On the Horizon: Court hands down final ruling on conflict minerals rule

Contents Current reporting issue    Financial reporting implications of U.K.’s withdrawal notification to EU

FASB    PCC posts highlights of April 4 meeting

SEC    Final judgment on conflict minerals rule issued
   CorpFin adds C&DIs related to Regulation Crowdfunding

AICPA    FinREC releases additional revenue recognition implementation working drafts
   ASEC issues audit data standard

GAO issues exposure draft to update Yellow Book

Current reporting issue Financial reporting implications of U.K.’s withdrawal notification to EU Recently the United Kingdom (U.K.) gave written notice to the European Council that it intends to withdraw from the European Union (EU). This written notice, which is required under Article 50 of the Lisbon Treaty, begins the two-year negotiation process between the U.K. and EU on the withdrawal agreement, which will set out the terms for the withdrawal and the framework for the U.K.’s future relationship with the EU. In accordance with Article 50, the U.K. will leave the EU by March 29, 2019, unless the withdrawal agreement is finalized sooner or the negotiation period is extended unanimously by the European Council and the U.K.

ASC 740, Income Taxes, requires an entity to record the effects of an enacted tax law or rate change in the period that includes the “enactment” date, that is, the date a tax bill becomes law. Enactment date should not be confused with effective date; many tax-rate changes do not apply immediately, but become effective at some future date. An entity may have to remeasure its deferred taxes in the period a new tax law or rate change is enacted. ASC 740-10-30-8 through 30-9 requires an entity to measure a deferred tax liability or asset using the enacted tax rate(s) that are expected to apply to taxable income in the periods the deferred tax item is expected to be settled or realized. If there is a phased-in change in tax rates, determining the applicable tax rate may require scheduling the reversal of temporary differences.

The U.K.’s written notice to withdraw from the EU is not considered an enacted tax law or rate change that would require recognition and measurement in an entity’s financial statements.

Entities should, however, consider including disclosures in their financial statements about the risks and uncertainties relating to the U.K.’s withdrawal from the EU that could significantly affect the amounts reported in the financial statements in the near term, as well as the near-term functioning of the reporting entity in accordance with ASC 275, Risks and Uncertainties. Additionally, an SEC registrant should consider the need for disclosures outside its financial statements regarding the potential impact of this uncertainty, in accordance with Regulation S-K, Item 503(c), Risk factors, and Regulation S-K, Item 303, Management’s discussion of financial position and results of operations.

It is our understanding that the SEC staff will not object to a registrant concluding that it is not appropriate to recognize any income tax effects that may occur upon the U.K.’s withdrawal from the EU until a change in tax law is enacted. If an SEC registrant evaluates its facts and circumstances and concludes that the written notice by the U.K. results in a change in measurement of deferred taxes, we would encourage the registrant to request a staff consultation with the Office of the Chief Accountant of the SEC.

FASB PCC posts highlights of April 4 meeting The Private Company Council (PCC) met on April 4 with FASB members and provided input on the following FASB projects:

  • Disclosure framework: PCC members supported this project and also expressed support for the proposed ASU on inventory disclosures. PCC members also provided input on various aspects of this project.
  • Financial instruments – hedge accounting: Several members expressed support for the proposed ASU on hedge accounting, including the guidance impacting private companies’ completion of hedge-effectiveness documentation.
  • Liabilities and equity – targeted improvements: PCC members discussed feedback received on the proposed ASU covering two narrow aspects of distinguishing liabilities from equity, along with the Board’s research on an alternative that would simplify the accounting for one aspect of the proposal—financial instruments with down round features.
  • Consolidation targeted improvements to related-party guidance for variable-interest entities: The Board’s recent tentative decisions on this project, including the accounting alternative that would not require private companies to apply variable-interest entity guidance to entities under common control, were discussed, and PCC members voiced support for the direction of the project.

The PCC also provided the Board with private company examples and situations for recognizing and measuring cloud computing services, contracts, and related expenses.

The next PCC meeting will be held on July 11.

SEC Final judgment on conflict minerals rule issued On April 3, the U.S. District Court for the District of Columbia issued final judgment in the litigation regarding the Final Rule, Conflict Minerals, and set aside those portions of the rule that require companies to report to the SEC and state on their website that any of their products “have not been found to be ‘DRC conflict free.’” Further, the court remanded the matter back to the SEC to take appropriate action on this rule in furtherance of the court’s decision.

In response to this court decision and to instructions from SEC Acting Chairman Michael S. Piwowar to work on a recommendation for future SEC action, the Division of Corporation Finance (CorpFin) issued a statement noting that, subject to any further action that may be taken by the Commission, it will not recommend enforcement action if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD.

CorpFin adds C&DIs related to Regulation Crowdfunding The Compliance and Disclosure Interpretations described below reflect the views of the SEC staff. They are not rules, regulations, or statements of the Commission and have not been approved by the Commission. The interpretations are intended as general guidance and should not be relied on as definitive.

The staff of the CorpFin recently added Questions 201.02 and 202.01 to its Regulation Crowdfunding Compliance & Disclosure Interpretations (C&DIs). The questions address certain related-party disclosure requirements and provide guidance regarding the calculation of the number of holders of record for purposes of determining eligibility to terminate an issuer’s ongoing reporting duty.

AICPA FinREC releases additional revenue recognition implementation working drafts The AICPA Financial Reporting Executive Committee (FinREC) released working drafts of 11 revenue recognition implementation issues for informal comment. This latest set of working drafts discusses considerations about, and provides illustrative examples for, airlines, gaming, hospitality, and time-share entities implementing the new revenue standard.

The implementation issues will be added to the AICPA audit and accounting guide on revenue recognition after the review of public comments and finalization of the issues.

The comment period for these working drafts ends June 1.

ASEC issues audit data standard The Emerging Assurance Technologies Task Force of the AICPA’s Assurance Services Executive Committee (ASEC) published the audit data standard, Inventory Subledger Standard. The standard includes information specific to inventory accounts and can be used by management and internal and external auditors.

Audit data standards are voluntary and nonauthoritative.

GAO issues exposure draft to update Yellow Book The U.S. Government Accountability Office (GAO) issued the exposure draft, Government Auditing Standards – 2017 Exposure Draft, to amend Generally Accepted Government Auditing Standards, also known as the “Yellow Book.” Key proposed amendments include:

  • An updated format that differentiates requirements from application guidance
  • Updates to the internal control requirements and guidance
  • Revised continuing professional education requirements
  • Revised peer review requirements for audit organizations that also comply with peer review requirements of affiliated organizations
  • Added requirements for reporting waste detected during an audit

Comments are due by July 6.

© 2017 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.