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Disclosure Framework to Stress Materiality’s Legal Aspects

The FASB decided to incorporate the Supreme Court’s definition of materiality into its guidelines for writing disclosure rules. The accounting board said its guidelines will describe materiality as a legal concept that varies by jurisdiction.

The FASB decided at its November 19, 2014, meeting to incorporate the Supreme Court’s definition of materiality into Statement of Financial Accounting Concepts (CON) No. 8, Conceptual Framework for Financial Reporting: Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (a replacement of FASB Concepts Statements No. 1 and No. 2).

The description of materiality in CON No. 8 will be amended to stress that materiality is a legal concept that varies by jurisdiction, the FASB said. It will also include the description of materiality from the 1976 Supreme Court decision in TSC Industries v. Northway that said information that’s of “dubious significance” can be left out of regulatory filings.

CON No. 8 will also be revised to say that decisions about materiality will vary from one company to the next and that materiality differs from relevance, the FASB said.

Materiality has been one of the chief issues the accounting board has had to consider as it’s debated Proposed CON No. 2014-200, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which was published in March.

FASB Concepts Statements do not override authoritative standards, although they are intended to be used by board members as they write standards. In some instances, standards may be inconsistent with the concepts statements.

The disclosure review dates back to 2009, and began as a response to what then-FASB Chairman Robert Herz described as “disclosure overload.” The SEC has a parallel effort under way.

The FASB is trying to determine how to satisfy the demands to get rid of the disclosures companies call redundant without denying investors information they consider useful.

For more analysis of Proposed CON No. 2014-200, please see the Accounting and Auditing Update Service [AAUS No. 2014-13] and the SEC Accounting and Reporting Update Service [SARU No. 2014-12] (March 2014): A Conceptual Framework for Notes to the Financial Statements.

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