August 2023 financial reporting, governance, and risk management

FASB proposes disaggregation to income statement expense disclosures

The FASB on July 31, 2023, published a proposed Accounting Standards Update (ASU), “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40) – Disaggregation of Income Statement Expenses,” aimed at providing more decision-useful information about a public business entity’s expenses.

Under the proposed ASU, public companies would provide detailed disclosure in interim and annual periods of specified categories underlying certain expense captions. Relevant expense categories for financial institutions include, among others, employee compensation, depreciation, and amortization of intangible assets. Other expenses presented on the face of the income statement (for example, credit losses or income taxes) are not expense categories listed in the proposed ASU and therefore do not require disaggregated disclosure. Financial institutions should refer to Example 3 for an illustrative example. Institutions reporting under Securities and Exchange Commission (SEC) Rule 9-04 of Regulation S-X can elect to apply a practical expedient to continue presenting salaries and employee benefits under Rule 9-04 instead of the definition under Subtopic 220-40.

Comments are due Oct. 30, 2023.

On Dec. 13, 2023, the FASB will host a public roundtable to get additional feedback on the proposed ASU. Details will be posted on the FASB website.

FASB amends SEC paragraphs pursuant to SAB 121

On Aug. 3, 2023, the FASB issued ASU 2023-04, “Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121.” Staff Accounting Bulletin (SAB) 121 addresses accounting for obligations to safeguard crypto assets an entity holds for its platform users, and this guidance is now incorporated into the Accounting Standards Codification (ASC).

FASB updates ASC for SEC guidance

On July 14, 2023, the FASB issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement – Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities From Equity (Topic 480), Equity (Topic 505), and Compensation – Stock Compensation (Topic 718),” which amends the SEC paragraphs within the ASC to conform to SEC SAB 120, “SEC Staff Announcement at the March 24, 2022 EITF Meeting,” and SAB Topic 6.B, “Accounting Series Release 280 – General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” This ASU introduces no new guidance, so no transition period or effective date is associated with it.

FASB addresses segment reporting

At its July 26, 2023, board meeting, the FASB discussed a proposed ASU, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” and affirmed the decision to base the principle on the significant segment expenses that are regularly provided to the chief operating decision-maker (CODM) and included in the measure of segment profit or loss.

In addition, the FASB affirmed the decisions to:

• Require that a public entity consider quantitative and qualitative factors when assessing significance
• Require that a public entity disclose an amount and qualitative description for other segment items for each reportable segment
• Require that a public entity disclose the nature of the segment expense information that the CODM uses to manage operations if the entity does not disclose expenses under the principle for one or more of its reportable segments
• Not require disclosure of a reconciliation of the total of the reportable segment’s amount for each significant expense category to its corresponding consolidated expense amount
• Require that a public entity disclose interest expense for a financial operation segment when that item represents a significant expense in accordance with the principle
• Retain all existing segment disclosure requirements of both Topic 280 and other GAAP topics
• Require that a public entity disclose significant expense categories and amounts that are easily computable from the management reports that are regularly provided to the CODM
• Allow a public entity to report multiple measures of a segment’s profit or loss that the CODM uses to allocate resources and assess performance
• Require that the total of the reportable segments’ amount for each measure of segment profit or loss be reconciled in accordance with paragraph 280-10-50-30(d)
• Require disclosures for a reportable segment’s profit or loss and assets on an interim and annual basis
• Require that a public entity recast segment expense categories and amounts in prior periods when a change occurs in the composition of reportable segments in the current period, unless impracticable
• Require that a public entity disclose the title and position of its CODM

The segment disclosure requirements apply to all public entities, including those that have a single reportable segment. The amendments will be applied on a retrospective basis unless impracticable and will be effective for fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024, with early adoption permitted. The final ASU is expected to be issued in the third quarter of 2023.

SEC issues cybersecurity incident, risk management, and governance disclosure final rule

On July 26, 2023, the SEC issued a final rule requiring enhanced standardized disclosures of material cybersecurity incidents and cybersecurity risk management, strategy, and governance. Under the new rule, registrants are required to disclose when they have experienced a material cybersecurity incident on Form 8-K within four days of determining that the incident is material. Registrants also must make the following disclosures annually on Form 10-K:

• Risk management: The registrant’s processes for assessing, identifying, and managing material risks from cybersecurity threats as well as whether and how any cybersecurity threats, including previous incidents, have materially impacted or are likely to materially impact the registrant’s business strategy, results, or financial condition
• Governance: A description of board oversight over cybersecurity risk as well as management’s role in assessing and managing material cybersecurity risks

Cybersecurity incident disclosures are required beginning Dec. 18, 2023 (or June 15, 2024, for smaller reporting companies). Risk management, strategy, and governance disclosures are required beginning with annual reports for fiscal years ending on or after Dec. 15, 2023.

For additional information about the new rule, see the Crowe article “SEC Ruling on Cybersecurity Incident Disclosure: What to Know.”

SEC proposes new rules for broker-dealer predictive analytics and conflicts of interest

On July 26, 2023, the SEC proposed new rules addressing potential conflicts of interest created when broker-dealers and investment advisers use predictive data analytics, artificial intelligence (AI), and similar technologies to interact with investors. Technologies within the scope of the proposed rule include computational models, algorithms, and other predictive methods or processes that could guide an investor’s behavior and therefore have the potential to prioritize the firm’s interests over those of an investor. Under the proposal, firms using such technologies would be required to eliminate or address conflicts of interest, maintain written policies and procedures designed to prevent violations of or achieve compliance with the proposed rules, and maintain books and records related to the requirements of the proposed rules.

Comments are due Oct. 10, 2023.

SEC proposes amendments to internet-based investment adviser exemption

The SEC proposed new rule amendments on July 26, 2023, to enact more restrictive requirements on the exemption that permits internet-based investment advisers to register with the commission. To qualify for the exemption under the proposal, internet-based investment advisers would be required to maintain an operational and interactive website and to provide advisory services to all clients exclusively through such a website. In accordance with these changes, the proposal also would make corresponding changes to Form ADV.

Comments are due Oct. 2, 2023.

SEC chair speaks on climate risk disclosure and discontinuance of LIBOR

Chair Gary Gensler remarked on climate risk disclosure and the phase-out of the London Interbank Offered Rate (LIBOR) before the Financial Stability Oversight Council on July 28, 2023. Regarding the former, Gensler emphasized the role of the SEC in providing investors with fair and truthful disclosures, allowing investors to make informed investment decisions while remaining neutral on the merits of such investments. As such, Gensler noted that the SEC’s role in climate risk disclosures is to mandate consistent and comparable disclosures.

Gensler commented on the discontinuation of LIBOR, comparing the previously ubiquitous rate, which often lacked meaningful underlying transactions, to the “emperor with no clothes.” Gensler cited multiple cases of banks fraudulently manipulating the rate and called for new alternatives to LIBOR to be transparent, robust, and appropriately supported by underlying transactions.

SEC chief accountant issues statement on crypto asset services

On July 27, 2023, SEC Chief Accountant Paul Munter issued a statement that cautions accounting firms that perform nonaudit work for crypto asset clients to be aware of the risks presented by providing such services. Risks include:

• Potential liability for antifraud violations. Firms should consider the potential liability caused by statements made and language used by both the firm and its clients over the scope of work performed. Firms should take precautions during their client acceptance procedures, even with new clients with no previous history of misrepresentations.
• Auditor independence. Firms should consider whether their public statements, as well as any advocacy or lobbying efforts on behalf of an audit client, would lead a reasonable investor to believe that the firm’s independence is impaired.

In addition, Munter emphasized that firms found in violation of antifraud provisions of the federal securities laws or applicable independence requirements could be censured or suspended from appearing or practicing before the SEC pursuant to Rule 102(e) of the commission’s Rules of Practice.

SEC chair testifies before Senate subcommittee

On July 19, 2023, Gensler testified before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government to summarize the SEC’s fiscal year 2024 budget request. In his testimony, Gensler stated his support for the $2.4 billion budget request as well as for additional funding of $39.6 million requested to support General Services Administration-led real estate projects. Gensler detailed how the funds and proposed staffing levels would be allocated among the SEC’s divisions.

Gensler stressed the evolving threats presented by the market and noted that the increase in budget would help maintain and add to current staffing levels to help the SEC fulfill its expansive and growing responsibilities.

SEC chair remarks on AI

On July 17, 2023, Gensler spoke on AI and exponential data growth before the National Press Club. Gensler highlighted examples of the some of the regulatory and enforcement challenges presented by the integration of AI in the capital markets, such as:

• The potential for predictive models to mask systemic bias or to place the interests of advisers and brokers before those of retail investors and clients
• The rise of misinformation generated by or disseminated through AI
• The threat of concentration to a limited number of AI platforms, fed by the data of applications built on top of those platforms
• Threats to data privacy and ownership of intellectual property
• The risk of heightened financial instability by causing herd behavior in individual investors

Gensler concluded by reiterating both the challenges and opportunities presented by AI, and he emphasized that the SEC is “technology neutral.”

PCAOB provides preview of 2022 inspection observations

The PCAOB on July 25, 2023, released the report “Staff Update and Preview of 2022 Inspection Observations,” which provides aggregate observations from the PCAOB’s inspections of public company audits in 2022. The report shows a year-over-year increase in the number of audits with deficiencies and highlights common deficiencies, observations related to quality control systems, trends in areas with recurring deficiencies, and good practices. According to the report, PCAOB staff expects approximately 40% of the audits reviewed will have at least one deficiency to include in Part I.A of the individual audit firm’s inspection report; this is up from 34% in 2021.

The report also includes questions audit committees should consider in discussions with independent auditors to address the PCAOB inspection findings. These questions focus primarily on whether the audit engagement has been inspected, whether the engagement partner has been inspected, inspection results, and how the audit firm is addressing inspection findings.

PCAOB introduces online tools to compare inspection report data

On July 19, 2023, the PCAOB announced six new search filters that users can apply to PCAOB inspection reports, giving investors, audit committee members, and other stakeholders better access to compare and understand inspection report data. The new filters are inspection type, total issuer audit clients, Part I.A deficiency rate, specific global network, inspection year, and audits reviewed.