Chief Accountant Notes Support for Global Accounting Standards

Introduction

Thank you for both the kind introduction and the invitation to speak with you today. Before I begin, let me remind you that the views expressed today are my own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.

As most of you probably know, I am fortunate to have three deputy chief accountants and a chief counsel that assist me in executing the responsibilities of OCA:¹ Julie Erhardt oversees our International Group, Wes Bricker is responsible for our Accounting Group, Brian Croteau supervises our Professional Practice Group and Jeff Minton is my Chief Counsel. As you can imagine, each of these groups have very differing priorities, but all are important to the SEC's mission. Today, I would like to share my thoughts and perspectives on some of our key priorities -- IFRS,² the new revenue recognition standard, a future concept release on Audit Committees and the PCAOB's³ standard setting activities.

Future Prospects of IFRS

This time last year, I had just retired after spending 30 years as an audit partner, and I was approached by Chair White to be the Chief Accountant. One topic we discussed was her speech in May 2014⁴. Chair White indicated that she was making IFRS a priority and would be asking me to advise her on the next step forward if I were to be appointed. Although retired, I read with great interest the attention grabbing headlines from former Chairman Cox's keynote address at this conference last year that we should "bury IFRS⁵." Since arriving at the Commission last October, I have spent considerable time with my staff and others researching and discussing IFRS, and I believe Chairman Cox's burial of IFRS entirely may have been premature.

As I mentioned publicly last month,⁶ the staff has recently heard from a number of different constituents about IFRS: preparers, investors, auditors, regulators and standard-setters. We heard three key themes through those discussions:

• There is virtually no support to have the SEC mandate IFRS for all registrants.

• There is little support for the SEC to provide an option allowing domestic registrants to prepare their financial statements under IFRS.

• There is continued support for the objective of a single set of high-quality, globally accepted accounting standards.

In my opinion, in the near term, FASB⁷ and IASB⁸ should continue to focus on converging the standards. The boards should renew their commitment to cooperate and develop standards that eliminate differences between IFRS and U.S. GAAP⁹ whenever it meets the needs of its constituents and improves the quality of financial reporting. I recognize the boards will not always be able to eliminate differences during the standardsetting process, primarily because they serve different constituents that have different needs. However, when differences in standards arise, the boards should monitor the implementation of those standards with the objective of learning from the implementation and re-engaging with each other with the goal of converging to the standard with the highest quality financial reporting outcome. The boards should apply the lessons learned from the recent revenue recognition standard and realize that even though the words may be the same, to achieve convergence, cooperation is needed after the standard-setting process is complete and during the implementation stage of the standards. Finally, the FAF¹⁰ and IFRS Foundation should be supportive of the underlying objective and provide their respective boards with the support necessary to achieve convergence.

Let me close our IFRS discussion by repeating some comments I made about a month ago¹¹. I believe that, for the foreseeable future, continued collaboration is the only realistic path to further the objective of a single set of high-quality, global accounting standards. Accordingly, how the FAF, IFRS Foundation, FASB and IASB decide to interact in the future is critical to the advancement of the objective of a single set of high-quality, globally accepted accounting standards.

Implementing the New Revenue Recognition Standard

The staff continues to monitor implementation of the new revenue recognition standard to encourage consistent application not only in the U.S., but globally. And today I'd like to offer a few observations from our monitoring activities. I am encouraged that preparers, auditors, and standard-setters are working together to identify, evaluate and resolve issues in a consistent manner across all industries and transaction types. As they continue to work together, I encourage them to apply each step outlined in the standard in a practical way that considers the utility of the resulting information to investors and other users of the financial statements. Evaluating issues across industries and transaction types under the standard is critical because an important objective of the standard was to eliminate industry guidance and practices. While I am encouraged by the progress made, there are areas where I believe more cooperation is needed to identify an appropriate and practical balance to implementing the principles of the standard. Let me illustrate my point by reference to the guidance for identifying performance obligations.

The term performance obligation codifies and encompasses the concepts of a deliverable, a component and an element of a contract that currently exists in U.S. GAAP and is used to ensure that consistent and meaningful units of accounting are identified to report an entity's performance in transferring goods or services to customers. And I emphasize meaningful units of accounting.

I have heard some suggest that the new standard results in significantly more performance obligations as compared to the application of the current standards. Based on my discussions with various constituents, I do not believe that was the intent. The new standard allows an entity to apply reasonable judgment in considering whether promised goods and services are meaningful in the context of the contract with the customer, a point which the FASB is proposing to clarify by amending the standard. I am hopeful that the proposed amendment will include clarifying guidance and additional examples. The IASB also intends to amend their standard to include additional examples that further illustrate how the guidance should be applied. While the FASB and IASB approach to clarifying the guidance differs slightly, both boards, as evidenced by their discussions during their joint meeting, continue to believe they have a converged approach to identifying performance obligations. I also believe a converged approach will help preparers focus on those revenue-related promises in their contracts that are truly important and worthy of reporting to investors.

Application of any definition, including that of performance obligation, requires sound judgment that is supported by evidence. In this regard, the totality of the nature and purpose of the transaction with the customer should be understood, which includes understanding how the customer's expectations are reflected in the contract terms and how the entity's management of the contract is consistent with this purpose and its business model. For example, did the customer order 20 ships or the procurement, management and integration services of the vendor to provide 20 ships? A review of the entity's marketing materials and business practices can aid in identifying and understanding the nature and purpose of the transaction. As a general matter, I believe that many of the services that are provided may be viewed as fulfillment costs, rather than separate performance obligations that require a complex allocation of the revenue to each performance obligation. If the company does not sell that service separately and only provides the service to a customer in connection with the sale of a good or service, then it is likely a fulfillment cost. While the joint standard does not incorporate the concept of inconsequential and perfunctory performance obligations that currently exists in U.S. GAAP, I believe the FASB's proposed amendment has the potential to obviate the need for such guidance.

Implementation of the revenue standard -- or any standard for that matter -- results in a fresh examination of an entity's transactions, and because the revenue standard eliminates industry specific guidance, the starting point for the identification of performance obligations might differ from today. We anticipate that the number of performance obligations identified will change relative to existing guidance. In some cases there could be more promises to include, such as marketing incentives, while in other cases there could be fewer.

As an example of identifying fewer performance obligations, consider a software developer that sells a license, provides installation services at the request of its customer and, unlike its other arrangements, provides one day of training on the software. Under existing U.S. GAAP, the software developer would be unable to recognize revenue until it transferred the license and completed the installation and training services because it lacks vendor specific objective evidence of fair value for the training services. By contrast, under the new standard, the vendor likely will be able to recognize revenue earlier and would not need to separately identify and account for the training services because they appear to be immaterial in the context of the contract. That is, reporting separate performance obligations would not be meaningful to investors.

I also envision, consistent with existing practice, that call centers that stand ready to answer questions about how to put together or install a product or to field customer complaints generally will not rise to the level of material performance obligations in the context of the contract. These seem to be minor promises to a customer and likely are not worthy of separately identifying and reporting to investors.

Similarly, the identification of performance obligations for a broker who executes transactions, maintains custody of the customers' securities, statutorily reports certain tax information, and as a matter of statute or courtesy provides periodic statements to its customers should consider the nature and design of the broker's business and totality of its arrangement with its customer when evaluating what promises should be accounted for as performance obligations. The promises to provide tax information, periodic statements or perhaps even host a website to facilitate customers' access to its accounts do not seem to be the material aspects of the arrangement with the customer and likely will not rise to the level of performance obligations.

Again, this type of conclusion should be drawn from a thorough understanding of an entity's business and the nature and purpose of the transaction with the customer, and I encourage preparers and auditors to be practical in their assessment and make informed, reasonable yet supportable judgments.

Important Role of Audit Committees

Another topic I would like to address, given the integral role they play in our investor protection regime, relates to audit committees. Last December, I spoke at the AICPA Conference about the work OCA staff is undertaking with staff in the Division of Corporation Finance to consider whether improvements can be made to existing audit committee reporting requirements¹². We have been actively developing a recommendation to the Commission in the form of a concept release intended to seek feedback regarding how investors currently use the information provided in audit committee disclosures as well as feedback on the usefulness of potential enhancements, including additional disclosures. I anticipate being in position to recommend that the Commission publish the release for public comment in the near future.

As I envision it, the value of public comment would be to aid in our understanding of audit committee disclosures that investors would find useful in informing their investment or voting decisions. As part of its review, the staff is also giving consideration to current trends in audit committee reporting. For example, many companies and their audit committees are currently providing disclosure beyond that which is required by the Commission's requirements.

From that standpoint, the audit committee plays a critical role in the financial reporting process and a significant part of that role, which was mandated by the Sarbanes -- Oxley Act for listed companies, is focused on the oversight of the external auditor. Therefore, I am particularly interested in learning more from investors, audit committees, auditors, and others regarding current audit committee disclosures related to oversight of the independent auditor and whether the disclosures should be refined to provide more insight into the information the audit committee used and the factors they considered in executing their oversight of the external auditor. This feedback will be critical to the staff in understanding the nature of the information investors are seeking and how audit committees consider what information to report.

Also on the topic of audit committees, I would like to briefly mention that although the PCAOB does not have jurisdiction over audit committees, the PCAOB has made it a priority to enhance its outreach to and interaction with audit committees. Most recently, the Board published a new webpage for audit committees, which includes summary information from inspections and other PCAOB oversight activities¹³. The PCAOB has indicated that this is the first in a series of actions intended to make inspection and other information more accessible to audit committees to use in their oversight role. I commend the Board for recognizing the importance of the role of audit committees in improving audit quality through their oversight of the external auditor, and I encourage those involved in the audit process to read this publication and provide feedback to the PCAOB on any ways such publications and other actions can be made more useful in the future.

PCAOB Standard Setting Activities

Speaking of the PCAOB, I would like to now turn to its standard-setting. In December, at the AICPA Conference, I discussed my view of the need for the PCAOB to conduct a review of its standard setting process with the goal of improving the pace of its standard setting activities¹⁴.

I am pleased with the initial efforts the PCAOB has undertaken to address my suggestion. While I acknowledge that it will take time to develop and implement an improvement plan, I am optimistic that the PCAOB should be able to make significant and meaningful changes that will help improve the quality and pace of its standard setting efforts. Such improvements have strong potential to influence the quality of audits for the benefit of investors.

While the work has just begun, we have already seen some subtle, yet encouraging, results from some of the initial changes the PCAOB has been experimenting with in its standard setting process. The PCAOB recently issued its staff consultation paper on the use of specialists and is also scheduled to further discuss it, in addition to its standard setting efforts on auditing accounting estimates, including fair value measurements, and related disclosures at its Standing Advisory Group meeting later this month. Several other releases are anticipated soon that are intended to advance projects related to going concern, use of other auditors, and transparency of certain participants in the audit. One result of the PCAOB's efforts to improve standard setting may be an increase in the number of releases you will see in the next year for public comment. I encourage those interested in projects on the PCAOB's agenda to pay close attention if the pace accelerates and take advantage of the opportunities to provide your perspectives. I can assure you that both the PCAOB and SEC staff pay careful attention to your input.

Notwithstanding the efforts to date, there are some very significant and fundamental issues that will need to be addressed, and I encourage the Board to continue to stay focused in assessing the results of its review and developing and implementing an improvement plan. I remain committed to working together with the PCAOB to produce high quality auditing standards that will improve audit quality and ultimately increase investor protection, which is a mission that both the PCAOB and the Commission share.

Thank you for your kind attention, and I will be happy to address your questions on any of these topics during the Q&A session.

² International Financial Reporting Standards.

³ Public Company Accounting Oversight Board.

⁴ Mary Jo White, Chair, U.S. Securities and Exchange Commission, Remarks at the Financial Accounting Foundation's 2014 Annual Board of Trustees Dinner (May 20, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370541872065.

⁵ Chris Cox, How America's Participation in International Financial Reporting Standards Was Lost (June 5, 2014), Keynote Address to the 33rd Annual SEC and Financial Reporting Institute Conference, available at: http://www.uscsecconference.com/assets/Keynote-Address-to-SEC-and%20Financial-Reporting%20Institute-2014.pdf.

⁶ James Schnurr, Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2015 Baruch College Financial Reporting Conference (May 7, 2015), available at: http://www.sec.gov/news/speech/schnurr-remarks-before-the-2015-baruch-college-financial-reporti.html.

⁷ Financial Accounting Standards Board.

⁸ International Accounting Standards Board.

⁹ Generally Accepted Accounting Principles.

¹⁰ Financial Accounting Foundation.

¹¹ See note 6 above.

¹² James Schnurr, Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2014 AICPA National Conference on Current SEC and PCAOB Developments (December 8, 2014), available at: http://www.sec.gov/News/Speech/Detail/Speech/1370543609306.

¹³http://pcaobus.org/sites/digitalpublications/Pages/auditcommittees.aspx

¹⁴ See note 12 above.