FASB weighs in on materiality

FASB issued two exposure drafts that address the use of materiality—an attempt to help organizations eliminate unnecessary disclosures in financial statements.

Feedback received by FASB indicated that the current discussion of materiality in the board’s conceptual framework is inconsistent with the legal concept of materiality established by the U.S. Supreme Court, FASB Chairman Russell Golden said in a news release.

That created uncertainty about organizations’ abilities to interpret which disclosures are material, as well as FASB’s ability to identify and evaluate disclosure requirements in accounting standards, according to Golden.

“These proposals are intended to clarify materiality—which will help organizations improve the effectiveness of their disclosures by omitting immaterial information, and focus communication with users on the material, relevant items,” he said.

The proposals address the use of materiality in two ways:

• Helping organizations use discretion when determining which disclosures in notes to financial statements should be considered “material,” and
• Helping FASB understand the reporting environment in which it sets accounting and reporting standards.

One of the EDs proposes amendments to Chapter 3 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, and is intended to clarify the concept of materiality.

The other ED, Proposed Accounting Standards Update, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material, aims to promote the appropriate use of discretion when organizations decide which disclosures they should consider material. The amendments to ASC Topic 235 would apply to all types of organizations—public and private companies, not-for-profits, and employee benefit plans.

Comments are sought by Dec. 8 and can be submitted at FASB’s website.