There is considerable agreement that more disclosures often do not lead to more useful financial statements.
The question FASB faces now is: How to decide the best way to instruct preparers on which footnote disclosures to omit?
Stakeholders at round-table discussions held this fall by FASB and the Center for Audit Quality, which is affiliated with the AICPA, generally agreed that streamlining disclosures is desirable.
The sentiment also was expressed recently by FASB member Marc Siegel during a webcast on the board’s Disclosure Framework project.
“Some of this information becomes boilerplate, or it may not be material to the reporting entity,” Siegel said. “That makes it harder for a reader to find information even if they know what they’re looking for. And it may cause them to miss information that they did not know how to look for.”
But according to a report on the round tables at Columbia and Stanford universities, opinions were mixed on whether the concept of relevance or the more familiar term materiality should be used as a benchmark for paring disclosures.
In an Invitation to Comment (ITC) issued July 12, FASB asked stakeholders to comment on whether and how disclosures in the footnotes to financial statements can be made more effective. The comment period ended Nov. 16.
Many industry commenters said unnecessary disclosures can prevent users from finding the information they need. Tesoro Corp., a Texas-based petroleum refining company, reported in a comment letter by CFO G. Scott Spendlove that the number of pages in its Form 10-K statement grew 36% from 2005 to 2011. During the same period, the number of pages devoted just to notes in Tesoro’s 10-K grew by 58%.
Intel Corp. Finance Corporate Controller James G. Campbell wrote that swift action is needed to stem the tide of disclosure overload.
“The increasing rate of footnote disclosures is unsustainable,” Campbell said.
Some preparers in the Columbia and Stanford forums said efforts on their part to streamline disclosures had resulted in:
- Clearer communication of financial performance, increasing users’ trust of management.
- Less time spent preparing and auditing disclosures.
- Increased finance staff morale and improved goodwill with auditors and regulators.
- Better allocation of capital by investors, according to academic research.
How to streamline
But round-table participants couldn’t agree on the proper benchmark for including disclosures.
Some said relevance would be an appropriate benchmark. But some questioned the ITC’s language, which stated that a disclosure would be relevant if it “could be useful to investors.” That threshold was considered too broad and too low; participants favored “would be useful” over “could be useful” as a definition for relevance.
The discussion of relevance also caused some participants to express concern over the risk of litigation or regulatory action as a result of omitting information previously provided in the notes.
Many participants did not favor using the term relevance at all. Some stated that if relevance is used in the framework, there should be a clear explanation of how relevance differs from materiality. The idea of a need for an “initial filter” of whether the item related to disclosure is material also was a subject of conversation.
Although the idea of reducing disclosures generally met with agreement at the round tables, many participants said it would be difficult to maximize effectiveness of disclosures without considering the SEC’s requirements for disclosure and presentation of information in the primary financial statements.
Many comment letter writers also supported involving the SEC in the project.
“It is paramount that the disclosure framework project be a joint effort between the SEC and the FASB to address the comprehensive disclosure package of the MD&A and the financial statements,” IBM Vice President for Accounting Policy & Financial Reporting Gregg Nelson said in a comment letter.
Nelson’s letter said that preparers, users, auditors, lawyers, and regulators such as the PCAOB need to know that the SEC supports a more flexible framework that promotes efficient disclosure of all material items.
Some round-table participants even said that without a holistic approach that includes evaluation of SEC disclosure requirements and shifts the existing compliance-oriented environment, it might be safer to retain stale disclosures or continue using boilerplate language. Many participants said the path of least resistance might be to continue adding disclosure instead of evaluating and removing disclosure.
So while preparers welcome the idea of relief from increasingly voluminous and costly disclosures, the path forward for FASB may be difficult.
Ken Tysiac (
) is a JofA senior editor.