January 2024 financial reporting, governance, and risk management

| 1/17/2024
January 2024 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

I hope you enjoyed the holiday season and your new year is off to a great start. After a flurry of activity from the standard-setters and regulators in late 2023, I am delighted to report January (so far) has been relatively quiet. We know that is not going to last for long, especially with the forthcoming Securities and Exchange Commission (SEC) final rule on climate. As of last month, April 2024 is estimated for the final rule. Of course, the date is just that – an estimate. It could be sooner, it could be later.

Earlier this month, we issued our recap of the 2023 American Institute of Certified Public Accountants and Chartered Institute of Management Accountants conference on SEC and Public Company Accounting Oversight Board (PCAOB) developments. Also of note for our industry, the PCAOB issued its 2024 inspection priorities, which include a focus on financial services entities. In late December, the Financial Accounting Standards Board (FASB) met and decided not to add a project to reconsider changing the accounting or disclosures for held-to-maturity debt securities, which was in response to an agenda request submitted after the bank failures earlier in 2023. The FASB staff will provide a recommendation to the board on the agenda request to reconsider interest-rate risk and liquidity risk disclosures at a future meeting.

I wish you well in 2024 and look forward to a year of keeping you informed.

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2023 Conference on Current SEC and PCAOB Developments  

AICPA & CIMA hold annual conference

On Jan. 5, 2024, Crowe released “Highlights From the 2023 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. 4-6, 2023. Themes that emerged included:

  • Investor information needs are top of mind for regulators and standard-setters.
  • Engagement of all stakeholders is needed to support high-quality financial reporting.
  • The accounting profession fosters public trust and protects our capital markets.
From the federal financial institution regulators

OCC issues guidance on buy now, pay later lending

On Dec. 6, 2023, the Office of the Comptroller of the Currency (OCC) issued new risk management guidance for institutions engaging in “buy now, pay later” (BNPL) retail lending, addressing the growing popularity of these consumer loan offerings. BNPL loans are defined as those that are payable in four installments or fewer and carry no finance charges. The OCC recommends that banks engaging in BNPL lending should do so within a tailored risk management framework, maintaining appropriate underwriting criteria, repayment assessment, and other risk management practices and safeguards. Such banks also should ensure that marketing materials contain clear and conspicuous consumer disclosures stating a borrower’s obligations and applicable fees. The bulletin notes that comprehensive reporting of BNPL loans to credit bureaus could improve industrywide transparency and help mitigate credit risk associated with BNPL loans.

FDIC issues final rule on deposit insurance signage

On Dec. 20, 2023, the Federal Deposit Insurance Corp. (FDIC) issued a final rule on the use of official FDIC signs and advertising statements. The final rule creates a designated digital FDIC sign for use on bank websites, mobile applications, and certain automated teller machines, and it updates requirements for use of the existing official FDIC signs on display at branches and other physical locations. The final rule also clarifies requirements for entities to differentiate between deposit and nondeposit products, thereby allowing customers to clearly identify which products are covered by deposit insurance.

The final rule is effective April 1, 2024; full compliance is extended to Jan. 1, 2025.

FinCEN issues final rule and intercompany guidance on BOI access

On Dec. 21, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a final rule on beneficial ownership information (BOI) access. The final rule specifies the circumstances under which BOI that is reported to FinCEN under the BOI reporting rule may be disclosed to authorized parties, including:

  • Federal government agencies engaged in matters of national security, intelligence, or law enforcement
  • State, local, and tribal law enforcement agencies, with the authorization of a “court of competent jurisdiction”
  • Foreign requesters meeting certain criteria
  • Financial institutions with customer due diligence requirements, including compliance with anti-money laundering programs and other obligations under the Bank Secrecy Act
  • Federal functional regulators and other regulatory agencies acting in a supervisory capacity
  • Treasury personnel

These authorized parties must satisfy certain other security, confidentiality, and safeguarding requirements as set out by the final rule. FinCEN also has issued clarifying interagency guidance for banks and nonbanks.

The final rule is effective on Feb. 20, 2024. Authorized access will be implemented in phases, beginning with key federal agency users who will have access through a pilot program beginning in 2024.

From the Financial Accounting Standards Board (FASB)

FASB proposes clarifications to induced conversions of convertible debt instruments guidance

On Dec. 19, 2023, the FASB issued a proposed Accounting Standards Update (ASU), “Debt – Debt With Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments,” to clarify whether certain settlements of convertible debt instruments should be accounted for as induced conversions if certain criteria are met. Under the proposed ASU, to account for such a settlement transaction as an induced conversion, an entity would assess the qualifying criteria as of the date the inducement offer is accepted by the holder. If the convertible debt instrument had been modified without being substantially different within one year leading up to the offer acceptance date, the entity would compare the terms provided in the inducement offer with the terms that existed one year before the offer acceptance date. The proposed amendments do not modify the other existing criteria that must be satisfied to account for a settlement transaction as an induced conversion.

The proposed ASU does not yet include an effective date and would be applied either retrospectively to the later of 1) the beginning of the earliest period presented in the financial statements or 2) the date the entity adopted the amendments under ASU 2020-06, or prospectively to any settlements of convertible debt instruments that occur after the effective date of the guidance.

Comments are due March 18, 2024.

For more information, see the Crowe article “FASB Issues Proposal on Convertible Debt Instruments.”

FASB discusses agenda prioritization

At its Dec. 20, 2023, board meeting, the FASB discussed its agenda prioritization and decided not to add the following projects to its agenda:

  • Eliminating the held-to-maturity (HTM) classification for debt securities
  • Other amendments to the accounting for HTM debt securities
  • Accounting for equity securities
  • Clarifying the scope and application of Topic 480, “Distinguishing Liabilities From Equity,” for legal form debt instruments
  • Topic 740, “Income Taxes,” backwards tracing

However, the FASB decided to discuss at a future meeting certain potential presentation and disclosure requirements for HTM debt securities and interest-rate risk and liquidity risk disclosures.

From the Securities and Exchange Commission (SEC) 

SEC approves bitcoin spot funds

On Jan. 10, 2024, the SEC approved 11 applications to list bitcoin spot exchange traded funds. The commission vote was split, and various commissioners provided perspectives.

SEC approves NYSE proposed listing standard on certain securities sales requiring shareholder approval

On Dec. 26, 2023, the SEC granted accelerated approval to a New York Stock Exchange (NYSE) proposal that amends the circumstances under which listed companies must obtain shareholder approval prior to a sale of securities to a significant shareholder. If the sale is below “minimum price” (as defined by the NYSE listed company manual) and exceeds 1% of either the number of shares of common stock or the voting power outstanding before the sale, shareholder approval is required. Under the amendment, the requirement to obtain shareholder approval would apply only to sales of securities to “active related parties.” This category includes “directors, officers, controlling shareholders or members of a control group or any other substantial security holders of the company that have an affiliated person who is an officer or director of the company.”

Comments are due Jan. 23, 2024.

Court vacates issuer share repurchase rule

On Dec. 19, 2023, the U.S. Court of Appeals for the 5th Circuit ruled to vacate the SEC’s rule on share repurchase disclosures. The court previously had issued an opinion on Oct. 31, 2023, stating that the SEC had violated the Administrative Procedure Act by failing to adequately address public comments, perform a proper economic cost-benefit analysis, and substantiate the need for the rule, giving the SEC 30 days to remediate the identified issues. The SEC’s request for an indefinite extension to remediate the rule was denied on Nov. 26, 2023.

SEC clarifies definition of an accredited investor

On Dec. 15, 2023, the SEC issued a staff report to clarify the definition of an accredited investor. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to reexamine the definition every four years. The report includes a review of the current accredited investor pool with feedback from the Investor Advisory Committee and Small Business Capital Formation Advisory Committee. It encourages feedback from the public.

SEC releases 2023 small-business capital formation report

On Dec. 14, 2023, the SEC’s Office of the Advocate for Small Business Capital Formation released its annual report analyzing trends in capital formation and garnering perspectives and experiences within the small-business ecosystem. The report emphasizes the challenges faced by small businesses in raising capital and includes a summary of activities and policy recommendations from the office and the Small Business Capital Formation Advisory Committee.

From the Public Company Accounting Oversight Board (PCAOB) 

PCAOB details target team’s 2022 inspections observations

The PCAOB on Dec. 21, 2023, publishedSpotlight: Observations From the Target Team’s 2022 Inspections,” which provides an overview of the target team’s 2022 inspection work including observations, good practices, and key insights. In 2022, the team performed in-depth reviews across audit firms focusing on inspecting audits of public companies related to three areas:

  • First post-IPO audit engagements, including private companies transitioning to public companies through traditional IPOs as well as private operating companies undertaking business combinations with special purpose acquisition companies
  • Audit firms’ use of shared service centers as part of the audit
  • Auditors’ consideration of climate-related matters that are potentially material to a public company’s financial statements

PCAOB identifies 2024 inspection priorities

On Dec. 20, 2023, the PCAOB released a report, “Spotlight: Staff Priorities for 2024 Inspections and Interactions With Audit Committees,” that details 2024 inspection focus considerations, key risks and considerations for auditors, technology-related considerations, and questions for audit committees to consider.

In 2024, the PCAOB will prioritize inspections of financial-services entities and information technology companies, while continuing to emphasize inspecting audits of public companies in industries and sectors with specialized accounting and those that might be negatively affected by uncertainties and volatility in the economic and geopolitical environment. Additionally, the PCAOB will concentrate on audits of companies engaged in merger and acquisition activities or business combinations, audits of audit broker-dealers, and nontraditional audit areas. The inspections will consider overall business risks including:

  • Continuing high interest rates, tightening of credit availability, and inflationary challenges
  • Disruptions in the supply chain and rising costs
  • Business models affected by rapidly changing technology
  • Geopolitical conflicts
  • Financial statements with a higher inherent risk of fraud Estimates involving complex models or processes
  • Presentation and disclosures that might be affected by complexities in the entity’s activities

The report suggests questions for audit committee members to consider among themselves or in discussions with their independent auditors. These questions cover such topics as auditor understanding of the business, fraud, going concern, other auditors, critical audit matters, and the use of technology. Audit committees can use this report as a reference point when engaging with their auditors.

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