SAB 74: What Are the Disclosure Requirements?
Understand your disclosure obligations under SAB 74 for new accounting standards and how to provide investors with meaningful insight into future financial impacts.
Staff Accounting Bulletin (SAB) 74 provides guidance for public companies on disclosing the potential effects of accounting standards that have been issued but not yet adopted. Codified as SAB Topic 11.M, its purpose is to ensure investors are informed about impending changes to a company’s financial reporting. This guidance applies to all Securities and Exchange Commission (SEC) registrants and requires disclosures in both interim and annual filings. The bulletin bridges the information gap between the issuance of a new standard and its mandatory adoption date, providing transparency into how it will affect a company’s financial position.
Qualitative Disclosure Requirements
When a new accounting standard is issued but not yet implemented, a company must provide a qualitative discussion about the upcoming change. A primary requirement is to include a brief description of the new standard, outlining its main objectives and the areas of the financial statements it is expected to influence.
The disclosure must also specify the date on which the new standard is required to be adopted. If the company plans to adopt the standard earlier than the required date, this should also be stated. This information provides a clear timeline for when the changes will be reflected in the company’s reported financials.
A discussion of the method of adoption the company plans to use is another component of the qualitative disclosure. Many accounting standards permit different transition methods, such as the full retrospective approach or the modified retrospective approach. The company’s expected approach should be disclosed, as the choice of method can alter the comparability of financial statements from one period to the next.
This narrative disclosure is required even if the company does not expect the new standard to have a material impact on its primary financial statements. For instance, a new standard might not significantly change the balance sheet or income statement but could introduce extensive new footnote disclosure requirements. The qualitative disclosure ensures that stakeholders are aware of all significant upcoming changes to financial reporting.
Quantitative Disclosure Requirements
The SEC staff expects companies to provide a quantitative analysis of the effects of a new accounting standard if it can be reasonably estimated. A company that can determine the potential impact is expected to disclose these amounts, providing a concrete preview of the changes to come.
A quantitative disclosure involves specifying the potential impact on key financial statement line items. For example, a company might disclose the expected increase or decrease in reported revenue, the anticipated change to net income, or the projected adjustment to the opening balance of retained earnings upon adoption.
Developing a reasonable estimate requires a company to compare its current accounting policies to the expected policies under the new standard. This involves a detailed analysis of transactions and balances that will be affected. For example, with a new revenue recognition standard, a company would analyze its existing contracts with customers to determine how the timing and amount of revenue recognized would differ.
If a company determines that a new standard will have a material effect, it must disclose this fact. Failing to provide a quantitative estimate when one can be reasonably developed is viewed as an incomplete disclosure. The SEC also expects these disclosures to be transparent about the company’s implementation progress.
Disclosures When Impact is Not Known
When a company cannot reasonably estimate the financial impact of a new accounting standard, simply stating that the impact is unknown is insufficient. The SEC requires a more detailed explanation to provide context for the lack of a quantitative figure, ensuring the absence of a number is not misinterpreted.
The company must state that it has not yet determined the impact and explain why the estimate is not available. Reasons could include that the company is still evaluating the standard’s effects, the necessary data has not been gathered, or that the impact is contingent on future events or transactions.
The disclosure should also describe the company’s ongoing efforts to assess the impact. This could include the status of the implementation project, significant matters yet to be addressed, and the deployment of internal resources or external consultants. This shows the company is actively working towards compliance.
This type of disclosure should also include a qualitative description of how the new standard is expected to affect the company’s accounting policies. For example, a company could describe which of its current policies are likely to change and the general nature of that change, even without attaching specific numbers.