Below we summarize accounting and financial reporting developments potentially affecting companies in the current period or near term for audit committees to monitor.
Monitoring for impacts of economic uncertainty on accounting and financial reporting
Companies should continue to monitor for evolving macroeconomic trends and events and consider their potential impacts on financial reporting and disclosure.
Companies are encouraged to revisit their disclosures and maintain close communications with their boards of directors, audit committees, external auditors, legal counsel, and other service providers as circumstances develop.
New excise tax effective for 2023
As a reminder, the Inflation Reduction Act of 2022 was signed into law in August 2022. Among other things, the legislation imposes a 1% excise tax on stock repurchases in a tax year that are made by certain publicly traded corporations. The tax applies to repurchases of common and preferred stock, net of issuances (including exercises of options or vesting of restricted shares). This new tax is effective in 2023 for calendar year–end public companies to which it applies.
The excise tax is derived from a non-income-based measure and is therefore not accounted for as an income tax under Topic 740 (income taxes). Instead, companies will generally account for the tax as a direct cost of a repurchase of a corporate stock transaction. It is appropriate for a company to recognize these direct costs in the period(s) that includes a repurchase, and subsequently adjust those costs for any reductions in the period that includes a stock issuance.
For a calendar year–end company, the excise tax for the 2023 tax year will be paid in 2024. Therefore, there is no cash flow to report in 2023 financial statements. However, there may be noncash financing activities to disclose – e.g., the amount of excise tax charged to equity. Companies are encouraged to start considering the appropriate presentation for the ultimate cash outflow, including whether a split between financing and operating activities may be necessary based on the facts and circumstances.
SEC regulatory update
In June, the SEC published its Spring 2023 Regulatory Agenda, which outlines the SEC’s rulemaking priorities over the next 12 months. Release of a final climate disclosure rule is now anticipated for October 2023, which is not surprising considering the volume of comments the SEC received on its 2022 proposal. Significant questions about the final rule include the nature of the disclosures that might be required in the financial statements and the disclosure of greenhouse gas (GHG) emissions, in particular Scope 3.
The Spring 2023 regulatory agenda also scheduled October as the anticipated timing of the release of a final cybersecurity risk governance rule, as well as the release of proposed amendments to the human capital management (HCM) disclosures. The HCM proposal could include a list of detailed quantitative and qualitative disclosures on workforce-related topics like diversity, turnover, compensation and benefits, and training. It is not yet clear whether the proposal will also require more expansive disclosures regarding a company’s governance, strategy, and risk management for its HCM.
On June 26, the International Sustainability Standards Board published its first two IFRS® Sustainability Disclosure Standards: general requirements (IFRS S1) and climate (IFRS S2). This marked a key milestone in the ISSB’s vision to create a global baseline for investor-focused sustainability reporting that local jurisdictions can build on.
Subject to adoption by local jurisdictions, the effective date of the standards is January 1, 2024. However, companies can elect to disclose only climate-related information in the first year of application. Additional transition options include relief related to disclosing comparative information and Scope 3 GHG emissions.
The ISSB standards are not directly applicable to US companies. However, in addition to any group reporting requirements that emerge as other countries adopt the standards, the demand for information from companies’ customers and other stakeholders may well influence adoption. Also noteworthy is CDP’s announcement that it will incorporate the climate standard into its questionnaire.
As the final step in its due process, on June 9, the European Commission released a near-final set of European Sustainability Reporting Standards (ESRSs) for consultation; the comment period ended July 7. To address stakeholder feedback, the updated drafts included a number of changes, including making all disclosures (other then certain general disclosures) subject to a materiality assessment.
The final standards—which comprise just the first set of ESRSs—will be issued by the end of August and the first wave of companies will adopt them from January 1, 2024. Once issued, the degree of interoperability between the ESRSs and ISSB standards can be formally assessed.
GHG emissions reporting
The ISSB standards and the forthcoming ESRSs will differ in a number of ways; however, the disclosure of GHG emissions will be common. The reporting will be heavily informed by the Greenhouse Gas (GHG) Protocol, which has emerged as a nexus in the climate reporting ecosystem. The SEC’s climate proposal also leveraged the GHG Protocol.
The Protocol provides the underlying principles, concepts and methods to develop a GHG emissions inventory that can be used for various voluntary or mandatory reporting purposes. Understanding the accounting and reporting for GHG emissions through the lens of the Protocol is a key step in preparing for the future of emissions reporting. For dual reporters, this includes understanding how the respective forthcoming climate-related disclosure requirements compare to each other and to the Protocol. Ourr Handbook explains GHG emissions reporting for finance professionals.
The SEC has issued a final rule hat requires issuers to provide additional disclosure about their share repurchases. The amendments are intended to provide investors with enhanced information to assess the purpose and effects of the repurchases. Issuers that file Forms 10-K and 10-Q must comply with the requirements in their first filing covering the first full fiscal quarter beginning on or after October 1, 2023 (i.e., for calendar year–end issuers, in Form 10-K for the year ending December 31, 2023, for repurchases during the quarter ended December 31, 2023). Foreign private issuers and listed closed-end funds have later compliance dates.
The PCAOB has proposed a new standard that seeks to strengthen the auditor’s obligations related to a company’s noncompliance with laws and regulations in three key areas.
Identify would establish specific requirements for auditors to proactively identify—through inquiry and other procedures—laws and regulations that apply to the company and could have a material effect on the financial statements if not complied with, and would make explicit that financial statement fraud is a type of noncompliance with laws and regulations.
Evaluate would strengthen requirements related to the auditor’s evaluation of whether noncompliance with laws and regulations has occurred and, if so, the possible effects on the financial statements and other aspects of the audit.
Communicate would make clear that the auditor is required to communicate to the appropriate level of management and the audit committee as soon as it is made aware that noncompliance with laws or regulations has or may have occurred, and would create a new requirement that the auditor must communicate to management and the audit committee the results of the auditor's evaluation of such information.
The comment period ends August 7.
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