SEC Chief Accountant Lauds FASB for Engaging Investors, Stakeholders on Potential New Standards
Acting Accounting Head Also Encourages Continued Input from CFOs and Others
Paul Munter, acting chief accountant for the SEC's Office of the Chief Accountant, on Feb. 22, 2022, released a statement related to the Financial Accounting Standards Board's (FASB) effort to consult with investors and stakeholders when developing new accounting standards. In general, Munter praised the FASB's efforts to engage with financial statement users with the goal of producing the best possible standards for improving the accuracy and effectiveness of financial reporting.
The key takeaway for chief financial officers, chief accounting officers, audit committee members, investors and others involved in financial reporting is that the FASB wants their input to develop accounting standards going forward. Therefore, when possible, companies, their personnel and shareholders should consider taking advantage of the opportunity to comment on the process and standards that directly impact their businesses.
In June 2021, the FASB "published an Invitation to Comment, Agenda Consultation (ITC), to solicit broad stakeholder feedback about the FASB's standard-setting process and its future standard-setting agenda." This included "outreach by the FASB staff and Board members to a cross-section of stakeholders, approximately one-third of whom were investors or other financial statement users." Following more than 500 responses, the ITC closed in September 2021. Munter encouraged the FASB and trustees of the Financial Accounting Foundation, in its oversight role, to continue engaging with stakeholders in the future to improve the standards-setting process.
Munter commented that "an understanding of evolving investor needs can directly contribute to the FASB's ability to keep standards current in order to reflect changes in the business environment, and to promptly consider changes to accounting principles necessary to reflect emerging accounting issues and changing business practices." In short, in an ever-changing world, the FASB can benefit from hearing directly from those who actually use financial statements to make decisions or evaluate a business. This will help the FASB to develop standards that are informed by real-world application, not just accounting standards produced in a vacuum.
However, this is not a one-way street, as Munter recognized. He encouraged "all stakeholders to engage with the FASB early and often in the standard-setting process" because "the objective of financial reporting is to provide decision-useful information to investors and other users." Thus, he reiterated that investors and other stakeholders "should take every opportunity share perspectives on what information is useful to them and how they could use that information."
Munter also highlighted several topics that received substantial comment in the ITC:
- Disaggregation of Financial Reporting Information. Munter noted that there is a "general alignment among commenting investors that greater disaggregation of financial reporting information – in the income statement, statement of cash flows, and the notes to financial statements – should be among the FASB's top priorities." The FASB held its more recent public discussion on disaggregation last month, and the possibility of "potentially targeted improvements" in this area could be on the horizon, particularly in light of the FASB's existing project considering the disaggregation of certain income statement expenses.
- Climate-Related Transactions. Respondents to the ITC "urged the FASB to continue to monitor the business environment and suggested certain targeted issues for potential standard setting along with requests for broader disclosures regarding the impact of climate-related issues on the financial statements." The FASB currently has multiple ongoing projects concerning "climate-linked features" and renewable energy arrangements. Munter teased out the possibility that the time may be ripe for the FASB to take "thoughtful action on targeted areas of accounting, disclosure, and financial reporting" on climate-related issues.
- Digital Assets. Many commenters noted that digital assets should be a priority for the FASB, including consideration that "the FASB should permit or require issuers to account for certain digital assets at fair value." In response, FASB added a research agenda item on accounting for exchange-traded digital assets and commodities. This emphasis on digital assets generally demonstrated that investors and preparers expect digital assets to increase in significance in the coming years.
In light of the FASB's efforts to engage investors and stakeholders, and the SEC's encouragement for the FASB to continue these efforts, key company personnel should monitor the FASB's requests for comment on accounting standards, then speak up when those requests touch on the company's business and financial reporting.
The SECond Opinions Blog will continue to monitor FASB developments and provide further updates. If you need any additional information on this topic – or anything SEC- or internal-investigations-related – please contact the authors or another member of Holland & Knight's Securities Enforcement Defense Team.