Weinberg & Company

Best Practice June 2022 Newsletter

Companies Weigh in on SEC’s Climate Change Rule-

The hottest item on the SEC’s Rulemaking Agenda, the Climate Change Disclosure rule that would impose mandatory disclosure requirements relating to climate risks and greenhouse gas emissions, generated more than 3,400 responses by the time the comment period ended on June 17. Substantial pushback came from companies concerned that the proposed rule would increase legal liability, impose significant costs, and increase reporting burdens.

The 3,400 comments are significantly higher than what the SEC typically receives for rule changes, with feedback coming from both public and private companies, investors, auditors, lawmakers, both trade and environmental groups and interested individuals.

Strong opposition came from U.S.-listed companies. If enacted, the proposed rule will require publicly traded companies to both assess and report on how their businesses impact climate change. In certain cases, companies will be required to report on greenhouse gas emissions generated by their suppliers. Companies also will be required to review and report the impact that climate risks such as extreme weather events or flooding have on their financials.

Companies also complained that the SEC didn’t provide enough clarity on how it defines what is material and thresholds that will trigger disclosures.

If approved, the rule will require independent attestation by an auditor, that companies say will significantly increase financial reporting costs. The Wall Street Journal reported that the SEC estimates the price tag for this extra reporting to be $420,000 per year, but companies say it will be much higher.

In addition, lawmakers, legal scholars and attorneys general from 12 states are challenging the SEC’s legal authority to set such a rule.

The SEC expects to issue its final ruling in October 2022.

Cancelled

FASB Halts Plan to Change Goodwill Accounting

After a four-year project that would have changed how companies account for goodwill, the Financial Accounting Standards Board (FASB) at its June 15 meeting unanimously voted to stay with the status quo, saying there wasn’t a strong enough case made for an overhaul of current rules.

Goodwill arises when companies buy another business in excess of its book value. Under GAAP rules, companies are required to periodically test the value of goodwill assets to determine if any impairment has occurred.

Since 2018 FASB’s technical agenda included the “Identifiable Intangible Assets and the Subsequent Accounting of Goodwill” project. During that time, FASB focused mainly on how to calculate and report goodwill. It is estimated there is $3.6 trillion of goodwill on public company balance sheets.

After four years of study, it took only a 35-minute discussion for FASB board members to pull the plug and remove the project from its technical agenda, with Chair Rich Jones saying “This would be a very significant change. I think you need a case for change and, as I see it, as this is stacking up, it doesn’t assemble.”

FASB’s June 15 meeting handout, provided a roadmap of options the board had been considering, including:

(a) Amortize goodwill on a straight-line basis over a 10-year default period or over an estimated period (using an open list of factors to consider), limited to a 25-year cap. Reassessing the amortization period would be prohibited.

(b) Test goodwill for impairment only upon a triggering event.

(c) Continue to test goodwill for impairment at the reporting unit level.

(d) Subsume into goodwill those customer relationship intangible assets that are not separable.

Though it appears the roadmap led to nowhere, it may not be a dead end. FASB said it will continue to monitor the International Accounting Standards Board’s (IASB) project on goodwill disclosures and left open the possibility of revisiting its own project at a later date.

Full house

Senate Confirms 2 for SEC Board

With the Senate’s June 16 confirmation of Democrat Jaime Lizarraga and Republican Mark Uyeda to the SEC Commission, the regulatory body’s five seats are now filled, with Democrats maintaining a three to two majority over Republicans.

Uyeda replaces former Republican Commissioner Elad Roisman, who resigned his seat last January, though his term was not set to expire until 2023. Uyeda, a career SEC attorney, has been on detail with the Senate Banking Committee, working on the Republican side.

Lizarraga fills the seat of departing Democrat Allison Herren Lee, who is at the end of her term. Lizarraga currently works as a senior advisor to House Speaker Nancy Pelosi.

Both Lizarraga and Uyeda join at a time when the SEC is pursuing a robust regulatory agenda under Chair Gary Gensler. Currently, the SEC’s Rule Agenda lists over 50 items.

One of the most significant agenda items affecting all US exchange-listed companies is the “Climate Change Disclosure” rule which would define requirements for environmental, social and governance (ESG) disclosures. A day after both commissioners were confirmed, the SEC on June 17 closed its comment period on the Climate Change Disclosure rule.

Also on the SEC’s agenda is another rule affecting private funds called the “Rules Related to Investment Companies and Investment Advisers to Address Matters Relating to Environmental, Social and Governance Factors.” Other rules on the list would mandate disclosures relating to cybersecurity risk, special purpose acquisition companies (SPACs), corporate board diversity, pay versus performance, to name a few.

Breaking bad

IPOs Decline in Numbers & Dollars Raised 

In what may be a sign of how 2022 will pan out, IPO trends show that both the number of initial public offerings and dollars raised declined sharply in Q1 2022 compared to the same quarter last year.

Audit Analytics is reporting that in Q1 2022 just 84 companies completed IPOs on the NYSE and Nasdaq, raising $11.3 billion, compared to 407 IPOs which raised over $134.6 billion in Q1 2021.

SPACs continued to dominate IPOs, with 54 listings raising $8.922 billion. Traditional IPOs numbered 30, raising $2.360 billion.

Audit Analytics also is reporting that the average amount raised in Q1 2022 was “much lower than it has been in the previous five years. The average amount raised during Q1 2022 was just $134.3 million. Excluding SPACs, it was just $78.7 million.”

As U.S. markets continued to tumble in Q2, several IPOs have been postponed.

It’s Pie in the Face Serious

SEC Launches Game Show-themed Campaign

Think that investing on Wall Street is easy money?

The SEC has launched a public service campaign that drives home the message that although investing may look and feel like a game, you may wind up losing money.

The lighthearted campaign, called Investomania features a TV spot titled “Crypto” which warns investors not to be tempted by celebrity endorsements, and another called “Margin” which warns that borrowing money to invest can be very risky.

In another TV spot, a game show host asks two contestants to pick a square on a video game board with investment options including: internet rumors, celebrity endorsements, stock tips from your uncle, crypto to the moon, FOMO, meme stocks, tulip bulbs, guaranteed returns, and timing the market. After the contestants make their choices, the video shows the consequences of a bad choice.” The loser gets a pie in the face.

The SEC says the video “is designed to show investors the consequences of their investment decisions and to help investors understand the importance of protecting themselves when making investment decisions.”

The SEC has not announced where and when it will be broadcast.