Approaching the 2022 year-end financial reporting season

As 2022 draws to a close, our latest report provides insights for audit committee consideration for the year-end financial reporting season and beyond. We highlight impacts of the current economic environment, regulatory and standard-setting developments, as well as emerging matters that could make their way onto the audit committee’s agenda.

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Year-end reporting and emerging developments

Impacts of the current economic environment

The current economic environment is affecting business broadly across the globe. Rising interest rates, inflation, geopolitical instability, including the war in Ukraine, and lingering impacts from the pandemic remain top concerns among executives, boards, and investors. 

While the ultimate effects on a company will differ depending on its specific circumstances and its business initiatives, the severity and duration of any one, or a combination, of these macroeconomic conditions could have a significant impact on the financial statements. 

What questions should the audit committee ask? 

  • What is the impact of these macroeconomic conditions and what, if any, strategic or operational shifts (e.g., restructurings, compensation or benefit plan changes, contract modifications) have been or will be made in the short or long term to manage any identified risks to the organization?
  • Has management thoroughly evaluated the impact of these conditions on the financial statement line items (especially as they relate to current or potential asset impairment triggers, valuation risks, and liquidity and going concern issues)?
  • Has management considered the impact on critical accounting estimates, which could be more susceptible to changes in the near term?
  • Has management evaluated the need for incremental disclosure relating to geopolitical conflict and economic uncertainty as a risk factor or in MD&A?

The Inflation Reduction Act: Tax implications

On August 16, President Biden signed the Inflation Reduction Act (the IRA) into law, which includes a wide range of tax, clean energy, and healthcare-related provisions. The law includes a new 15% corporate alternative minimum tax (CAMT), and provides that companies that pay the CAMT will receive a non-expiring tax credit carryforward that can be claimed against regular tax in future years. Under US GAAP, changes in income tax rates and law are accounted for in the period of enactment. For US federal purposes, this is the date the President signs the bill into law; however, the majority of the provisions in the IRA will impact financial statements prospectively only.

What questions should the audit committee ask?

  • Does management anticipate the company being subject to the CAMT for tax years beginning after December 31, 2022? Does management expect the company to be a perpetual CAMT taxpayer? If so, how has management considered the impact on the valuation allowance?
  • How has management considered the impact to the company’s existing or anticipated plans to repurchase stock as it relates to the impending excise tax?
  • How has management evaluated the enhanced clean energy credits from the IRA and whether the company may be eligible to take advantage of them? If credits are available, how is management planning to account for eligible credits?

SEC comment letter trends

Over the past year, the SEC has issued more climate-related comments, making it one of the top topics covered. These comments, described in a “Dear CFO” letter that the SEC staff publicly released, largely seek disclosure of the risks, trends, and impact of climate change for the registrant and its business, and may focus on inconsistencies between a registrant’s corporate responsibility report and its SEC filing.

What questions should the audit committee ask? 

  • Has the company received a comment letter and, if so, what are the issues raised by the SEC? How does management plan to respond?
  • How does management stay abreast of financial reporting and other required disclosure developments and trends? How does management monitor comment letters issued to other companies in its industry? How is the disclosure committee involved in helping keep track of comment letter trends?
  • Has management considered whether additional disclosures related to the top comment trends are appropriate?

Enhancing transparency in proxy disclosures

Audit committee responsibilities continue to expand as the ever-evolving business landscape requires companies to implement new technologies, find new ways to interact with customers, respond to changing regulations, and contend with new and emerging risks. At the same time, stakeholders are demanding more transparency from companies about the impact of these matters and how boards and management teams are responding to them. As a result, disclosures in the annual proxy, including the audit committee’s report, have been expanding.

What questions should the audit committee ask?

  • What questions have investors asked about company disclosure in the proxy that could be proactively addressed by enhancing transparency?
  • Does the current proxy disclosure accurately reflect the entire scope of the audit committee's responsibilities and processes?
  • How does the company’s proxy disclosure compare to that of its peers?

Updates to the audit committee’s ESG oversight role

The audit committee’s oversight role in ESG matters has continued to evolve, particularly with proposed disclosure rules on climate change from the SEC and new rules and proposals from standard setters in various other jurisdictions as well. In 2022, both the International Sustainability Standards Board (ISSB) and the European Union (EU) (as part of the Corporate Sustainability Reporting Directive (CSRD) released proposed ESG disclosure requirements. The scope of the EU’s disclosure rules is very broad and may take some companies by surprise, as it may apply to any companies doing any type of business in the EU.

What questions should the audit committee ask? 

  • What processes, controls, and resources do management have at the ready to address the proposed climate change disclosure rules, once they are finalized? 
  • How is management keeping track of new international disclosure regulations and their impact on the business and disclosures?
  • If the audit committee is overseeing some elements of ESG, are there plans to update the charter for the specific areas of oversight responsibility?

FASB standard-setting developments

The following three projects are at various stages of the standard-setting process, but all could have impacts on companies now or in the future:

  • Supplier finance programs
  • Segment reporting proposal
  • Targeted improvements to income tax disclosure

What questions should the audit committee ask?

  • What is management’s process for monitoring and evaluating emerging standards and their potential impacts on the financial statements?  
  • If the company participates in a supplier finance program, how has management evaluated the risks associated with the program? How does management plan to classify the transaction (e.g., as trade payable or debt), and what is the rationale for the approach? Does management plan to early adopt the standard for the 2022 fiscal year end?

Topics for the audit committee’s radar

Making use of renewable energy credits and carbon offsets

Many companies have made public commitments to reduce their carbon emissions. One method to help achieve these reductions is by using Renewable Energy Credits (RECs) or carbon offsets.

  • RECs are created when electricity is generated and delivered to the grid from a renewable energy source. They are issued by one of 10 regionally-based electronic REC tracking systems in the United States.
  • Carbon offsets are certificates that are meant to represent a reduction in actual carbon emissions from the environment. They are generated from projects that reduce or remove emissions from the atmosphere, such as reforestation.

What questions should the audit committee ask?

  • What is the company’s strategy for using RECs and carbon offsets, and what are the current investments in these instruments?
  • How is the company valuing these assets?
  • How is management accounting for these assets and what are the estimates and judgments used in determining the valuation for these assets?
  • How does management keep track of the regulatory and standard-setting developments in this area?

Developments in the crypto assets landscape

Crypto assets utilize blockchain technology and come in a variety of forms. Some, such as Bitcoin, may function as a medium of exchange. Others may provide the right to use a product or service, rights to an underlying asset, voting rights, or rights to profits and losses among others. With the difference in rights and obligations comes differences in accounting. Today, many crypto assets do not meet the definition of cash or a financial instrument. And, given that crypto assets are not tangible assets, they do not meet all the requirements to be accounted for as inventory. Therefore, many crypto assets are accounted for as indefinite-lived intangible assets.

What questions should the audit committee ask?

  • If applicable, what is management’s crypto strategy, and what is management’s plan for monitoring, measuring, and mitigating the business and financial reporting risks?
  • How does management keep pace with global regulatory requirements, accounting and valuation implications, and tax reporting in this area?
  • What are the processes and controls in place to support the accounting, valuation, and other risks related to crypto activities?

Understanding the metaverse

The metaverse is a virtual reality (VR) world where users can interact with a computer-generated environment and with real people. It is changing how businesses and consumers interact with products, services, and each other. By putting on a VR headset, a user can “visit” a factory on the other side of the world—see its machines and meet with the local supervisor without leaving their desk.

What questions should the audit committee ask?

  • Have the company and its key stakeholders, such as customers and suppliers, explored utilizing the metaverse? Could the metaverse create opportunities for the company? What does that look like?
  • What investments have been made and what investments does management plan to make in the next few years to interact with the metaverse? If applicable, what controls does management have in place to assess how return on investment will be measured?
  • What is the accounting for transactions conducted in the metaverse? What controls are needed for estimates and judgments involved?
  • How is management keeping current on any developing regulations related to the metaverse?

Contact us

Maria Castañón Moats

Maria Castañón Moats

Leader, Governance Insights Center, PwC US

Stephen G. Parker

Stephen G. Parker

Partner, Governance Insights Center, PwC US

Tracey-Lee Brown

Tracey-Lee Brown

Director, Governance Insights Center, PwC US

Gregory Johnson

Gregory Johnson

Director, Governance Insights Center, PwC US

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