The SEC and FASB: Turning Down the Political Heat, Part 2

Key Takeaways

Part 2 of the conversation with Nicola White of Bloomberg and Alan Wilson of the law firm WilmerHale! Last week there were so many insights on the SEC, FASB, and crypto accounting that we had to keep the convo going. Catch the rest of the chat now.

Show Notes:

• Listen to part 1 of the conversation here
• Learn more about Alan Wilson's career path here

 

Season 4, Episode 4: The SEC and FASB: Turning Down the Political Heat, Part 2 | Transcript

 

Mike Gravagno: Hello and welcome to Off the Books, where we surf the uncharted waters of accounting, finance, risk, ESG, and wherever else the waves take us. This is part two of a two-part series. In last week's episode, we were talking to Nicola White, a reporter from Bloomberg, and Alan Wilson, CPA and securities attorney from WilmerHale, about a recent proposal that could add more oversight by the SEC to the Financial Accounting Standards Board, known as the FASB. For decades, the FASB's work in setting generally accepted accounting principles, or GAAP in the U.S., has generally moved forward independently. But their slow pace of rulemaking, the Inflation Reduction Act, and recent cries for more accounting guidance over crypto have people calling for the SEC to get more involved in the FASB. If you haven't heard last week's episode, you'll definitely want to check it out. I would pause right now and just throw back, as we do a lot of table setting there and we're going to continue here. And now let's get back to Steve and Catherine chatting with Nicola White and Alan Wilson, as we talk more about the FASB's independence, the proposed climate rule, crypto accounting, and more.

 

Steve Soter: Could this actually go potentially in the opposite direction of what the Investor Advisory Committee is saying, where, "hey, we think the FASB needs to be more politically independent when actually the opposite might"? Because if you have a very active SEC, which by design tends to flip just a little bit based on whoever's in the White House and who is appointing the SEC chair. I mean, again, it just feels like this is going to have the complete opposite effect of what the advisory committee was saying. And I can't be the only one who is having that reaction or who is thinking that.

 

Nicola White: That's a totally valid perspective. That absolutely could be the case. I mean, this is a very, for example, the SEC we have right now is extremely active, and it's even really active in the accounting space, which typically the SEC is pretty hands off. There has been some staff accounting bulletins that have, you know, like the recent crypto holding staff accounting bulletin created a lot of waves. The climate plan has like 50 pages of new audited disclosures in it. And people in the accounting world are like, well, if that was something that was put out by FASB, it would have been debated ad nauseam before the public saw it, debated in public ad nauseum before the public saw it. Whereas, you know, the SEC proposal, it landed like a 300-page brick the day that it came out. And everybody's frantically—and the auditor disclosures are such a tiny part of that huge plan—so, yeah, there's a lot going on. You just don't know. And tying things more to Washington definitely could open up FASB to more influence from the politics end of things.

 

Steve: So Alan, you and I have been having a long-running dialog about—we're shifting gears here just a little bit—a long running dialogue about when the SEC is going to adopt the climate proposal guidance. Of course, we saw very recently that they reopened the comment period due to a technological issue. Now, I've backed off of my conspiracy theories just a little bit after finally listening to Chair Gensler's testimony to the Senate Banking Committee. This does seem a bit fishy. I'm just wondering, again, totally shifting gears away from the FASB, wondering if you have any thoughts on how that might impact the way this whole climate thing lays out?

 

Alan Wilson: I think it certainly will. There were a significant number of standards affected, as you saw, about a dozen or so. And because the extension reopens the comment period for 14 days after the release is published in the Federal Register, which has not happened as of today, October 14. So we're still now looking at comments that may not come in until the end of October or after. We've now pushed back the comment period, potentially added more comments to be reviewed. All of which is to say it builds in delay for climate as well as the other releases that were included. And so I think that what we'll see is probably a calendar shift in terms of when things are likely to be adopted, if you will. I probably before this release came out, was betting pretty heavily that we would see adopted final climate rules by the end of the year. That would be effective by the end of the year, right? And start for next year. But I think that we'll probably see that get pushed. So it's still possible you would have an adopting release sometime this year in 2022, but I think it really is to pressured to see those rules go effective. Just thinking about the timing that we have left for getting things released, adopted, and published in the Federal Register. I just don't think that there's now enough time for that to occur, which is certainly probably welcome news to companies that were worried about beginning to comply with climate rules next year, not to say that they can take their foot off the gas at all in terms of preparing. I think that those rules are still coming. It just looks to be a little bit later for climate, and really the others that are included in the reopening release.

 

Catherine Tsai: If we're going to be talking about the climate proposal, one question is what effect that would have on small private companies if that proposal is adopted as written? Usually small private companies are not complying with SEC reporting requirements, but under this proposal, they would probably have to be estimating or measuring their greenhouse gas emissions so that they can provide that to the large public companies that are their customers so that they can report their Scope 3 emissions. How do you see all of this playing out?

 

Alan: I think for the smaller companies, it's still a risk. I think the one question that comes to mind is whether Scope 3 ultimately makes it into the final proposal. Scope 3, as you'll recall, was one of the hot-button issues that I think was attributed for the delay in getting out the climate proposal in the first instance. And I think that it's still a significant area of debate in terms of how that fits into the final adopted rules. It's quite possible, I think, that there might be a scaling back of the requirements as it relates to publication of Scope 3 data, but I don't know whether that's going to actually occur. There's certainly a lot of discussion that that could happen. And Gensler has indicated that he's open to considering amendments and changes around the Scope 3, so I think that it remains to be seen what actually happens. But I do think that there may be some relief for the smaller companies. And in fact, the additional time period and additional comments might allow for some further discussion and debate to evolve in that respect, which might ultimately afford those smaller issuer some some relief. I mean, I think they'll certainly have relief from a timing perspective and maybe so from an actual disclosure and obligation perspective. That said, as you're probably aware, separate and apart from the SEC requirement, many companies are publishing Scope 3 reports and Scope 3 data and are really on the leading edge, in part in response to investor demands and other stakeholders that are looking for the data. So, whether or not the SEC mandates it, I do think that there's still a chance that you could find yourself as a smaller company getting asked to provide the data to a company. The difference is if the company doesn't actually have a legal obligation to publish it, their ability to push, I think, for the smaller companies to provide the data is a little bit weaker than it might otherwise be.

 

Steve: Well, it was certainly a hot topic in Chair Gensler's testimony. I had no idea how many sitting senators on the Senate Banking Committee were actually farmers. Apparently there's a bunch because he kept coming up in his testimony.

 

Alan: A significant number.

 

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Steve: And one of the things that I wonder is that this does introduce just a potential flip-flopping of accounting standards whereyo u end up having this whipsaw of, again, auditors and companies and others trying to—I mean, because if you think about how long it takes the FASB to do something, takes a long time. Well, it can also take a long time for companies to implement these things. We think about revenue recognition, leasing. Those things took years. And I just wonder if you took a step back, if an investor said, "Well, either through non-GAAP disclosures or maybe other areas of information that might supplement my financial reporting, I would actually prefer that consistency again, rather than potentially flip-flopping based on whoever's in the White House. And then, you know, as a result, whoever's leading the SEC." I just say that as my observation. Catherine or Nicola, if you want to disagree with me, then that might be an interesting conversation.

 

Nicola: Well, one of the things we should note that this proposal doesn't say, like, we want this committee, this to-be-determined committee, to actually set accounting standards—it definitely does not say that at all. It just says make recommendations to FASB. So, you know FASB could very well say, "No, we don't like that recommendation." However, it does say that if FASB rejects the recommendation, they would have to formally respond to it. So they'd really have to justify why they didn't agree with the committee. So it's interesting. FASB is a very slow-moving organization, and a lot of that is on purpose. So you don't shock the markets with brand new accounting requirements that, you know, transform company earnings overnight. But at the same time, I think it's pretty valid to acknowledge that accounting is supposed to reflect economics. It's not supposed to drive economics. And maybe some of the outdated accounting standards just don't reflect the current economics.

 

Catherine: Well, if I have to put you two on the spot, how likely do you think it will be that this committee will actually form?

 

Nicola: I have no idea. It's just a recommendation, right? But it passed out of the committee with no dissents. I think it'll be up to the appetite of the current SEC commissioners as to whether or not they think FASB is doing a good enough job to set timely standards, listen to investors, and be independent. And at least one of the commissioners publicly said leave FASB alone. But there might be some appetite from others that think, "Well, maybe this organization in Norwalk that has a lot of power that we've given it, maybe we do need a little bit more oversight of it."

 

Steve: Yeah, I would agree. I think there's more than an outside chance of that happening. Chair Gensler has indicated his support that he would be willing to do it. And I think actually, and I appreciate you bringing that up just just a moment ago, Nicola, with the fact that the FASB could choose to pursue any recommendations. If they didn't, they would at least need to respond in writing. And that feels to me like a good argument that somebody like Chair Gensler or others could make to say, "Well, hey, look, we're not trying to mandate what their agenda is and what they're doing, but we are having a more clear public view on what we think the investor community needs."

 

Nicola: Yeah. Okay. So two things real quick. First, on Gensler's appetite for the proposal, he's pretty measured in his public remarks. Before the proposal, he just said, "We welcome or I welcome the recommendations," which I guess one could potentially read that you like, "I welcome it gladly versus like I'm going to read it and see what I think." So I don't know if Gensler necessarily is pro or con. Just based on his public statements, I'm not sure how excited he is about this. I'll have to ask him next time I see him, maybe, but I don't know. And then the second thing, yes, FASB is moving super fast on crypto, relatively. It also has on its current agenda, it's sort of fast-tracking some long-requested investor projects, such as—this is all going to sound very nerdy to people who aren't following FASB super closely—but disaggregation of the income statement so that companies break out more details about their expenses instead of just recording these ump buckets where they kitchen sink all their expenses. That's an investor priority they released last week or two weeks ago. New disclosures for segments that investors have called for a very, very, very long time, and they're moving forward with a project that looked absolutely dead before the pandemic hit. And that was improving disclosures about the income taxes that companies pay in particular, which is like a hot, hot topic. And that project has been on the FASB's agenda for so long, has died two deaths, and then revived, and let's see what actually comes out of it. But that is something that investors are closely following. So I think there is some action in Norwalk to really kind of fend off some of the criticism that it's not listening to investors.

 

Steve: And I would guess that they perceive this as a somewhat existential threat to the FASB, at least some of these conversations, which I think is probably encouraging them to put a little fuel on the fire to get movement on some of these critical things.

 

Nicola: Yeah, it's interesting. And they put out this year a big report, like here's all the investors we talked to behind the scenes, and they did that last year as well. So they're really trying, I think.

 

Catherine: Right?

 

Steve: That's right.

 

Nicola:Yeah. And to what extent that's enough? You know, that's the big question.

 

Catherine: Well, do you two both have time to talk a little bit more about this guidance on digital assets and crypto?

 

Nicola: Sure.

 

Steve Soter [00:16:06] Sure.

 

Catherine: Because you were talking about consistency, this seems like this is going to be blowing up consistency, at least when we make the switch over to accounting for digital assets with fair value accounting. Right. I mean, how what sort of reaction do you think investors will have to this change?

 

Nicola: Oh, that's Steve. This is Steve's turn for sure.

 

Steve: Well, I don't know about that. I think you bring up a good point about the consistency question. I think I would clarify that digital assets was never really clear and settled and established to begin with. This emerged, this became a thing, you know, suddenly as a business, I can't ignore crypto. My customers are going to want to pay for it. Or that might be a competitive advantage for me to incorporate it in my payment streams. And so you make those, let's say, economic or competitive decisions. Well, then you've got to answer the question about the accounting. And that was exactly where we found ourselves. At Overstock, I can say is, you know, the first large national retailer to accept bitcoin. And so we had made that as a competitive decision, but then faced with, "Okay, well now we own this bitcoin and other cryptocurrencies, what do we do with it?" And so I actually feel like, Catherine, to your point, this will introduce that consistency, settle the issues so we don't have to keep thinking about and talking about it. I mean, the way that it works, just for our audience, is that you would think of crypto today like you would inventory. I pay a certain amount of money for it. I put it on my balance sheet. But then if I don't, you know, then I need to be looking at it for impairment. Is it still worth what I paid for it? And the way that it works is that if that value has decreased, I need to write that down. I recognize a charge, an expense to my income statement. But the odd thing is, is that let's say if the value goes up—and that doesn't often happen with inventory, but it certainly happens with cryptocurrency—I don't actually get to write it back up. I don't get to recognize that increase in value until I actually sell it. Well, that creates a very strong disconnect, again, between the economics of cryptocurrency and those assets and what is being represented in your financial statements—a really big deal for those companies that have significant cryptocurrency holdings. I mean, honestly, I wouldn't call this a watershed moment, but pretty close. And it certainly will be for those companies that will be impacted in a big way.

 

Nicola: After FASB's vote, I got some PR pitches saying that if FASB moves to fair value, it's going to make more companies want to invest in crypto or hold crypto on their balance sheet so they don't have these counterintuitive impairments that they never can record. They can never increase their value if the price of bitcoin or whatever goes back up. So, just based on my inbox, I think people generally would favor that accounting compared to what the current model is. But it's going to introduce—I mean, fair value is just, by its nature, up and down, so it'll introduce volatility.

 

Steve: Yeah, what's so ironic to me is that that was the treatment, this whole you write it down, but you don't write it up until you sell it. And we're talking about crypto assets here, you know, technological and future-thinking and whatever. That was actually how Overstock recorded the gold and silver holdings that we had, which is a whole other episode. But we actually had like a warehouse actually, full of gold, full of silver. Our CEO at the time thought that that was important for us to have, and that's exactly how we would treat that. The price of gold would go down, and we would write it down, but it would never go back up unless we actually disposed of it. And I can't think of a more ancient asset than that, but yet that is exactly how we were treating these new modern cryptocurrencies. Just seems very ironic to me.

 

Nicola: That's awesome.

 

Catherine: Well, it seems like it's come the a time when we have to ask Nicola a closing question of the day.

 

Nicola: Okay.

 

Steve: Yes.

 

Catherine: In the spirit of trying to get FASB to act a little bit faster, we have a similar closing question. So what is a rule or product launch or movie release that it feels like you have been waiting years for?

 

Nicola: The next season of Derry Girls. I rewatched the first two seasons on Netflix when we had COVID last month, and I got to the end I was like, I just want more. And it's magically back. So I get to watch it this weekend.

 

Catherine: Excellent.

 

Steve: Netflix is going to be the brunt of this question because I have answered, so we've actually asked this question a number of different and I generally have the same thing or the same response, and it's Stranger Things. Yes, I know the recent season came out, but they didn't they didn't end it. They didn't wrap it up. So now I've got to wait for season five, I think it is. And who knows, I probably have to wait another like two or three years. So. Netflix, if you could be listening to this conversation, we would appreciate some faster action. How about you, Catherine? What are you waiting for?

 

Catherine: Is it too soon to say Batgirl? I'm going to be waiting for a very long time I think.

 

Steve: You are going to be waiting for a very long time. And that's an impairment issue that we've been talking about.

 

Catherine: Yes, that's right.

 

Nicola: Good tie in.

 

Steve: Well, Nicola, thank you so much for joining us.

 

Nicola: Well, thank you for having me.

 

Catherine: Thank you, dear listener, for surfing along with us. I'm Catherine Tsai. That was Steve Soter, and this has been Off the Books presented by Workiva. Please subscribe, leave a review, and tell your buddies if you liked the show. What did you think of the episode? What do you want to hear us talk about next? Drop us a line at offthebooks@workiva.com. Surf's up and we'll see you on the next wave.