Highlights from the Baruch Conference: Exploration of Non-GAAP Definitions, Discussion on Environmental Credits, and Analysis of ESG Data
Bracing for Truth at the Baruch Financial Reporting Conference
After a long hiatus due to the pandemic, the Baruch Financial Reporting Conference is back with a bang, offering a rare glimpse into the concerns of accountants, auditors, and industry regulators. Here are four captivating takeaways from this year's conference on May 4.
1. A Clear Definition of Terms
The debate on non-GAAP disclosures may have subsided in business headlines, but it's a discussion that's far from over among accountants, auditors, and regulators. Lindsay McCord, the chief accountant of the Securities and Exchange Commission's (SEC) division of corporate finance, revealed that she still receives numerous queries concerning the SEC's definition of the terms "normal" and "recurring" in the context of non-GAAP operating expenses.
As per McCord, "Recurring is an operating expense that occurs repeatedly or occasionally, including at irregular intervals." To give a solid example, the costs a retailer incurs to open new stores can fall under this category.
In December 2022, the division of corporate finance released revised compliance and disclosure interpretations, providing definitions for "normal" and "recurring" expenses. When considering whether an expense is considered "normal," the SEC considers the nature and effect of the non-GAAP adjustment in relation to the company's operations, revenue-generating activities, business strategy, industry, and regulatory environment.
2. Rely on the SEC's Help
Need some advice regarding accounting or auditing compliance matters? If so, the SEC's office of the chief accountant (OCA) can lend a hand. Despite a dedicated webpage offering answers to questions, Lindsay McCord noted that many companies underutilize this resource. Consulting the OCA doesn't result in a review of the company's financials by the SEC. However, companies should be transparent with OCA staff, and it's essential to recognize that advice from the OCA doesn't constitute approval of a specific accounting or auditing matter.
3. Environmental Credits: A Credit or Not a Credit?
FASB has placed an environmental credit program project on its technical agenda, signifying the lack of specific rules related to accounting for environmental credit programs - such as carbon offsets. FASB aims to address recognition, measurement, presentation, and disclosure requirements for compliance and voluntary credit program participants. The market for voluntary carbon offsets is booming, and a large emitter buys a credit to fund green projects.
One question that arises is whether FASB will base the accounting treatment on the theoretical definition of an environmental credit or how it is actually used in practice. For example, an investigation by The Guardian discovered that approximately 90% of the rainforest offset credits approved by a significant carbon credit certifier were practically worthless.
4. ESG: A Matter of Data
The conference couldn't skip the hot topic of the SEC's forthcoming ESG reporting standards. Given the vast amount of uncertainty surrounding these rules, the panel largely focused on the logistics of implementation.
One concern addresses the data quality and the required controls. For years, sustainability information has existed in standalone reports, often outside the scrutiny required for a public filing. "Will the numbers be accurate enough to be in the public domain?" asked John Hodges, a partner in EY's climate change and sustainability practice.
Google's parent company, Alphabet, focuses on greenhouse gas emissions, stating that emissions data will be obtained from meters, invoices, and operational databases. The most challenging part of the ESG disclosure process, according to Daniel Lim, ESG controller at Google's parent company, will be data collection, also known as "data ingestion." The location of all this data is also a concern.
With the SEC rules expected to roll out this year, Hodges recommended companies follow three steps to prepare: 1) Assess inventory – organize and catalog the company's sustainability activities; 2) learn and develop ways to collect and deliver sustainability data, including establishing controls; and 3) ensure responsibility for governance is in place.
- The discussion on non-GAAP disclosures remains ongoing among accountants, auditors, and regulators, with Lindsay McCord from the SEC's division of corporate finance clarifying that "recurring" expenses include costs that occur repeatedly or occasionally, even at irregular intervals.
- Lindsay McCord encouraged companies to utilize the SEC's office of the chief accountant (OCA) for help with accounting or auditing compliance matters, emphasizing that consulting the OCA doesn't imply a review of the company's financials by the SEC.
- The Financial Accounting Standards Board (FASB) is working on an environmental credit program project to establish accounting rules for environmental credit programs like carbon offsets, raising questions about whether the accounting treatment will be based on theoretical definitions or practical usage.
- The SEC's forthcoming ESG reporting standards were discussed at the conference, with an emphasis on the logistical challenges of implementing these rules, especially concerning data quality, data collection, and data controls.
- In the context of ESG reporting, data collection, often from meters, invoices, and operational databases, was identified as the most challenging part of the process for companies like Google's parent company, Alphabet.
- John Hodges, a partner in EY's climate change and sustainability practice, posed the question about the accuracy of ESG data if it will be made public, while Daniel Lim, ESG controller at Google's parent company, expressed concern about data collection, or "data ingestion."
- Hodges recommended that companies prepare for the upcoming SEC ESG reporting rules by assessing their sustainability activities, developing methods to collect and deliver sustainability data, and establishing controls.
- Underutilized resources and misconceptions about the role of the SEC's office of the chief accountant (OCA) were highlighted, with McCord expressing concerns about companies not fully utilizing the OCA for accounting and auditing compliance advice.
- The market for voluntary carbon offsets is growing, yet the authenticity and effectiveness of some of these credits have been called into question, emphasizing the need for clarity and transparency in accounting practices related to environmental credits.
