The Financial Accounting Standards Board intends to issue a discussion paper in the next few weeks to solicit feedback on the disclosure framework it has been preparing, followed by roundtable meetings and workshops later this year to talk with financial statement preparers and users.
FASB has been working on a project to improve the effectiveness of financial disclosures by more clearly identifying and communicating the information that is most important to users of each organization’s financial statements (see FASB Readies Framework for Financial Disclosures). The project aims to cut down on disclosure overload for investors while also combating the tendency for financial statement preparers to follow a checklist of unnecessary disclosures.
“When immaterial or unimportant information is given as much prominence in financial reports as important information, investors find it much more difficult to identify the information that provides insights into the trends, risks, and prospects of the company,” said FASB chair Leslie Seidman during a speech at the Compliance Week 2012 annual conference in Washington, D.C., on Monday.
“For some months now, the FASB has been working to develop a disclosure framework that we believe will improve the quality of the information being disclosed and will make financial statements more understandable for investors and other users,” she added. “Let me emphasize that the purpose of this project is to improve disclosure effectiveness, not to single-mindedly reduce disclosure volume. In the coming weeks, we will issue for public comment a discussion paper that will address three different areas that could affect disclosures, both in the present and the future.”
The framework will first help FASB establish consistent disclosure requirements that focus on what is most important to most users, Seidman noted. The framework will also explain how the reporting entity should evaluate which disclosures are needed under different circumstances at different times, ultimately leading to a more dynamic approach to providing disclosure. In addition, the framework will explore ways to emphasize the more “newsworthy” information and ways to make it easier for users to find the information that they are most interested in, Seidman added. The discussion paper also will invite comments on the approach to interim disclosures and how to evaluate materiality in the context of disclosures.
“I know that some people would like to start slashing disclosures right now to deal with the wide perception of overload—the so-called ‘red pen’ approach,” she said. “However, at a recent resource group meeting, we received broad support for establishing a framework for disclosure first, so that there is a rationale for deleting or modifying existing disclosures and potentially adding new disclosures in the future. We also plan to hold interactive forums to generate interest and awareness in the framework during the comment period.”
Once FASB has confirmation on the basic elements of the disclosure framework, the board plans to undertake a review of the existing disclosure requirements. “Because one of the known issues is perceived overlap between the GAAP footnotes and MD&A, we plan to work cooperatively with the SEC staff,” said Seidman. “In fact, the topic of disclosure effectiveness is being contemplated for an upcoming meeting of the Financial Reporting Series, a roundtable including representatives of the SEC, the FASB, and the PCAOB, as well as participants from the financial reporting community.
In our current deliberations of pending standards, we are trying to think strategically about disclosure requirements based on the key principles underlying the draft framework. For example, on the revenue recognition proposal, we heard very diverse views from preparers (who said the disclosure requirements were excessive) and investors (who strongly supported the proposed disclosures).”
Seidman said that FASB plans to hold a special workshop this fall that will include both preparers and users to work through the proposed requirements and to try to provide the information that users are seeking with greater focus and efficiency.
“We believe that our disclosure framework project will lay the groundwork for a robust discussion about how we can all work together to make the financial statements a more effective communication tool, and we look forward to your comments and suggestions when the discussion paper is released in the next few weeks,” she added.
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