At this point, it goes without saying that 2020 was a year of sweeping change. The pandemic impacted virtually every aspect of life, and fundamental shifts in the political and economic environments kept the business world on its toes. For financial leaders, these shifts are likely to bring significant regulatory changes and updated disclosure requirements, especially in the realm of ESG (Environmental, Social and Governance).
As the SEC continues to release statements on upcoming regulatory changes, many financial leaders are searching for insight and guidance on getting prepared.
ESG disclosure updates
In our recent webinar, “Accounting Trends for Financial Leaders,” Jared Benedict, executive director of accounting and transaction services at MorganFranklin Consulting, and Erica Baker, managing director & partner at Vaco, explored some of the key trends and changes in the accounting space and examined how those shifts may impact financial arrangements moving forward.
Benedict focused specifically on ESG (Environment, Social and Governance) disclosures, and how financial leaders and accounting professionals may need to adjust to updated and refined requirements in the near future.
Some of the key expectations for financial leaders include the creation of a sustainability standards center, which will work with the SEC to develop criteria to require standardized reporting on climate-related items. As reporting becomes required, accounting teams will need to capture additional information and make sure that information is standardized and repeatable.
Additionally, Benedict explained recent updates to Regulation S-K, specifically section 101, which requires companies to now disclose material information regarding the development of their business, human capital resources, and any employer rewards (paid time off, flexibility of hours, flexibility of work location, etc.) as they relate to the material understanding of the business.
“This is going to be a fairly global change as it relates to disclosures and could require companies to put together a lot of policies that, maybe historically, have not really been considered,” Benedict said of the updates.
During the webinar, nearly 300 finance and accounting leaders shared how their companies were addressing the changes to ESG requirements:
SPAC regulation updates on the horizon
Special purpose acquisition companies (SPACs) also took center stage in the webinar conversation, as more companies are going public through SPAC transactions than ever before. With so much action in the SPAC space, the SEC has set its sights on updating regulations for these transactions.
One of the key components of the SEC’s crackdown on SPACs is the decision to reclassify SPAC warrants as liabilities instead of equity. In light of these changes, SPACs that are already public may need to restate their financial results. Additionally, the SEC stated they would not declare any registration statement effective until the warrants issue is addressed.
“This is a significant change in that those liabilities would need to be re-evaluated every quarter, and any changes will go through earnings on the financial statements. This will also impact SPACs that are already public. They may have to go through and restate their financial results, moving those warrants from equity classified to liability classified,” Benedict said.
Reference Rate Reform changes on the way
Another concern for financial leaders this year is Reference Rate Reform, an issue that Benedict says will affect both the financial markets and any company with multiple financial agreements.
At the end of 2021, banks will no longer submit rates to calculate LIBOR (London Interbank Offered Rate); instead, the FASB will now require the use of ARRs (Alternative Reference Rates) which are calculated using observable transactions rather than estimates. Benedict pointed out that LIBOR currently underpins $350 trillion in derivatives and other financial products, and that its phasing out will have a broad impact outside of the financial services industry, as interbank offering rates are frequently used in debt agreements, investments, contracts with customers and compensation arrangements, among other agreements.
During the webinar, nearly 300 finance and accounting leaders shared their thoughts on reference rate reform:
Benedict also discussed the massive impact of the coronavirus pandemic on the business environment, and outlined some unique challenges that companies are facing.
Forecasting, including liquidity, impairment analysis and non-GAAP disclosures, are expected to be a key challenge facing companies in the wake of COVID-19.
Additionally, the internal control environment, including segregation of duties and cybersecurity controls, have been affected by the pandemic, and many companies will need to address these issues effectively as economic recovery continues.
Being aware and getting prepared
Benedict anticipates even more regulatory updates surfacing in the near future, including additional modernization of financial disclosures and new regulations related to the Biden administration’s initiatives. SPAC regulations and audit updates are also expected to accelerate in the near future.
As always, knowledge is power, so being aware and getting prepared for these changes are the first steps to compliance and success.
Check out the full webinar for additional insight: