount if other areas of GAAP require the disaggregated disclosure of the amortized cost basis of assets included in the closed portfolio

In addition, an entity may not consider basis adjustments in an existing hedge when determining credit losses. Upon adoption, an opportunity exists for an entity to reclassify debt securities from held-to-maturity to available-for-sale if the entity intends to apply the portfolio layer method hedging that includes those debt securities. This decision must be made within 30 days of adoption.

For public business entities, the amendments are effective for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for any entity that has adopted ASU 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption.

FASB discusses segment reporting

At its board meeting on April 6, 2022, the FASB discussed two matters that arose during the drafting of the segment reporting proposed ASU based on the FASB’s tentative decisions to require a significant expense principle. The significant expense principle would require that a public entity disclose the significant expense categories and amounts that are both 1) regularly provided to the chief operating decision-maker and 2) included in each reported measure of segment profit or loss.

The board decided that the proposed ASU would require a financial operations segment that discloses net interest revenue to also disclose gross interest expense if that information meets the requirements for disclosure under the significant expense principle. However, the board decided not to require the total of the reportable segments’ amount for each significant expense category disclosed under the principle to be reconciled to its corresponding consolidated amount. The staff is continuing to draft a proposed ASU for external review.

EITF discusses tax credits

At its meeting on March 24, 2022, the Emerging Issues Task Force (EITF) continued its discussion of accounting for investments in tax credit structures using the proportional amortization method. The proportional amortization method results in the tax credit investment being amortized in proportion to the allocation of tax credits in each period. It also allows the investment amortization and tax credits to be presented on a net basis within the income tax line item; however, this treatment is limited to low-income housing tax credits. At the meeting, the EITF tentatively concluded that the proportional amortization method should be expanded to all tax credit investments that meet the criteria in 323-740-25-1, such as new market tax credits, historic rehabilitation tax credits, and renewable energy tax credits. Also, the EITF tentatively concluded:

• The proportional amortization method accounting policy election should apply to all tax credit investments that meet certain criteria. That is, an entity could elect to apply the proportional amortization method to all tax credit investments that meet the criteria in paragraph 323-740-25-1 or to no tax credit investments that meet the criteria in paragraph 323-740-25-1.
• The criteria in paragraph 323-740-25-1(a), (b), and (c) should be retained with no additional clarification to those criteria.
• The criterion in paragraph 323-740-25-1(aa) should be retained with a clarification that in multitiered structures the criterion would be evaluated in relation to the operations of the underlying project.

The next EITF meeting is scheduled for June 16, 2022.

SEC proposes rules to standardize climate-related disclosures

On March 21, 2022, the SEC proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports. The proposed rule changes would require a registrant to disclose information about:

• The registrant’s governance of climate-related risks and relevant risk management processes, including disclosures to understand developed transition plans and publicly set climate-related targets or goals
• How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements over time
• How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook
• The impact of climate-related events and transition activities on the line items of the consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements

The proposal also requires a registrant to disclose information about its own greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3) under certain circumstances. Additionally, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures. The proposed rules would include a phase-in period for compliance.

Comments are due May 20, 2022.

Crowe offers a closer look into what the rule proposal includes and how it could affect climate-related reporting through a recent report, “SEC Proposes Climate-Related Disclosures: A Closer Look.” It provides considerations for management and boards and for those who choose to comment on the proposal.

SEC chair remarks on proposed rules on standardizing climate-related disclosures

On April 12, 2022, at the Ceres investor briefing, SEC Chair Gary Gensler delivered remarks on the recently proposed climate-related disclosure rules. He began with some background on the tradition of disclosures, noting that the SEC has provided guidance and requirements when needed for disclosure of information relevant to investors and has played a role in standardizing disclosures. He said that the proposed climate-related disclosures would provide investors with consistent, comparable, and decision-useful information and would provide consistent and clear reporting obligations for issuers.

Gensler added that climate-related disclosures already are being made by hundreds of companies and that investors already are making decisions based on climate risks, which can create significant financial risks to companies. He said, “It makes sense to build on what so many companies are already doing to enhance the consistency, comparability, and decision-usefulness of these disclosures for investors.” He described the importance of including the disclosures in filings, specifically Form 10-K, so that investors can find useful information in one place rather than having to piece together information from different locations.

Gensler encouraged issuers and investors of all sizes to comment, noting that the SEC will benefit from wide and diverse input, including how the proposal approaches disclosure of strategy, governance, risk management, targets, financial statement metrics, and greenhouse gas emissions.

SEC proposes SPAC disclosure rules

On March 30, 2022, the SEC proposed rules related to special purpose acquisition companies (SPACs) that would:

• Increase disclosures and provide more investor protections in initial public offerings by SPACs and de-SPAC transactions (business combination transactions between SPACs and private operating companies)
• Determine the treatment of business combination transactions involving a reporting shell company under the Securities Act of 1933 and revise the financial statement requirements applicable to transactions involving shell companies, including SPACs
• Expand the guidance on the presentation of projections in SEC filings to address concerns about reliability and reasonableness
• Provide that a SPAC that complies with the conditions in the rule would not need to register as an investment company under the Investment Company Act of 1940

Comments are due May 31, 2022, or 30 days after publication in the Federal Register, whichever is later.

SEC issues guidance on crypto assets

On March 31, 2022, the SEC issued Staff Accounting Bulletin (SAB) 121, providing guidance for entities filing financial statements with the SEC that provide crypto asset custody services for platform users. It answers three questions:

• How should an entity account for its obligations to safeguard crypto assets held for platform users?
• What disclosure would the staff expect an entity to provide regarding its safeguarding obligations for crypto assets held for its platform users?
• How and when should an entity initially apply the guidance in this topic in its financial statements?

In an upcoming article, Crowe will provide an in-depth look at SAB 121. As significant judgment might be required to determine the applicability of SAB 121, the article provides a decision tree to help entities decide if the SAB’s accounting and disclosure guidance applies to them.

SEC proposes rules for security-based swap execution facilities

On April 6, 2022, the SEC proposed new Regulation SE under the Securities Exchange Act of 1934 (Exchange Act) to create a framework for the registration and regulation of security-based swap execution facilities (SBSEFs), as mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

The proposal would implement the Exchange Act’s trade execution requirement for security-based swaps and address the cross-border application of that requirement, implement Section 765 of the Dodd-Frank Act to mitigate conflicts of interest at security-based swap execution facilities and national securities exchanges that trade security-based swaps, and promote consistency between the proposed Regulation SE and the existing rules under the Exchange Act. Among other requirements, the proposed rules would require an entity meeting the definition of an SBSEF to register with the SEC as an SBSEF on Form SBSEF or register as a national securities exchange.

Comments are due June 6, 2022, or 30 days after publication in the Federal Register, whichever is later.

SEC releases 2022 examination priorities

On March 30, 2022, the SEC’s Division of Examinations announced its 2022 examination priorities, including several significant areas of focus and many perennial risk areas. Annually, the division publishes its examination priorities to provide transparency into its examination program and insights into its risk-based approach, including the areas that might present risks to investors and U.S. capital market integrity.

The 2022 examination priorities are categorized as follows:

• Private funds
• Environmental, social, and governance (ESG) investing
• Retail investor protections
• Information security and operational resiliency
• Emerging technologies
• Crypto assets

PCAOB issues report on conversations with audit committee chairs

As part of the PCAOB’s strategic goal of enhancing transparency and accessibility through proactive stakeholder engagement, the board released, on March 24, 2022, “2021 Conversations With Audit Committee Chairs,” which summarizes feedback received from outreach conducted during 2021. This report provides a summary of perspectives from approximately 240 audit committee chairs at U.S. public companies whose audits the PCAOB inspected. The report covers the following topics:

• Required communications between auditor and audit committee
• Discussions outside of required communications
• Auditor strengths and areas for improvement
• PCAOB inspection reports
• Quality control systems at audit firms
• Auditor’s use of technology
• Information outside of the financial statements including ESG and non-GAAP measures

PCAOB approves charters for new advisory groups

At an open meeting on March 29, 2022, the PCAOB approved the charters for two new advisory groups: the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. The charters will govern the membership and the activities of groups. The PCAOB said it expects to announce appointments shortly. Also at the meeting, the PCAOB voted to dissolve the Standards Advisory Group.