Proposed Disclosure Framework Nears Publication
Proposed Disclosure Framework Nears Publication
The FASB is close to releasing for public comment a proposal to guide companies about the information that should be included in footnote disclosures. The FASB wants companies to use the guide to help weed out extraneous information from increasingly lengthy financial statements and make the remaining disclosures more informative.
The FASB is moving closer to publishing a proposed guide to help companies decide how to present important information in their financial statement footnotes without loading them up with extraneous information.
The FASB on April 22, 2015, said the proposal’s benefits outweigh its costs. The proposed framework will address an “entity’s decision process” about disclosures.
The accounting board stopped short of voting on releasing the proposal for public comment. The board plans to privately distribute the draft framework among select auditors, companies, and investors to get feedback on whether there are any red flags in the document. The FASB at a future meeting will discuss issues raised during what it calls the fatal flaw review and then determine whether to release the document for a public comment period.
If finalized, the guidelines are expected to help companies exercise judgment when determining how to comply with a disclosure requirement in an accounting standard. The guidelines would be published in Topic 235, Notes to Financial Statements . There also would be modifications to disclosure sections throughout U.S. GAAP, a FASB spokeswoman said.
The board is writing the guidelines in response to complaints that companies have a “check-the-box” mentality when it comes to disclosures, erring on the side of supplying too much information that may not be important to investors and analysts. Companies and auditors say an excessive number of disclosure rules from the SEC and FASB lead to voluminous footnotes that bury important details.
The SEC is conducting a disclosure effectiveness project with goals that are similar to the FASB’s.
It has been tough for the FASB to describe exactly how companies should use discretion. Investors and analysts tend to want more information, not less, and are leery about losing valuable information.
“I’m supportive of what we’re doing, but I think this is an exceedingly challenging area to strike the right balance,” FASB Vice Chairman James Kroeker said. “Because on the one hand, we want more effective disclosures. But we don’t want people to use this at the worst end of the spectrum, to rationalize behavior that doesn’t require disclosure that is material.”
The FASB guide will state that businesses should provide disclosures “to the extent material.” The board will encourage the use of discretion and avoid phrases such as, “an entity should at minimum provide” certain information. Companies would assess materiality to decide whether to include information in a footnote. The board wants to use a definition of materiality that is based on the U.S. Supreme Court’s description.
In 1976, the Court decided in TSC Industries v. Northway that information that’s of “dubious significance” can be left out of regulatory filings.
“Consistent with the U.S. Supreme Court’s description, qualitative and quantitative disclosures generally should be evaluated as material based on whether there is substantial likelihood that the omitted disclosure would have been viewed by a reasonable user has having significantly altered the total mix of information made available in making a decision,” according to a staff memo.
In addition, if a business or group does not provide a disclosure because its management has concluded that the information is not material, the omission would not be considered an accounting error.
The FASB does not intend for the planned guidelines to be mandatory.
“I feel like we’re trying to encourage companies to exercise flexibility and discretion and to try to root out immaterial disclosures,” FASB member Marc Siegel said.
This would require work for companies, which may incur additional costs, Siegel said. But he said he believed the benefits outweigh the costs.
“I think those costs are justified,” he said. “We’re not imposing it; it’s at their discretion.”
A framework to help management’s decision-making process is the second part of the FASB’s larger project to improve financial statement footnotes.
The board also is working on an internal guide that would help the FASB set consistent, and less redundant, disclosure requirements as it crafts new accounting standards. The FASB in March 2014 released Proposed Statement of Financial Accounting Concepts (CON) No. 2014-200, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. , to gather input on a proposed guide.
The FASB also is reviewing individual disclosure requirements in four existing accounting standards. The disclosures under review are in Topic 820-10-50, Fair Value Measurement ; Topic 715-20-50, Defined Benefit Plans ; Topic 740-10-50, Income Taxes , formerly SFAS No. 109; and Topic 330-10-50, Inventory , formerly Accounting Research Bulletin (ARB) No. 43.