Disclosure Rules on Stock Compensation not Complex but Some Audits Costly.
Recommendations on whether FASB should revise certain disclosure requirements for stock compensation awards will likely be made in this year’s fourth quarter, according to recent discussion by the Private Company Council (PCC). Accountants have not flagged the topic as being more complex than usual, but some disclosures are costly to audit, including those on weighted-average exercise price; exercised and forfeited awards; aggregate intrinsic value; and weighted-average remaining service period, a staff member said during the September 12 discussions. The PCC will broach the topic of disclosure rules on stock compensation awards to the Risk Management Association (RMA) at an October 19 liaison meeting to solicit views from lenders from banks in various sizes and states. That meeting will largely wrap up outreach efforts on the topic, after which FASB staff will summarize its findings and the PCC will determine next steps, the discussions indicated. “This project is on our research agenda, it’s not on our technical agenda anywhere so when we finish our outreach that will be the next decision point as to whether or not it gets moved to someone’s technical agenda, whether it’s ours or we request the board take it on for a short fix,” PCC Chair Candace Wright said. “So, anybody that might have any questions or comments or concerns or whatever it would be helpful to hear those as we move forward,” said Wright, also a partner in EisnerAmper’s Audit & Assurance Services Group.
Tentative Advances on Recognition Rules for Software Costs
FASB has tentatively agreed on when companies should recognize software costs under a single model that is being developed for all direct software costs—settling on a systematic approach that would enable the use of judgment. The discussions aimed to flesh out recognition requirements for applying the model when capitalizing or expensing software costs, focusing on at what point costs should be reported and how, which can be tricky in an agile technological environment that is rapidly changing. “I do think this allows significant judgment and I do think it also would allow many companies today to get to outcomes that aren’t significantly different than what they have today,” FASB member Frederick Cannon said. “The reason I’m relatively comfortable with that and moving ahead on that is that users and investors are not clamoring for a change in outcome today, especially because of the challenge they feel they would have in terms of the metrics that are used to value these companies today,” said Cannon. “I’m not saying that we shouldn’t perhaps think about something that would change outcomes but if we do want to go towards changed outcomes I think we would have to make the case that the outcomes would result in better outcomes for users. So that’s why I’m fairly comfortable with what we have in terms of the significant judgment that’s continuing to be included in this.” Capitalization allows companies to report software costs as an asset rather than an expense, enabling them to record the costs over time to match the period when a benefit is received to when costs are recognized.
Rule Revision to Increase Auditor Accountability Proposed
The Public Company Accounting Oversight Board (PCAOB) on September 19, 2023, issued a proposal intended to deter auditor misconduct by fully utilizing the enforcement authority granted by the Sarbanes-Oxley Act of 2002 (SOX). The proposal in part would update the board’s auditor contributory liability standard from “recklessness” to “negligence,” aligning it with the same standard of reasonable care auditors are already required to exercise when they perform audits of a public company’s financial statements. Recklessness represents a level of culpability that is higher than negligence. The proposed revision would “match what investors already expect: that when an associated person’s negligence directly and substantially contributes to firm violations that can put investors at risk, the PCAOB has tools to hold them accountable,” said PCAOB chair Erica Williams. The contributory liability standard in question is in Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, which became effective in 2006. When the PCAOB was first drafting the rule almost 20 years ago, it decided to use the reckless threshold because of pushback from the largest accounting firms at the time against the negligence standard of conduct. However, SOX allows the board to bring charges against any registered firm or any associated person. The PCAOB is also authorized to go after violations committed in negligence—a result of the failure to exercise reasonable care. And now today’s board wants to align Rule 3502 with the mandates conferred to the PCAOB two decades ago. “This is a positive step towards holding those engaging in unprofessional conduct accountable for their actions,” said Lynn Turner, former SEC chief accountant and current member of the PCAOB’s two advisory groups.