A quarterly update for audit committees on accounting and financial reporting developments, including SEC stays final rules on climate disclosures
On April 4, 2024, the SEC issued an order staying its final rules on climate-related disclosures pending the completion of the Eighth Circuit’s review of legal challenges to the final rules. “In issuing a stay, the Commission is not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions.”[1]
The final rules as adopted on March 6, 2024, while scaled back from the proposed rules, would require public companies to make detailed climate-related disclosures in their annual reports and financial statements. A number of industry and environmental organizations, as well as state attorneys general, challenged the final rules in various courts, and on March 21, a judicial panel issued an order consolidating these cases in the Eighth Circuit Court of Appeals.[2] The SEC’s April 4th order stays the Commission’s final rules pending the Eighth Circuit review and decision. That decision could affect the legality and scope of the final rules, including the scheduled compliance phase-in.
Notwithstanding this uncertainty, companies currently assessing reporting requirements under the California climate laws as well as EU and other international standards can now use the SEC’s final rules to complete their analysis of reporting obligations and create a rigorous, repeatable, and timely climate reporting process. The final rules comprise disclosures with two distinct components:
The two sets of disclosures are connected because the Reg S-K disclosures require quantitative and qualitative disclosure of any material expenditures incurred and material impacts on financial estimates and assumptions that directly result from certain items.
Certain disclosures (qualitative and quantitative) are required in a note to the financial statements for the company’s most recent fiscal year and include disclosures about:
The climate risk disclosures outside of the financial statements are arranged under the broad categories of governance, strategy, and risk management, which is consistent with the structure in the SEC’s recent rule on cybersecurity reporting and disclosures.
These disclosures include the following governance and risk management disclosures:
The disclosures also include quantitative and qualitative disclosure of any material expenditures incurred and material impacts on financial estimates and assumptions that directly result from the company’s:
Large accelerated filers and accelerated filers (except for smaller reporting companies and emerging growth companies) are required to disclose gross Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions, if material. Limited assurance will be required three years after the disclosures are first required. For large accelerated filers only, reasonable assurance will be required four years after that.
The rules do not prescribe a specific approach to be followed. Instead they require the company to describe the methodology, significant inputs, and significant assumptions used to calculate GHG emissions, including the:
The April 4th stay order does not address the scheduled phase-in of the Commission’s final rules. While the earliest compliance date is scheduled for the fiscal year beginning in calendar year 2025 for large accelerated filers, there is uncertainty as to how the Eighth Circuit litigation and any subsequent SEC action might affect the scheduled phase-in.
Also see SEC stays its climate rule pending judicial review.
On March 6, a diverse group of auditors, preparers, legal experts, investors, and professors gathered for a virtual roundtable hosted by the PCAOB. The focal point of the dialogue was the PCAOB’s proposal on noncompliance with laws and regulations (NOCLAR)—an extensive proposal that would significantly increase auditors’ responsibilities related to NOCLAR. Although the proposal is targeted to auditors, the potential effects would be wide-reaching, extending to company management and audit committees alike.
The roundtable aimed to foster public outreach and facilitate discussions on various aspects of the proposal as the PCAOB staff strives to develop an operable standard that adequately safeguards investors’ interests. Despite achieving some consensus, the discussions underscored the substantial work that remains before the PCAOB can issue a final standard.
The varied perspectives on the proposal’s key concepts, expressed at the roundtable and in submitted comment letters, underscore the significant challenges that remain in developing an updated NOCLAR standard. The PCAOB’s standard-setting agenda indicates that a final standard is anticipated in 2024. However, this timeline will depend on the PCAOB's redeliberation of the feedback, the extent of changes made to the proposal, and the decision on whether to re-propose. Whether re-proposal is necessary was yet another area where the panelists were divided.
The national exchanges’ (NYSE and Nasdaq) final compensation clawback listing standards became effective on October 2, 2023. Companies were required to adopt their recovery policies by December 1, 2023, and have had many questions about how to apply their new recovery policies under the rules. Among them, companies have asked about when to check Boxes 1 and 2 in their annual report filing.
At the 2023 AICPA and CIMA Conference on Current PCAOB and SEC Developments, staff from the SEC’s Division of Corporation Finance clarified that companies should check Box 1 for any annual financial statements that reflect an error in previously issued financial statements as defined by Topic 250 (accounting changes and error corrections). Box 1 is not checked (1) for changes in accounting principle or (2) if there is an out-of-period adjustment reflected in current-year financial statements that does not change any prior-year financial statements.
A company checks Box 2 if the financial statements included in the filing reflect the correction of one or more errors that required a recovery analysis—i.e., either a “Big R“ or “little r“ restatement to previously issued financial statements as defined in the rules.
There could also be circumstances where a company can check Box 1 but not Box 2. An issuer checks Box 1 any time there is an error correction, regardless of materiality. The issuer checks Box 2 only if those error corrections are “Big R“ or “little r“ restatements that require the issuer to perform an analysis under its recovery policy.
The SEC has adopted final rules and guidance to enhance investor protections in response to concerns arising from the surge in 2020 and 2021 of special purpose acquisition company (SPAC) IPOs and the subsequent acquisition of private operating companies (de-SPACs). Key provisions of the final rules include:
For more detail about these and other issues potentially affecting you in the current period or near term, see the KPMG Q1 2024 Quarterly Outlook.
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