January 2023 financial reporting, governance, and risk management

| 1/18/2023
January 2023 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

Welcome to 2023. As we settle into a new year, we bring you a recap of the 2022 American Institute of Certified Public Accountants and Chartered Institute of Management Accountants conference on Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) developments, which should get your financial reporting season off to a great start. This month, we provide information about financial institution regulators, which released new crypto asset guidance, issued a final rule on the London Interbank Offered Rate (LIBOR), and proposed a new beneficial ownership rule. The Federal Reserve chair also made some pointed remarks on climate. The SEC appointed its chief accountant, and its fall 2022 regulatory flexibility agenda was posted, which includes an update to its forecasted timing on its climate-related disclosure rule, among others. We also provide more details on the SEC’s updated non-GAAP interpretations and note SEC Chair Gary Gensler’s recent remarks on LIBOR. Finally, the PCAOB proposed a new audit confirmation standard.

We wish you well in your year-end financial reporting and look forward to a year of keeping you informed.

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2022 Conference on SEC and PCAOB Developments

Crowe publishes highlights from AICPA & CIMA annual conference on SEC and PCAOB developments

On Jan. 4, 2023, Crowe released “Highlights From the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments,” detailing notable messages and topics from the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) annual Conference on Current SEC and PCAOB Developments, which was held in Washington, D.C., Dec. 12-14, 2022. Themes that emerged include:

  • Investor information should be a key focus of all stakeholders.
  • High-quality financial reporting requires the cooperation and engagement of all stakeholders.
  • Trust is foundational to high-quality financial reporting and is fostered through high-quality audits.
Matters of importance from the federal financial institution regulators

Fed chair remarks on climate

On Jan. 10, 2023, at the Symposium on Central Bank Independence in Stockholm, Sweden, Federal Reserve (Fed) Chair Jerome Powell remarked on central bank independence and transparency as well as the importance of taking action consistent with statutory mandates. In Powell’s view, the Fed should “‘stick to our knitting’ and not wander off to pursue perceived social benefits that are not tightly linked to our statutory goals and authorities.” While the Fed has important supervisory responsibilities to ensure banks appropriately manage climate-related financial risk, he concluded his remarks with an observation that the Fed is not and will not be a “climate policymaker.”

Banking regulators issue warning on crypto asset risks

On Jan. 3, 2023, the federal banking regulators issued a joint statement highlighting several key risks posed by crypto assets that banks should consider if they wish to offer related services. The Fed, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) cited risks including the possibility of fraud and scams, legal uncertainties related to custody practices and ownership rights, and the lack of maturity in risk management practices within the crypto asset sector.

The agencies specifically noted, “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.”

Regulators continue to assess whether or how current and proposed activities can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.

Basel Committee issues standard for banks’ crypto asset exposure

The Basel Committee on Banking Supervision (BCBS) on Dec. 16, 2022, finalized a standard intended to help banks monitor and mitigate crypto asset exposure, including tokenized traditional assets, stablecoins, and unbacked crypto assets. The final standard incorporates feedback received in comment letters to a proposed version the committee issued in June 2022.

The standard, which would need to be adopted by federal banking regulators before it applies to U.S. banks, provides a “robust and prudent global regulatory framework for internationally active banks’ exposures to [crypto assets] that promotes responsible innovation while preserving financial stability.”

Under the standard, banks would be required to classify crypto assets on an ongoing basis into two groups. The first group includes crypto assets that meet a full set of classification conditions and covers tokenized traditional assets and crypto assets with effective stabilization mechanisms. The second group includes unbacked crypto assets and crypto assets that fail to meet any of the classification conditions and pose additional and higher risks compared with the first group.

The BCBS has requested that national regulators implement the standard in their respective jurisdictions by Jan. 1, 2025.

Fed adopts final rule implementing LIBOR Act

The Fed on Dec. 16, 2022, adopted a final rule that implements the Adjustable Interest Rate (LIBOR) Act and provides benchmark rates based on the Secured Overnight Financing Rate (SOFR), which will replace the London Interbank Offered Rate (LIBOR) in certain financial contracts after June 30, 2023. The final rule ensures that LIBOR contracts adopting a benchmark rate selected by the Fed will not be interrupted or terminated following LIBOR’s replacement.

As required by the law, the final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the act. The contracts include U.S. contracts that do not mature before publication of LIBOR ends (on June 30, 2023) and that lack adequate fallback provisions that would replace LIBOR with a practicable replacement benchmark rate.

In response to comments received on the proposed rule, the final rule restates safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected by the Fed. It also clarifies who would be considered a “determining person” able to choose to use the replacement benchmark rate selected by the Fed for use for certain LIBOR contracts.

The rule will be effective 30 days after publication in the Federal Register.

FinCEN proposes beneficial ownership rule

The Financial Crimes Enforcement Network (FinCEN) on Dec. 15, 2022, issued a notice of proposed rulemaking that would implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information. The proposed regulations would govern the circumstances under which such information must be protected and how it is disclosed to federal agencies; state, local, tribal, and foreign governments; and financial institutions. This is the second piece of FinCEN’s three-part rulemaking effort to implement the CTA.

Under the proposal, financial institutions would not be permitted to run “broad or open-ended queries” in the beneficial ownership database. “Rather, FinCEN anticipates that a [financial institution,] with a reporting company’s consent, would submit to the system identifying information specific to that reporting company, and receive in return an electronic transcript with that entity’s [beneficial ownership information (BOI)].”

The proposed rule also outlines how government officials would be permitted to access BOI in order to support law enforcement, national security, and intelligence activities as well as how regulators could use the database when conducting supervisory activities.

Written comments on the proposed rule are due Feb. 14, 2023.

New York State DFS issues virtual currency guidance

The New York State Department of Financial Services (DFS) issued guidance on Dec. 15, 2022, to remind banking organizations regulated by New York of the requirement to seek approval before engaging in activities related to virtual currencies, including when engaging with a third party to perform such activities. The guidance outlines six broad categories of information that the DFS will consider in assessing an institution’s proposed activities: business plan, risk management, corporate governance and oversight, consumer protection, financials, and legal and regulatory analysis.

An institution should notify the DFS of its intention a minimum of 90 days prior to commencing the activity, and the department will work with the institution to identify the materials needed to conduct its review. To help institutions prepare a written submission, the guidance also includes a supplemental checklist of materials that might be relevant in evaluating a proposed virtual currency-related activity.

The department noted that institutions already engaged in virtual currency-related activities should promptly notify it. The guidance is final, but the DFS invites comments that it will consider as it continues to supplement and refine the supervisory framework related to virtual currencies.

From the Financial Accounting Standards Board (FASB)

FASB expands use of proportional amortization method to other tax credit programs

On Jan. 18, 2023, the board ratified the Dec. 1 Emerging Issues Task Force (EITF) final consensus and directed the staff to proceed with issuing a final Accounting Standards Update (ASU). The ASU will expand use of the proportional amortization method of accounting to equity investments in tax credit programs beyond those in low-income-housing tax credit (LIHTC) programs. The ASU will allow entities to elect the proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in tax credit programs meeting the eligibility criteria in Accounting Standards Codification (ASC) 323-740-25-1.

While the final ASU will not significantly alter the eligibility criteria, it will provide clarifications to address existing interpretive issues. It also will prescribe specific information that reporting entities must disclose about tax credit investments each period.

The final ASU will be effective for reporting periods beginning after Dec. 15, 2023, for public business entities. All other entities will have an extra year to adopt. Early adoption is permitted, including early adoption in any interim period as of the beginning of the fiscal year that includes that interim period.

Entities will have the option of applying the forthcoming revisions using either a modified retrospective or retrospective adoption approach.

For more detail, please read the Crowe article “EITF Consensus Improves Accounting for Income Tax Credits,” issued Dec. 5, 2022.

From the Securities and Exchange Commission (SEC)

SEC names chief accountant

On Jan. 11, 2023, the SEC named Paul Munter chief accountant. Munter has served as acting chief accountant since January 2021. The chief accountant leads the SEC’s Office of the Chief Accountant and is the primary commission adviser on accounting and auditing matters. Prior to joining the SEC, Munter was a senior accounting instructor at the University of Colorado Boulder and retired as a partner at a public accounting firm.

SEC publishes fall 2022 regulatory agenda

On Jan. 4, 2023, the Office of Information and Regulatory Affairs released the SEC’s fall 2022 regulatory agenda, which lists 23 proposed rules and 29 rules in the final stage. They address the SEC’s three-part mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. This agenda provides estimates on timing and identifies April 2023 as the next date for action on climate change disclosure and cybersecurity, although this date is only an estimate and is subject to change.

SEC updates C&DIs on non-GAAP financial measures

On Dec. 13, 2022, the SEC updated Compliance & Disclosure Interpretations (C&DIs) questions 100.01, 100.04, 100.05, 100.06, and 102.10(a)(b)(c) related to the use of non-GAAP financial measures. The updates provide clarifications, not new information. These are the updated questions:

  • “Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?”
  • “Can a non-GAAP measure violate Rule 100(b) of Regulation G if the recognition and measurement principles used to calculate the measure are inconsistent with GAAP?”
  • “Can a non-GAAP measure be misleading if it, and/or any adjustment made to the GAAP measure, is not appropriately labeled and clearly described?”
  • “Can a non-GAAP measure be misleading, and violate Rule 100(b) of Regulation G, even if it is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure?”
  • “Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?”
  • “Are there examples of disclosures that would cause the non-GAAP reconciliation required by Item 10(e)(1)(i)(B) of Regulation S-K to give undue prominence to a non-GAAP measure?”
  • “The staff considers the presentation of a non-GAAP income statement, alone or as part of the required non-GAAP reconciliation, as giving undue prominence to non-GAAP measures. What is considered to be a non-GAAP income statement?”

Chair remarks at FSOC meeting

At the Dec. 16, 2022, Financial Stability Oversight Council (FSOC) meeting, SEC Chair Gary Gensler delivered remarks addressing LIBOR transition and the FSOC annual report.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB proposes new standard on auditor’s use of confirmation

On Dec. 20, 2022, the PCAOB proposed for public comment a new auditing standard on the auditor’s use of confirmation. The new standard, AS 2310, “The Auditor’s Use of Confirmation,” would replace in its entirety the current AS 2310, “The Confirmation Process,” and is designed to strengthen and modernize the confirmation requirements. Among other changes, the proposed standard includes a new requirement that the auditor should perform confirmation procedures when auditing cash and cash equivalents and should consider confirming other financial relationships with third parties with which the auditor determines to confirm cash.

Comments are due Feb. 20, 2023.

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