SEC to study what information should be required in broader financial reporting

BY KEN TYSIAC
December 3, 2012

The SEC plans to study the issue of what information should be required in the financial reporting package outside the financial statements—an examination aimed at providing investors the right information in the right places while preventing overlap in demands on preparers.

“We intend to initially focus on whether the issue should be further explored, including, for example, whether there are any perceived gaps in the disclosures today, and what are the critical decision points regarding this issue of the dividing line between what should appear in the financial statements versus the broader reporting package,” Paul Beswick, the SEC’s acting chief accountant, said Monday at the AICPA Conference on Current SEC and PCAOB Developments in Washington.

In the coming months, Beswick said, the SEC will convene a round table that will include FASB, the PCAOB, preparers, and business interests in an exploration of the issue.

The review comes as technology-enabled investors are constantly looking for more information but financial statement preparers are struggling with the volume of disclosures required of them. Meanwhile, some businesses are concerned about the cost of preparing financial statements that require disclosures of increasing volume.

“We’re living in an era marked by complexity and flux—in our economy, in financial reporting and auditing, and in the regulatory environment,” AICPA Chairman Richard Caturano, CPA, CGMA, said Monday at the conference.

Comments on FASB’s projects on interest rate disclosure, going concern, and creating a disclosure framework have pointed to the need for this study, Beswick said.

Brad O’Bryan, CPA, the chief accounting officer for Hyatt Hotels, was among those who called for a coordinated approach to disclosures from the SEC and FASB.

“We believe that in order to make financial statement disclosures more effective and less redundant, the FASB and SEC need to undertake a joint approach with respect to this project,” O’Bryan wrote in a comment letter to FASB on the disclosure framework project, which aims to improve the effectiveness of disclosures in the notes to financial statements. “Further, we believe this would provide increased value to users of the financial statements … as this would promote a holistic view.”

The purpose of management discussion and analysis (MD&A) in the broader reporting package, Beswick said, is to provide readers with the information necessary to an understanding of a company’s financial condition, changes in financial information, and the results of operations.

According to Beswick, objectives for MD&A in the financial reporting package are:

  • To provide a narrative explanation of a company’s financial statements that allows investors to see the company through the eyes of management.
  • To enhance overall financial disclosure and provide context with which financial information should be analyzed.
  • To provide information about the quality of and potential variability of a company’s earnings and cash flow so that investors can ascertain the likelihood that past performance is indicative of future performance.


A corollary issue, Beswick said, is what consideration should be given to preventing overlap with existing reporting requirements outside the financial statements when FASB considers disclosures for financial statements.

“A healthy and robust dialogue could greatly contribute to this debate,” he said.

IFRS update

Beswick did not provide a timeline on the SEC’s consideration of IFRS. In July, the SEC issued a report discussing the challenges and benefits of IFRS adoption in the United States. The report did not give a recommendation on whether U.S. public companies should be allowed or required to file financial statements prepared in accordance with IFRS.

Although he said the question of whether to adopt IFRS for U.S. financial reporting is one of the most important in the SEC’s history, he said the SEC commissioners have a lot of important issues to consider, including their continuing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203.

Beswick said other jurisdictions had different incentives for adopting IFRS, and the SEC needs to think carefully about what the incentives are for the United States to adopt or allow adoption of IFRS. Asked whether a decision would be made within the next year, Beswick said he was “hopeful that we at least would have a better indication of where we are going.”

“The best advice I can give you is to stay tuned,” he said.

Caturano, the AICPA chairman, said that the AICPA continues to support the goal of one set of high-quality global accounting standards for public companies worldwide. He said many entities with U.S. ties already are using IFRS.

“IFRS is already an established financial reporting system here,” Caturano said. “The SEC allows IFRS filings for foreign private issuers. Domestic and foreign-based multinational companies often report in IFRS. Private companies in America have the option of using IFRS.”

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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