FASB took a step forward Tuesday in its effort to make disclosures in notes to financial statements more useful to investors.
The board is building a framework that is intended to reduce unnecessary disclosures and highlight information that investors need most.
On Tuesday, FASB issued a proposed concepts statement that would help the board create a process for identifying relevant information—and the limits on information—that should be included in notes to financial statements.
If approved, the proposed statement, Conceptual Framework for Financial Reporting, Chapter 8: Notes to Financial Statements, would become part of the conceptual framework that provides the foundation for making standard-setting decisions.
The proposal would require FASB to:
- Identify information to disclose in the notes that is likely to help those who are deciding whether to provide resources to an organization.
- Eliminate disclosures of certain types of future-oriented information that may have negative effects on the cash flow prospects of the reporting organization.
- Consider the costs and potential consequences of providing a disclosure in the notes.
In addition, the proposal discusses what the board should consider when determining which disclosures should be required at interim periods.
Comments on the exposure draft can be submitted at FASB’s website by July 14.
FASB’s staff is compiling field-test study results as part of the disclosure framework project. These results will be included along with stakeholder feedback from a 2012 invitation to comment when developing the decision process an entity will use to determine what is disclosed in the notes to financial statements.
The board is undertaking the project in an attempt to streamline disclosures that have grown in complexity and volume in recent years. A KPMG and Financial Executives Research Foundation study of Form 10-K annual reports filed by 25 Fortune 100 companies found that disclosure expanded 16% from 2004 to 2010 and footnote disclosure grew 28% over that same period.
In a 2012 comment letter to FASB, Dell executives said some preparers believe increased disclosures are necessary to avoid the risk of litigation or a comment letter from the SEC.
“However, we believe that an effective disclosure framework should balance legal and regulatory requirements with the overall objective of communicating relevant financial information to users,” Dell Vice President and former Chief Accounting Officer Yvonne Mcgill and Corporate Reporting Senior Accountant Courtney Slaughter said in the letter.
Other accounting standard setters also are focused on disclosure reform. Roger Marshall, chair of the UK Financial Reporting Council's Accounting Council, issued a call in October for financial reporting disclosures to focus on relevant information and avoid boilerplate language.
And International Accounting Standards Board (IASB) Chairman Hans Hoogervorst issued a speech last year stating the board’s focus on “breaking the boilerplate” and facilitating more relevant disclosures. The IASB also has undertaken an initiative to improve disclosures.
Ken Tysiac (
) is a JofA senior editor.