Financial Reporting

Non-GAAP Definitions, Environmental Credits, ESG Data: Baruch Conference Highlights

Four takeaways for accountants, auditors, and CFOs from the Baruch financial reporting conference.
Non-GAAP Definitions, Environmental Credits, ESG Data: Baruch Conference Highlights

The Baruch Financial Reporting Conference, back in person for the first time since the pandemic, is a chance to get a ground-level view of what’s on the minds of accountants, auditors, and regulators. 

This year’s gathering on May 4 produced the usual valuable conversations and frank discussions. Here are four highlights.

1. Defining Terms

The issue of non-GAAP disclosures doesn’t appear in the business news cycle much anymore. That doesn’t mean accountants, auditors, and CFOs feel the matter is settled.

Lindsay McCord, the chief accountant of the Securities and Exchange Commission’s division of corporate finance, said she still gets plenty of questions about the SEC’s definition of the terms “normal” and “recurring” — as in, a “normal, recurring GAAP operating expense.” As in the expenses that should not be excluded from a company’s non-GAAP earnings measure.

“Recurring is an operating expense that occurs repeatedly or occasionally, including at irregular intervals.” — Lindsay McCord, SEC’s office of the chief accountant

The division of corporate finance released revised compliance and disclosure interpretations in December 2022 that provided definitions for “normal” and “recurring.” 

For the record, when considering whether an expense is “normal,” “the staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue-generating activities, business strategy, industry, and regulatory environment,” according to the interpretations document.

“Recurring is an operating expense that occurs repeatedly or occasionally, including at irregular intervals,” according to McCord. An example of the last item, McCord said, would be a retailer’s costs to open up new stores.

2. Accounting Lifeline

Do you or your accounting head need reliable help with an accounting or auditing compliance matter? The SEC’s office of the chief accountant (OCA) is available. Lindsay McCord said consulting the OCA is a resource underutilized by many companies, despite a whole web page devoted to where to get questions answered. There’s even a list of information the OCA needs to sort out your sticking point.

Lindsay McCord

This is not a case of, “we’re from the government, and we’re here to help you.” McCord promised that a consultation would not trigger a review of the company’s financials by the SEC, but the company should be forthright with OCA staff. One word of caution: advice from the OCA doesn’t constitute a “preclearance” (approval of) a certain accounting or auditing matter, McCord stressed. 

3. Is an Environmental Credit a Credit?

Almost a year ago, FASB added a project to its technical agenda on accounting for environmental credit programs — e.g., carbon offsets, an area for which it has no specific rules.  

FASB hopes to address recognition, measurement, presentation, and disclosure requirements for compliance and voluntary credit program participants. The market for voluntary carbon offsets is already in the single-digit billions. A large emitter buys a credit, and the money goes to fund green projects — going by the rules, projects that wouldn’t be financed otherwise. 

On the panel covering hot FASB topics, Mark LaMonte, a partner at Williams Marston, said the new disclosure rules would drive behavior — more companies will buy and sell environmental credits once disclosure rules are set. Right now, it’s unclear, for example, which side of the balance sheet an environmental credit belongs on or which line item should contain the proceeds of a credit sale.

An interesting question is whether FASB will base the accounting treatment on what an environmental credit is supposed to be versus how it’s used in the real world. The panel didn’t address this, but an investigation by The Guardian, for example, found that about 90% of the rainforest offset credits approved by a large carbon credit certifier were worthless — in other words, they didn’t represent genuine carbon output reductions.

4. ESG Is About Data

What’s a financial reporting conference without a panel on the SEC’s forthcoming ESG reporting standards? With a lot still up in the air, the panel was mostly a “how will we do this, how will we do that” discussion. 

Will the numbers be accurate enough to be in the public domain? — John Hodges, EY

One area of concern comes naturally for auditors and controllers: the data quality and the required controls. For years sustainability information has been in standalone reports, often outsourced by marketing or communications, and hasn’t required the scrutiny needed for an SEC filing, said John Hodges, a partner in EY’s climate change and sustainability practice. “Will the numbers be accurate enough to be in the public domain?” Hodges asked.

Focusing on greenhouse gas emissions, Daniel Lim, ESG controller at Google’s parent company, Alphabet, said emissions data would come from meters, invoices, and operational databases. “Data ingestion” from these sources, what Lim calls the first mile of the ESG disclosure process, will be the most challenging part. “This is where things can go wrong,” Lim said. How and where companies will house all this data is also an issue.

With the SEC rules set to come out this year, Hodges recommended companies take three steps to get started: 1) Assess inventory — organize and catalog the company’s sustainability activities; 2) learn and develop ways to get better at collecting and delivering sustainability data, including setting controls; and 3) ensure the responsibility for governance is in place.