US standard-setter sees flexibility, relevance as cures to disclosure overload

As described by US Financial Accounting Standards Board (FASB) member Marc Siegel during a webcast Wednesday, disclosure requirements are becoming increasingly burdensome for financial statement preparers.

One objective of a current FASB project is reducing the volume of those disclosures by enabling flexible requirements geared toward relevance.

Siegel described the disclosure overload problem in detail during the webcast FASB hosted to explain its Invitation to Comment (ITC) in its development of a framework designed to improve the effectiveness of disclosures in notes to financial statements.

According to Siegel, the volume of disclosures required continues to grow as FASB responds to investors who seek more information and to problems such as those that occurred during the recent financial crisis.

“Unfortunately, each and every reporting entity feels it is required to provide every disclosure it possibly can provide,” Siegel said, “and sometimes some of those items might not be really relevant to a lot of entities at that particular time in their business and at that particular time in the economic cycle.”

FASB’s aim is to create a framework for flexible reporting in notes to financial statements that will allow each reporting entity to highlight important disclosures and make them easy for users to access, while eliminating irrelevant disclosures.

The board is conducting outreach, with a November 16th deadline for comments on the ITC. FASB also plans speeches, webcasts and opportunities for preparers, auditors and financial statement users to discuss the best ways to achieve flexibility and optimal relevance in financial statements.

In addition, FASB is cooperating with the European Financial Reporting Advisory Group (EFRAG), which is working on a similar project.

“We think that a judgement on the relevance of a particular disclosure and a particular set of circumstances is the best way and maybe the only way to reduce disclosure volume without eliminating disclosures that will be useful to some people,” said FASB research director Ron Lott.

Lott said the goal is to allow businesses and their auditors to consider relevance in notes in a manner similar to the way materiality is applied to line items on financial statements. But rather than using a financial benchmark, the new process for determining appropriate financial statement notes disclosures would be judgemental and based on how users’ assessments of future cash flows could be affected by a particular piece of information, Lott said.

“That’s how the thought process works,” he said. “There is no mathematical formula for this.”

Format and organisation

The project also addresses the format and organisation of notes to financial statements.

FASB is asking for feedback on whether ordering and formatting should be:

• Flexible and based on relationships of particular items;

• Flexible and based on the importance of particular disclosures; or

• Fixed and uniform.

FASB project manager Nick Cappiello said some users have expressed a preference for a consistent structure in the notes because they want to be able to go to one place for the same information for different periods and companies.

But Cappiello said others may think standardising the order is less important now that XBRL-tagged information can be accessed more easily through a search function.

“Some folks might think organisation of the notes in a way that conveys importance or establishes a more clear relationship to other related notes would be more useful than standardised ordering,” Cappiello said. “This might be a way to allow management to better explain what’s happening in their business and to highlight the most important items in the notes.”

The project also aims to establish principles to avoid making ad hoc decisions on interim reporting in each project. And specific changes to existing standards relating to the summary of accounting policies are being considered in the hopes of improving financial reporting easily and inexpensively.

But the actions that will result from the project are uncertain at this point. FASB is working towards the development of one or more exposure drafts, whose goals could include:

• Adding a chapter to Statement of Financial Accounting Concepts No. 8 regarding the FASB decision-making process for standard-setting activities that will help facilitate more flexible and relevant disclosures.

• Developing an Accounting Standards Update (ASU) on entity-specific disclosures.

• Developing an ASU or nonauthoritative guidance on organisation and formatting of notes. Nonauthoritative guidance is an option that is being considered even though it is a path FASB has not often taken in recent years, Cappiello said.

• Potentially modifying existing requirements or creating new standards, although those actions would require a separate exposure and comment process.

Siegel said that although some might hope the project would include taking a red pen to a lot of required disclosures, FASB may not be able to eliminate a significant number of existing disclosure requirements.

“But the board absolutely hopes and expects that a sharper focus on important information at the reporting entity level will result in a reduced volume of disclosures in many cases,” he said.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.