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SEC interim rules implement FAST Act provisions

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Contents Current reporting issue: Pension accounting      Updated mortality information
     Changing the method for computing net periodic benefit cost
SEC adopts interim final rules to implement two FAST Act provisions AICPA      ASB issues new standard clarifying format of auditor’s report
CAQ      Highlights from October SEC Regulations Committee meeting issued
     Report on audit quality indicators released



Current reporting issue: Pension accounting Updated mortality information In October 2015 the Society of Actuaries (SOA) published an updated mortality improvement scale (MP-2015). MP-2015 updates MP-2014, which was published in October 2014, to incorporate mortality data released by the Social Security Administration for 2010 and 2011. Based on preliminary estimates, the SOA expects that incorporating the MP-2015 scale might reduce a plan’s liabilities by up to 2 percent, depending on the plan’s specific characteristics.

To measure a defined benefit plan’s costs and obligations under U.S. GAAP, a sponsor must use assumptions that reflect its best estimate of the plan’s future experience. Although sponsors are not required to use SOA information to develop mortality assumptions, many sponsors do, and such entities should consider the updated improvement scale when preparing their financial statements.

Changing the method for computing net periodic benefit cost During 2015, some entities adopted alternative methods to the single weighted-average discount rate approach for calculating components of the net periodic benefit cost for pension and other postretirement benefit plans. For example, in adopting a spot rate approach, a sponsor that formerly computed a single weighted-average discount rate based on a yield curve would instead use disaggregated spot rates along the yield curve to separately discount the corresponding projected benefit payments. Typically a spot rate approach results in lower interest cost, service cost, or both, compared to a single weighted-average approach, although other alternative approaches could affect the components of net periodic benefit cost differently.

Adopting a new approach for measuring components of net periodic benefit cost would not impact measurement of the projected benefit obligation. For example, if a sponsor adopts an alternative approach that lowers service or interest cost, it would likely recognize a higher actuarial loss than under its previous approach.

At the 2015 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff noted that it has not objected to registrants changing their methodology for computing the discount rate used to calculate interest cost from the single weighted-average approach to the spot rate approach. The staff also has not objected to registrants accounting for the change as either a change in estimate or as a change in estimate inseparable from a change in accounting principle.

Plan sponsors should be aware of the requirements to disclose information about changing their approach for measuring components of net periodic benefit cost in the notes to their financial statements and, if applicable, in Management’s Discussion and Analysis.



SEC adopts interim final rules to implement two FAST Act provisions On January 13, the SEC adopted Interim Final Rules, Simplification of Disclosure Requirements for Emerging Growth Companies and Forward Incorporation by Reference on Form S-1 for Smaller Reporting Companies, to implement certain provisions of the Fixing America’s Surface Transportation (FAST) Act as follows:

  • Forms S-1 and F-1 are revised to allow an emerging growth company (EGC) to exclude from its draft confidentially submitted or filed IPO registration statement financial statements for historical periods that the EGC reasonably believes will not be required at the date of effectiveness. The issuer is, however, required to amend the registration statement to include all financial information required by Regulation S-X at the time of the amendment prior to distributing a preliminary prospectus. The SEC staff previously issued Compliance and Disclosure Interpretations, Fixing America’s Surface Transportation (FAST) Act, to clarify application of this provision.
  • Form S-1 is revised to allow for forward incorporation by reference of documents filed subsequent to the date of effectiveness by smaller reporting companies, provided the issuer meets existing eligibility requirements and conditions for incorporation by reference.

The Interim Final Rules will become effective when published in the Federal Register.

The SEC has also requested public comment on the Interim Final Rules, including whether such rules should extend to other registrants or forms, and will accept comments through February 18, 2016.



AICPA ASB issues new standard clarifying format of auditor’s report The AICPA Auditing Standards Board (ASB) issued Statement on Auditing Standards (SAS) 131, Amendment to Statement on Auditing Standards No. 122 Section 700: Forming an Opinion and Reporting on Financial Statements. The new standard clarifies the format of the auditor’s report to be used when an audit is conducted in accordance with PCAOB standards but is not within the jurisdiction of the PCAOB.

In these situations, SAS 131 requires the auditor to (1) comply with U.S. GAAS in addition to PCAOB standards, and (2) use the form of reporting specified by the PCAOB, amended to indicate that the audit was also conducted in accordance with U.S. GAAS.

The amendments also provide reminders and examples of when an audit is under the jurisdiction of the PCAOB and caution the auditor to consider whether the engagement specifies the “auditing” standards of the PCAOB or whether all PCAOB rules (including independence, for example) are applicable.

The amendments in SAS 131 are effective for audits of financial statements for periods ending on or after June 15, 2016, with early adoption permitted.



CAQ Highlights from October SEC Regulations Committee meeting issued The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with the SEC staff to discuss emerging financial reporting issues relating to SEC rules and regulations. The highlights summarize matters discussed at the meetings and do not represent official positions of the AICPA or the CAQ, nor are they authoritative positions or interpretations issued by the SEC or its staff.

The CAQ recently issued highlights of the joint meeting on October 21 between its SEC Regulations Committee and the SEC staff. Discussions at the meeting included the following topics:

  • Update by the SEC staff on Regulation A, including offering activity since Regulation A amendments became effective on June 19, 2015, and a reminder that the Commission added Securities Act Rules Compliance and Disclosure Interpretation 182.07, which permits the use of Regulation A for business combination transactions such as a merger or an acquisition
  • Discussion of ASU 2014-09 and IFRS 15, both titled Revenue from Contracts with Customers, when a registrant adopts the new standard using the full retrospective method, including

    • The impact on significance testing under Regulation S-X, Rules 3-09 and 4-08(g). At the 2015 AICPA Conference on Current SEC and PCAOB Developments, which was held subsequent to the SEC Regulations Committee meeting, the SEC staff noted that it plans to issue guidance allowing a registrant using the full retrospective method to use its pre-transition significance tests for periods prior to adoption when applying Rule 3-09. It is expected that the forthcoming guidance will apply to Rule 4-08(g) as well, although this topic was not specifically addressed.
    • Confirmation that the staff will not object to a registrant retrospectively adjusting both the ratio of earnings to fixed charges and the ratio of earnings to fixed charges and preferred dividend requirements for the same years presented in the primary financial statements when using the full retrospective method. However, registrants should clearly disclose that earlier years have not been adjusted.
    • Confirmation that pre-transition financial statements would need to be revised in connection with certain SEC filings when using the full retrospective method, such as a new or amended registration statement on Form S-3 in certain situations

  • Discussion of ASU 2014-17, Business Combinations: Pushdown Accounting, including

    • Confirmation that a registrant should continue to apply pushdown accounting in connection with Regulation S-X, Rule 3-10(i), when separate subsidiary financial statements reflect pushdown accounting and in change-in-control events for which pushdown accounting had been reflected previously in the condensed consolidating financial information
    • Confirmation that guidance regarding SAB Topic 1-J, Application of Rule 3-05 in Initial Public Offerings, in the Division of Corporation Finance Financial Reporting Manual, Sections 2070.4(A) and 2070.6(A), continue to be applicable, irrespective of whether pushdown accounting is applied

  • Confirmation that the requirements to file the financial statements of an acquired business that is greater than 50 percent significant prior to an effective registration statement do not apply to a probable acquisition, unless management determines that the probable acquisition constitutes a fundamental change

Report on audit quality indicators released The CAQ issued a report, “Audit Quality Indicators: The Journey and Path Ahead,” providing insights from roundtable discussions with audit committee members and other stakeholders on a potential set of audit quality indicators (AQIs).

Audit committee members recognized that AQIs can help them oversee the quality of their external audit, even if the external audit is just one aspect of quality financial reporting. Additional key findings from these discussions include the following topics:

  • Participants are seeking information that can assist audit committees in their assessment of the more qualitative aspects of the audit, such as the engagement team having the right mindset to bring forth professional skepticism and auditor judgment.
  • Most participants endorsed a flexible approach that allows an audit committee, working with an external auditor, to tailor or customize the selection and portfolio of AQIs that best suit its specific information needs.
  • While supporting the concept of AQIs, some roundtable participants said they already have the tools necessary for them to gauge the quality of their audit.
  • Audit committee members agreed that AQIs alone, without context, cannot adequately communicate factors relevant to any particular audit engagement or audit firm.
  • There was agreement that the process of identifying and evaluating AQIs needs to be audit committee–driven and iterative, and will require continuous assessment and refinement in order to meet the changing information needs of audit committees.
  • Audit committee members expressed strong concerns that public disclosure of engagement-level AQIs could lead to unintended consequences. The consensus that emerged was that any disclosure of engagement-level AQI information should be voluntary.



© 2016 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.