No more accounting rules, please!

Published July 27, 2020

  • Articles

Though the full effects of the COVID-19 pandemic are yet unknown, every business and not-for-profit organization is affected in some way. Executives have been working tirelessly to devise contingency plans and rework their companies’ goals and budgets to address potential risks. Some lawmakers and regulators are responding with potential relief measures.

Congressional letter to SEC

House Financial Services Chair Maxine Waters recently sent a letter to the Securities and Exchange Commission (SEC), urging it to halt all rulemakings not relating to the COVID-19 crisis. She expressed concern over the SEC’s proposals to expand access to private markets and limit shareholders’ ability to submit and resubmit proposals.

Waters’ letter represents the latest move in a broader effort by Democratic lawmakers, activist groups and state securities regulators to convince — or require — the SEC to focus its rulemaking attentions entirely on the COVID-19 pandemic. Waters pressed the SEC “to immediately halt further consideration of the following rulemakings that threaten to leave investors and our markets more vulnerable to financial instability and risk than ever before.”

Before the COVID-19 outbreak had reached pandemic status, the SEC in March issued a proposal in Release No. 33-10763, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets. It was designed to streamline the current options for raising capital without having to register with the SEC.

Today, companies can use a range of exemptions, all of which carry different requirements for accounting, investor accreditation and disclosure. The proposal would raise the dollar ceilings for some of those exemptions, among other changes. SEC Chair Jay Clayton said the proposal “would rationalize an overly complex, patchwork regulatory framework and thereby promote capital formation while preserving or enhancing important investor protections.”

However, Waters expressed concerns over the SEC’s continued attempts to expand the private markets. Her letter warns that further expanding the private markets “comes directly at the expense of public markets, which have been specifically designed to facilitate capital formation while ensuring that investors and other market participants receive the full protection of the securities laws and have access to the tools and information they need to make informed decisions.”

Waters also questioned the commission’s proposal in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8. This proposal would make a series of changes that would increase the difficulty for shareholders to bring proposals up for vote.

Waters is “deeply concerned” that Release No. 34-87458 contains “harmful changes initiated before the crisis that would significantly curb shareholder rights, including a proposal that would significantly hamper shareholders’ ability to submit and resubmit proposals to the board of directors of the companies they are invested in.” She warns that Release No. 34-87458 would increase stock ownership requirements to such a high threshold that even some of the largest investors would be unable to submit shareholder proposals.

Recommendation to FASB

The Financial Accounting Standards Advisory Council (FASAC) is the FASB’s main advisory council. Its members include CEOs, CFOs, senior partners of public accounting firms, executive directors of professional organizations, and senior members of the academic and analyst communities. During a FASAC meeting on June 23, council members discussed the COVID-19 pandemic and its effects on financial reporting.

Senior executives cautioned the FASB — as it resumes normal standard-setting work in the second half of 2020 — to refrain from issuing major new accounting changes for the remainder of the year. FASAC members said accountants are burned out from coping with extreme circumstances brought on by the pandemic. Moreover, they face significant challenges ahead.

“I think that the FASB should focus on emerging issues, on critical items in the context of standards that are already out there, or implementation,” said Chief Accounting Officer at Bank of America Rudolf Bless.

Under FASB Chairman Russell Golden’s leadership, the FASB deferred the updated revenue recognition and lease guidance to give certain organizations more time to implement those substantial changes. Golden recently left the FASB due to term limits, and Richard Jones took the helm on July 1.

Jones inherited a full agenda, including 24 active projects, eight research projects and approximately 20 agenda requests. Top priorities in the near term include new rules on 1) not-for-profit reporting on gifts-in-kind donations, and 2) liabilities and equity. The FASB has also issued a proposal to defer the effective date on accounting for long-term insurance.

“We’re not ignorant of what’s going on, [and] understand COVID distractions and delays that our stakeholders have,” said Jones. “That being said … we need to keep our focus on emerging critical issues — looking at standards that have not yet been adopted to see what changes we could make that would be helpful to our constituents, but also factoring in this new working reality setting comment periods as well as implementation dates.”

We can help

If you’re feeling overwhelmed during the COVID-19 crisis, you’re not alone. Contact your CPA to discuss any financial reporting concerns during these unpredictable times.