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PwC's Governance Insights Center

Special edition: Nine topics for your next audit committee agenda

This special edition, designed for the audit committee, focuses on helping you close out the quarter. As you perform your quarterly audit committee oversight responsibilities, you may want to consider the following topics for your upcoming audit committee meeting.

Financial reporting topics:

1. The lease accounting standard is here – what to look out for

Most calendar year-end public business entities (PBEs) adopted the new leases standard on January 1, 2019. Here are some key reminders and other implementation considerations to help companies prepare for the first quarter reporting under the new leases standard.

Focus on disclosures:

The disclosures under the new leases standard are more extensive than under the prior guidance. Further, calendar year-end PBEs will need to include all annual and interim lease disclosures starting with their March 31, 2019 quarterly filings. This is due to the SEC rules that require companies to provide both the annual and interim period disclosures for each interim reporting period in the initial year of adoption of a new accounting standard.

Process and control reminders:

The new leases standard introduces accounting and disclosures that may require management to obtain additional information not previously available under their systems and business processes. As a result, companies may need to develop new processes and controls to obtain, analyze and track the appropriate level of information. Management will need to consider the financial reporting risks associated with each new process and ensure controls are designed and operating effectively to mitigate these risks. The controls should not only address the initial accounting, but also the ongoing reassessment and related disclosures.

2. Tax regulations related to tax reform

In January 2019, the Treasury Department released the final tax regulations related to the ‘toll charge’ on mandatory deemed repatriation of certain deferred foreign earnings. These final regulations retain the overall structure and basic approach as the proposed regulations released on August 1, 2018, but also contain some significant modifications. Because the final regulations represent a change in tax law, any impact that this new information has on a company’s ‘toll tax’ liability should be reflected in the financial statements in the period that includes January 2019.

3. Planned LIBOR phase-out

In July 2017, the Financial Conduct Authority, the UK regulator responsible for the oversight of London Inter-Bank Offered Rate (LIBOR), announced that it would no longer require banks to participate in the LIBOR submission process and would cease oversight over the rate after 2021. Various industry groups continue to discuss replacement benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The replacement of LIBOR is expected to be a continuing challenge for the financial markets and will impact various stakeholders, including financial instrument issuers and investors, administrators, financial institutions and derivative counterparties.

4. SEC and regulatory update

SAB 74 disclosures

SEC Staff Accounting Bulletin (SAB) No. 74 requires a company to provide information on the status of its analysis and the impact that adoption of new standards is expected to have on its financial statements. With the adoption dates for the new current expected credit losses (CECL) standard and other new guidance approaching in 2020, companies’ SAB 74 disclosures should become more specific as the effective date of the new guidance nears.

Brexit accounting implications

The UK is expected to leave the EU on March 29, 2019. As the UK continues to negotiate its exit, companies should be considering how this new political landscape will impact their organizations. Irrespective of the outcome of the negotiations, whether that be with or without a deal, there will likely be significant changes for many UK companies. However, this is not just a concern for UK companies. Brexit may also impact companies doing business with the UK, as well as those with substantial UK operations. For some companies, the UK’s future relationship with the EU remains too uncertain to take action. However, by now companies should have identified and assessed the Brexit related risks that apply to their company and should be considering the impact on their accounting and financial reporting. Some of the accounting and reporting areas impacted include: financial statement disclosures (e.g., risks and uncertainties), restructuring, tax accounting, impairment and valuations.

The audit committee may want to consider discussing the above topics with management to understand how they are being addressed. For an in-depth discussion and more insights on these topics see The quarter close - First quarter 2019.

Other important topics:

5. Lessons learned from year-end

Consider whether there were any lessons learned or key takeaways from the year-end financial reporting process that the audit committee may want to raise to management to understand how they are being addressed. This could include a “close-call” on asset impairment or process and control issues that were flagged for management follow-up.

6. Transformation oversight

Many companies are going through some type of transformational change. It could be a business strategy transformation, information technology/digital transformation or workplace transformation. The audit committee may want to understand how the key risks associated with the transformation plan are being addressed and whether any of those risks might have an impact on the financial reporting or the financial reporting process.

For more insights on this topic, see The board's role in transformation oversight.

7. Audit committee assessments

The first quarter of the fiscal year is a good time to perform the committee's annual assessment. The assessment process should go beyond the minimum stock exchange requirements and be a mechanism to help a good audit committee become great. Individual members should give and receive specific feedback and development points. It should also help ensure that the committee is functioning well and finding ways to improve. Committees that participate in frank discussions about their performance and their composition and then commit to acting on results of their self-assessments will naturally stay sharp.

8. Planning ahead

The audit committee’s workload may be increasing as oversight of additional key risks is delegated to the committee. Take the time to plan the audit committee agenda and ensure that items such as ethics and compliance, cybersecurity, enterprise risk management and culture receive the right amount of attention on the annual agenda. Given the increased focus on some of these items, the audit committee may want to consider including them on the agenda more than once a year.

9. Recurring items for the audit committee agenda

  • Hotline complaints and code of conduct violations
  • Changes in the regulatory environment
  • Private sessions
  • Discussions with CIO, CISO and Head of Tax as needed
  • External audit fees requiring audit committee approval

For further discussion on any topic mentioned in this email, please contact PwC Governance Insights Center Partner, Sharad Jain at sharad.p.jain@pwc.com.

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