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Early Comments Give Mixed Reviews to Conceptual Framework Proposal

With a week to go before the comment deadline, six letters have reached the FASB for its proposed guide, or framework, for U.S. GAAP’s footnote disclosure requirements. Two letters have told the accounting board that its proposal will do very little to reduce and simplify the disclosure rules. The groups that wrote the letters said the proposal is so flexible that it’s open to almost any interpretation.

As of July 7, 2014, a week before the deadline, six comment letters have reached the FASB for its proposed guide, or framework, for footnote disclosure requirements for U.S. GAAP.

Two of the letters told the FASB that its amendments in Proposed Statement of Financial Accounting Concepts (CON) No. 2014-200, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, won’t come close to achieving the accounting board’s goal of reducing and simplifying the disclosure requirements in its standards.

“We do not believe that the approach outlined in the ED will result in an operable framework to guide disclosure requirement decision-making,” wrote the Institute of Management Accountants (IMA) in a June 30 comment letter.

On June 9, the California Society of Certified Public Accountants (CalCPA) wrote that it “fails to see how the limitations in the proposed concepts statement would have yielded substantially different results had they been applied to existing standards.”

The key issue for both groups is that the proposal is so flexible that it can be open to almost any interpretation.

The IMA said the proposal followed an approach that was “inconsistent with the development of a framework that would help drive coordinated and consistent decisions on disclosure requirements.”

Letters from the Maryland and New Jersey Societies of Certified Public Accountants were more supportive of the proposal, although they disagreed on the treatment of employee benefit plans.

The New Jersey CPAs said they endorsed the FASB’s plan to exclude benefit plans from the scope of the proposed concepts statement. The Maryland CPAs said the group’s members couldn’t form a consensus on the issue.

The New Jersey CPAs also said the proposal should be revised with more stringent requirements to exclude forward-looking information. CalCPAs advised the FASB to consider a three-tier format to disclosures in what it described as a disintegrated approach to disclosing and reporting financial information. The first tier would be summary financial statements with the most important footnotes; the second would include a supplement with data for more sophisticated investors and creditors; and the third would include the management’s reports, forecasts, and interpretations and analyses of business activities.

The March proposal outlined the FASB’s process for identifying the information that should be covered by U.S. GAAP’s footnote disclosure requirements. It also sought to discourage the board from writing rules that could bog down company financial statements.

If finalized, the disclosure framework will be added as a chapter to 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).

FASB Concepts Statements do not override authoritative standards, although some standards may be inconsistent with them, the FASB said.

The proposal aims to help the FASB identify information that is helpful for investors and financial analysts; avoid writing disclosure rules that call for some types of forward-looking information; and assess the costs of new disclosure requirements.

The document also contains a discussion of how the FASB should determine which disclosures should be required for annual financial statements versus quarterly statements.

The disclosure review dates back to 2009, and began as a response to what then-FASB Chairman Robert Herz described as “disclosure overload.” Businesses complained about compiling increasingly lengthy financial statements, with footnote disclosures being one of the main culprits. Others said companies included too much unhelpful, boilerplate information in the footnotes, making it harder to get at important facts.

Investors and analysts, however, often say that footnote disclosures contain valuable information, even if they have to dig for it. They have cautioned the FASB against reducing the amount of information they receive and instead focus on ways to make existing disclosures more effective.

The FASB in July 2012 released an early-stage proposal, Invitation to Comment, Disclosure Framework, which contained a discussion of the board’s process for deciding on disclosures, flexible disclosure requirements, a business’s decision process related to the requirements, and the organization and format of disclosures.

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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