CURRENT MONTH (November 2024)
FASB Adopts Accounting Standard on Disaggregation of Income Statement Expenses
By: Thomas W. White, Retired Partner, WilmerHale
On November 4, the Financial Accounting Standards Board (“FASB”) finalized new disclosure requirements regarding “disaggregation of income statement expenses” or “DISE.” Under current accounting standards, the income statement generally presents expenses under broad functional captions such as “cost of products sold,” “cost of services,” “general and administrative,” and “research and development.” FASB adopted the DISE standard in response to requests by investors for more detail about the specific types of expenses included within the expense captions on the income statement. The standard applies only to public business entities (SEC registrants and certain other entities whose financial statements are publicly filed).
The DISE standard will not change the information presented on the face of the income statement. It will require disclosure in each annual and interim report of disaggregated expense information in the financial statement footnotes, as follows:
- For each relevant expense caption, tabular disclosure of the amounts of
- purchases of inventory
- employee compensation
- depreciation
- intangible asset amortization
- depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities or other depletion expense
A “relevant expense caption” is an expense caption presented on the face of the income statement within continuing operations that contains any of the foregoing expense categories.
The tabular disclosure will also include certain expense, gain, or loss amounts that are already required to be disclosed under GAAP. - Qualitative description of amounts remaining in the relevant expense captions that are not separately disaggregated quantitatively
- Separate disclosures about the total amount of selling expenses and, in annual reports, the entity’s definition of selling expense
The DISE standards will be effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted.
PCAOB Approves Expanded Audit Firm Disclosure and Reporting Requirements, 2025 Budget; Defers NOCLAR Standard
By: Thomas W. White, Retired Partner, WilmerHale
On November 21, the Public Company Accounting Oversight Board (“PCAOB”) adopted new and amended rules that, if approved by the Securities and Exchange Commission, will substantially expand public disclosures and confidential reporting by registered public accounting firms. (See previous item on the proposed rules.)
Standardized Firm and Engagement Metrics. The Board adopted new requirements for certain registered firms to disclose a standardized set of information about their audits and audit practices. The disclosures will only be required from registered firms that act as lead auditors for one or more accelerated filers or large accelerated filers. Separate reports will cover both firm-level and engagement-level information. The proposed metrics will cover (1) partner and manager involvement, (2) workload, (3) training hours for audit personnel, (4) experience of audit personnel, (5) industry experience, (6) retention of audit personnel (firm-level only), (7) allocation of audit hours, and (8) restatement history (firm-level only).
Expanded Firm Reporting. The Board amended the PCAOB’s current annual and special reporting forms to expand the information required to be reported by registered firms. The proposal covers the following areas: (1) additional information regarding audit fees, and, for the largest firms, confidential submission of financial statements to the PCAOB; (2) audit firm governance information; (3) information about accounting firm networks; (4) for firms that are inspected annually by the Board, confidential special reports for events material to a firm’s organization, operations, liquidity, or financial resources, such that they affect the provision of audit services; (4) public reporting regarding cybersecurity policies and procedures and confidential reporting to the PCAOB of significant cybersecurity events; and (5) updated description of quality control policies and procedures.
Board Member Christina Ho dissented to adoption of both the firm and engagement metrics rules and the amended firm reporting rules. Generally speaking, she questioned the value of the expanded information and asserted that the rules will impose substantial costs and burdens on reporting firms. She also suggested that the rules were being rushed through in light of the results of the presidential election.
Also on November 21, the PCAOB approved its 2025 budget, subject to SEC approval. The budget is $399.7 million and provides for 945 positions. As noted by Board Member Ho, who dissented, this budget represents a 4 percent increase over the 2024 budget, down from double-digit increases in the previous two budgets but still a total increase of 40 percent over the 2020 budget.
In other PCAOB developments, the Board deferred action on its controversial proposed auditing standard on Noncompliance with Laws and Regulations (“NOCLAR”). (See this item on the proposed standard.) The Board’s standard-setting agenda had targeted adoption of the NOCLAR standard in 2024. However, following the presidential election, the Board updated its standard-setting agenda to move the target date to 2025 and indicated that the contemplated action is “TBD.”
Glass Lewis Issues 2025 Voting Guidelines; ISS Opens Comment Period for Proposed 2025 Benchmark Voting Policy Changes
By: Rani Doyle
Glass Lewis published its 2025 Voting Policy Guidelines for the US, UK, and Europe on November 14, applicable to shareholder meetings held after January 1, 2025. Key policy updates for US companies relate to:
- Board oversight of AI
- Shareholder proposals regarding company use of AI technologies
- Board responsiveness to shareholder proposals
- Change-in-control provisions for executive compensation
- Reincorporation proposals
- Executive pay programs
Glass Lewis intends to hold webinars in December to provide market stakeholders with additional context.
On November 18, ISS Governance launched the comment period on proposed changes to its ISS Benchmark voting policies for 2025. The open comment period elicits feedback from investors, companies, and other market participants globally on the proposed ISS Benchmark policy changes for 2025 and beyond, and will run through 5 p.m. ET on December 2, 2024. The proposed changes are light, and they include issues regarding pay-for performance, poison pills, and SPAC extension proposals.
Sustainability Developments; “DEI Under Pressure”
By: Rani Doyle
Attacks on “ESG” may be causing some companies to pivot away from some so-called “ESG-initiatives,” but key ESG/long-term value considerations are a priority for most business leaders, governments, and investors.
Recent articles of note:
- A November report from the Center for Audit Quality (“CAQ”) on 2024 audit committee reporting showed that public company boards are continuing to add ESG/sustainability experts to their membership and that audit committees are increasingly responsible for ESG oversight.
- A recent report by The Conference Board’s ESG Center titled “DEI Under Pressure” examines the “future of DEI in corporate America.” This report notes how some public companies are making changes to their DEI practices.
Recent standard-setting developments this month that may impact US companies include:
- The European Financial Reporting Advisory Group (“EFRAG”), which develops and promotes EU views on corporate reporting, published working papers on sustainability reporting standards for non-EU parent entity reporting under the EU’s Corporate Sustainability Reporting Directive (“CSRD”).
- The International Auditing and Assurance Standards Board (“IAASB”) issued a new global standard for sustainability assurance that aligns with the CSRD and supports other sustainability reporting frameworks, including ISSB and GRI.
SEC Dealer Rule Vacated by Federal Court
By: Karen Liu, Reid & Wise LLC
On November 21, 2024, the U.S. District Court for the Northern District of Texas (the “Court”), in two separate decisions on two cases—one brought by three investment trade groups (National Association of Private Fund Managers; Alternative Investment Management Association, Limited; and Managed Funds Association v. SEC, No. 4:24-cv-00250-O) and the other brought by two crypto industry groups (Crypto Freedom Alliance of Texas, et al. v. SEC, No. 4:24-cv-00361-O)— vacated Rules 3a5-4 and 3a44-2 under the Securities Exchange Act of 1934, as amended (“Exchange Act”) adopted by the SEC on February 6, 2024 (the “Dealer Rule”), holding that the Dealer Rule exceeds the SEC’s authority, and therefore complete vacatur is warranted.
The Dealer Rule interpreted “dealer” broadly such that an entity would be required to register as a dealer or government securities dealer with the SEC if it provides liquidity, which could cover certain proprietary trading firms, private funds, and participants in DeFi protocols. The Dealer Rule took effect on April 29, 2024, with the compliance date approaching one year after.
The Court analyzed the definition of “dealer” based on the text, history, and structure of the Exchange Act and emphasized that “dealer” is one who buys and sells securities to customers in the context of customer-order facilitation. The Court reasoned that a dealer provides “advice or services to other investors,” not merely trades for “its own best interests,” and it found that the Dealer Rule blurred the distinction between “trader” and “dealer” and ignored the congressionally designed “trader exception” to the definition of “dealer.”
The SEC has sixty days to consider whether to file an appeal against the two decisions. However, the SEC announced that Chair Gary Gensler will step down from the SEC effective at 12 p.m. on January 20, 2025, which could increase the uncertainty as to whether the SEC will seek to appeal the decisions.
SEC Announces Fiscal 2024 Enforcement Results, Reflecting 26% Decline in Enforcement Actions
By: Rani Doyle
The Securities and Exchange Commission announced on November 22 that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history, although the 583 enforcement actions represent a 26 percent decline in total enforcement actions compared to fiscal year 2023.
Of the 583 cases, 431 were “stand-alone” actions, 14 percent less than in the prior fiscal year; 93 were “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders, 43 percent less than the prior fiscal year; and 59 were actions against issuers who were allegedly delinquent in making required filings with the SEC, a decrease of 51 percent.
The SEC noted, “The $8.2 billion in financial remedies consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record. Approximately 56 percent of the $8.2 billion financial remedies ordered is attributable to a monetary judgment obtained following the SEC’s jury trial win against Terraform Labs and Do Kwon, who were charged with one of the largest securities frauds in U.S. history.”
See the addendum to the SEC’s announcement for an enforcement summary chart for fiscal year 2024.
