What We Learned: Committee on Corporate Reporting March 2016 Meeting

Transcription

1 Today s Webinar Presentation What We Learned: Committee on Corporate Reporting March 2016 Meeting Presented by Financial Executives International (FEI) April 6, 2016 will begin shortly slide 1

2 CPE Credits Today s webinar is worth 1 Continuing Professional Education (CPE) credit. To be eligible for CPE credit, you must: Answer at least 3 of the 4 polling questions (during the webcast) and have a total viewing time of at least 50 minutes. Participants will have the opportunity to download their CPE certificate immediately following the webcast if above requirements are met. In accordance with the standards for the National Registry of CPE Sponsors, CPE credit will be granted based on a 50-minute hour. We are unable to grant CPE credit in cases where technical difficulties preclude eligibility. CPE Program Sponsorship guidelines prohibit us from issuing credit to those not verified by the technology to have satisfied the minimum requirements listed above. slide 2

3 Non-GAAP Disclosure: In the Headlines John White Partner, Corporate Department Cravath, Swaine & Moore LLP slide 3

4 John W. White John W. White is a partner in Cravath s Corporate Department and serves as Chair of its Corporate Governance and Board Advisory practice. From 2006 through 2008, he served as Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission, which oversees disclosure and reporting by public companies in the United States. During his over 25 years as a partner at Cravath, Mr. White has focused his practice on representing public companies on a wide variety of matters including corporate governance matters, public reporting obligations, public financings and restatements and other financial crises. John W. White Partner Mr. White is a member of the Standing Advisory Group (SAG), which advises the Public Company Accounting Oversight Board (PCAOB). He has also served on the Financial Accounting Standards Advisory Council (FASAC), which advises the Financial Accounting Standard Board (FASB). He is a member of the Board of Trustees and the Audit Committees of both the Practising Law Institute and the SEC Historical Society. jwhite@cravath.com

5 Non-GAAP Disclosure Regime for Domestic U.S. Registrants Reg G Whenever a registrant, or person acting on its behalf, publicly discloses material information that includes a non-gaap financial measure, the registrant must accompany that non- GAAP financial measure with:... Reg S-K Item 10(e) Whenever one or more non-gaap financial measures are included in a filing with the Commission: (i) The registrant must include the following in the filing:... slide 5

6 Initial Questions Question 1: Do you have a non-gaap financial measure? Question 2: Any exceptions applicable? Compensation measures in proxy statements Segment disclosures M&A Question 3: Which branch of the non-gaap regime governs? Depends on where the disclosure appears: 1. Any public disclosure, oral or written (Reg G) 2. Earnings press release (Item 2.02 Form 8-K (furnished)) 3. In filings with the SEC (Reg S-K Item 10(e)) slide 6

7 Applicable Requirements (depends on where the non-gaap measure is used) 1. Reg G 2. Item 2.02 Form 8-K* 3. Reg S-K Item 10(e) Overriding Principle Not materially misleading Disclosure Requirements Most directly comparable GAAP financial measure Reconciliation Equal or greater prominence X Investor usefulness X Management purposes X Express Prohibitions relating to ᵹ ᵹ Liquidity measures, face of pro formas, financial statements (including notes), non-recurring items, titles ** * See Instruction 2 to Item 2.02 of Form 8-K = applies X = does not apply ᵹ = does not expressly apply (but consider applicability) ** See Reg S-K Item 10(e)(1)(ii) slide 7

8 Checkpoints Titles Adjustments Clarity Consistency Cherry picking Equal prominence Placement ( accompany or include ) Investor usefulness and management purposes Controls slide 8

9 Accounting Hot Topics Hillary H. Salo Partner, Department of Professional Practice KPMG slide 9

10 Hillary H. Salo Hillary is an audit partner in KPMG s Department of Professional Practice with broad financial reporting experience, including regulation at the U.S. Securities and Exchange Commission s Office of the Chief Accountant, audit and advisory services at KPMG LLP, and standards setting at the Financial Accounting Standards Board. In KPMG s Department of Professional Practice, Hillary advises audit engagement teams in resolving accounting and auditing issues, focusing primarily on financial instruments, derivative and hedging activities, debt and equity, earnings per share, consolidations, and foreign currency. Ms. Salo also consults with engagement teams on pre-clearance submissions and comment letters received on filings with the SEC. Hillary H. Salo Partner, Department of Professional Practice KPMG LLP 345 Park Avenue New York, NY hhsalo@kpmg.com Hillary is a former Professional Accounting Fellow in the Office of the Chief Accountant at the SEC. While at the SEC, Hillary consulted with registrants on accounting and reporting matters, participated in the development of the SEC s rule proposals, and served as a key resource for staff in the Division of Corporation Finance related to the resolution of technical accounting matters. In addition, she led and participated in OCA staff reviews of draft FASB and IASB accounting standards. Her areas of technical emphasis included financial instruments, derivatives and hedging activities, debt and equity issues, as well as consolidations. Prior to joining KPMG s Department of Professional Practice in 2007, Hillary was a director in KPMG s Accounting Advisory Group in Chicago and consulted with audit engagement teams and advisory clients on technical accounting and reporting issues under U.S. GAAP and IFRS. Hillary started her career as a Postgraduate Technical Assistant at the FASB, where she produced technical analysis and interacted with constituents through the technical inquiry process.

11 Disclosure Effectiveness Key Takeaways Exercise judgment to provide high-quality, decision useful information to investors. Design and evaluate appropriate processes and internal controls over financial statement disclosures. Disclosures are not static. Reevaluate disclosures from reasonable investor perspective. Take a fresh look to streamline disclosures to remove outdated or redundant information. Preparers may cross-reference to eliminate redundancies. Slides presented by slide 11

12 SEC Areas of Focus and Frequent Comment in Filing Review Process Significant Judgments and Estimates The most frequent SEC staff comment areas are those accounting topics that require significant judgments and estimates including: Segment identification and disclosure Income tax disclosure Fair value measurements Revenue recognition Intangible assets and goodwill impairment The SEC staff often requests additional information to support registrants conclusions and additional disclosures about the assumptions that support significant accounting estimates Slides presented by slide 12

13 SEC Areas of Focus and Frequent Comment in Filing Review Process Internal Control Over Financial Reporting (ICOFR) Management s Discussion and Analysis (MD&A) Non-GAAP Financial Measures Slides presented by slide 13

14 PCAOB Inspection Trends and Focus Areas Inspection improvements Inspection focus areas Audit quality is trending in the right direction for some firms Driven by firm s tone at the top, targeted and focused training, use of practice aids and checklists, providing coaching and support, enhancing internal monitoring programs. Continued deficiencies in recurring areas: ICFR, fair value measurements, and revenue 2016 Inspection focus areas Audit response to current economic factors: oil prices, rising U.S. dollar Segment disclosures, business combinations, income taxes, going concern, technology risks, and auditor compliance with new related party standard Slides presented by slide 14

15 ASU , Recognition and Measurement of Financial Assets and Financial Liabilities Instrument Current GAAP New Guidance Equity investments with a readily determinable fair value FVOCI or FVNI FVNI Equity investments without a readily determinable fair value Cost minus impairment FVNI or practicability exception (cost minus impairment +/- changes in observable prices) Equity method investments ASC Topic 323 ASC Topic 323 (no change) Debt securities Available-for-sale FVOCI with other-than-temporary impairment FVOCI with targeted amendments to other-than-temporary impairment * Debt securities Held-to-maturity Amortized cost with other-thantemporary impairment Amortized cost with lifetime expected credit losses * Financial liabilities Amortized cost or FVO FVO - all FV changes through NI Amortized cost or FVO FVO FV changes due to instrument specific credit risk through OCI, all other changes through NI * - Forthcoming impairment standard guarding disclosing credit risk Slides presented by slide 15

16 Main Changes under ASU Equity investments Practicability exception and impairment and related disclosures Financial liabilities for which an entity has elected the FV option Deferred taxes Presentation Other disclosures Slides presented by slide 16

17 Industry-Based Standards to Guide Disclosure and Action on Material Sustainability Information Jean Rogers, PHD, PE CEO and Founder SASB slide 17

18 Jean Rogers, PHD, PE Dr. Jean Rogers is the CEO and Founder of SASB. Since 2010 SASB developed from an idea formulated in collaboration with the Harvard University Initiative for Responsible Investment at the Kennedy School of Government into a globally-respected, ANSI-accredited, independent standards-setting organization. Dr. Jean Rogers CEO and Founder Jean draws upon her 20 years experience in sustainability and management consulting across a wide range of industries including utilities, extractives, financials, and real estate. She has worked with international clients to integrate sustainability into strategy and operations, minimizing risk and maximizing returns across the triple bottom line. Jean s leadership experience includes 10 years as a Principal at Arup, a global engineering consultancy focused on sustainable development. Jean was also a management consultant at Deloitte, working in the environmental and manufacturing practices to help leading companies improve business and product performance through sustainability. Jean is a former Loeb Fellow at Harvard University and holds a PhD in Environmental Engineering from the Illinois Institute of Technology, and an ME in Environmental Engineering and a BE in Civil Engineering from Manhattan College. In 2015 she was named one of the Top 100 Most Influential People in Accounting by Accounting Today and one of the Most Powerful Women in Accounting by CPA Practice Advisor.

19 The SASB Mission Improved non-financial disclosure results in enhanced market efficiency The mission of SASB is to develop and disseminate sustainability accounting standards that help public corporations disclose material, decision-useful information to investors. That mission is accomplished through a rigorous process that includes evidence-based research and broad, balanced stakeholder participation. Facts about SASB Independent 501(c)3 non-profit American National Standards Institute (ANSI) accredited standards developer Developing industry-specific standards for 10 sectors and 80+ industries Guided by the U.S. Supreme Court s definition of materiality, SASB prioritizes material sustainability factors for disclosure to investors Slides presented by slide 19

20 The SASB Difference SASB standards are created for the market, by the market Material Decision-Useful Cost-Effective Industry-Specific Evidence-Based Market-Informed Slides presented by slide 20

21 Comparing Fundamentals, Competing on Performance SASB standards enable peer-to-peer comparisons and foster competition SASB Metrics Peer comparison Consistent units Complete data set Benchmarking slide 21

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23 A Market-Driven Response SASB addresses needs of all market participants both investors and issuers Issuers A minimum set of disclosure topics that are reasonably likely to have material impacts on companies in an industry, and a model for disclosing information on those factors in a decision-useful way to investors A method to understand and improve performance on ESG-related value drivers A way to satisfy the requirements of Regulation S-K in the U.S. and Directive 2014/95/EU in Europe Investors Comparable data for benchmarking and evaluating performance Standardized, decision-useful information in a trusted channel (i.e., 10-K and 20-F) Tools and resources to analyze and understand sustainability risk at the portfolio level Guidance for more focused corporate engagement efforts SASB INDUSTRY WORKING GROUPS REFLECT BROAD-BASED INTEREST >2,800 $23.4T $11.0T PARTICIPANTS ASSETS UNDER MANAGEMENT MARKET CAP Slides presented by slide 23

24 A Rigorous, Transparent Process has led to Provisional Standards SASB will enter a phase of deep consultation, analytics, field testing, and CBA prior to codification of the standards for 79 industries. Industry Research Vetting Standards Development UNIVERSE OF ESG ISSUES Evidence-based discovery Industry working group engagement and evaluation Disclosure topics and metrics consensus and definition Public Comment Provisional Standards Release Codification Feedback and refinement Road testing by companies 2016: Deep consultation with issuers, internal review, cost-benefit analysis 2017: Proposed changes, public comment, basis for conclusion, and codification. The Conceptual Framework and Rules of Procedure governing the Codification Phase will be released for Public Comment on April 6, Please comment at Slides presented by slide 24

25 Percentage connecting senior-level financial executives since 1931 Shaped By Consensus SASB topics must achieve a high level of consensus among all stakeholder types 100 Stakeholder-specific feedback on likely materiality of all proposed disclosure topics (% of respondents, by interest group, who think suggested topics are likely to constitute material information) Health Care Financials Technology & Communications Non-Renewable Resources Transportation Services Resource Transformation Consumption 1 Consumption 2 Renewable Resources & Alternative Energy Infrastructure All Corporations Investors/Analysts slide 25

26 Designed for Integration Into Existing Disclosure Requirements SASB supports cost-effective disclosure in 10-K and 20-F filings under Reg S-K US GAAP SASB Accounting Metrics1 True and fair representation of performance on material factors slide 26

27 Complementary Efforts Mandatory and voluntary reporting serve different purposes for different audiences Relevant Information All environmental, social, and governance topics of interest Stakeholders Alignment is key (e.g., consistent use of the description material ) Material Information Sustainability factors reasonably likely to affect the financial condition or operating performance of a company Investors Slides presented by slide 27

28 Current State of Disclosure Reporting across sectors lacks consistency, comparability, industry-specificity Renewable Resources & Alternative Energy (47 companies) Consumption II (79 companies) Consumption I (68 companies) Resource Transformation (50 companies) Services Sector (93 companies) Transportation Sector (63 companies) Non-Renewable Resources Sector (81 companies) Technology & Communications Sector (59 companies) Financials Sector (63 companies) Health Care Sector (58 companies) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% No Disclosure Boilerplate Industry Specific Metrics slide 28

29 Cost-Effective Disclosures SASB provides a cost-effective way to report on material sustainability factors 74 percent of SASB topics are already being addressed in SEC filings. SASB standards average 5 topics and 14 metrics (78 percent quantitative) per industry. Slides presented by slide 29

30 Material Information Each of SASB s evidence-based metrics is tied to specific financial impacts Value Impact SASB Metric REVENUE Medical Loss Ratio (MLR): Medical costs as % of premium revenue Managed care firms with higher MLR spend more on patient care, likely improving outcomes which may lead to improved customer satisfaction and market share; meanwhile, firms with lower MLRs may be required by the ACA to offer consumers a rebate which may affect operating profits Investor use: Comparative valuation Managed Care COST ASSETS & LIABILITIES Total Energy Consumed, % Grid Electricity, % Renewable Energy-intensive firms may be overexposed to volatile energy prices, vulnerable to certain risks if reliant on the grid, and/or incur indirect costs from internalization of carbon prices; investments in self-generation, energy efficiency, and renewables may require new processes (R&D) Investor use: Comparative analysis and fundamental valuation Telecomm COST OF CAPITAL Total Loans to Companies in the Non-Renewable Resources Sector ESG factors affecting NRR firms may disproportionately raise the risk associated with their outstanding loans and leases, decreasing interest income to commercial banks and devaluing collateral and loans; weakened balance sheets can lead to higher cost of capital Investor use: Comparative analysis, fundamental valuation Commercial Banks slide 30

31 Materiality Matters Harvard research validates the materiality of the topics in the SASB standards Corporate Sustainability: First Evidence on Materiality, Working Paper by Mozaffar Khan, George Serafeim, and Aaron Yoon Harvard Business School, 2015 Findings: Using SASB s framework, Harvard researchers found that firms with good performance on material sustainability issues and concurrently poor performance on immaterial sustainability issues enjoy the strongest financial returns. These results speak to the efficiency of firms sustainability investments, and also have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions. They also found that 80 percent of corporate disclosures are immaterial, having no correlation to positive performance. Slides presented by slide 31

32 A R E T H E R E A N Y Q U E S T I O N S F O R TO D AY S P R E S E N T E R S?

33 F O R YO U R PA R T I C I PAT I O N D U R I N G T H I S W E B C A S T