FASB nearing release of invitation to comment on disclosure framework

A disclosure framework project that FASB has been developing for almost two years is scheduled to reach a milestone in June or July with the issuance of invitation for public comment, FASB Chairman Leslie Seidman said Thursday.

Seidman said the three main objectives of the framework project are determining what information is essential to investors, getting preparers to think about relevance, and organizing financial statements in a commonsense way.

During the panel on “The Future of Financial and Business Reporting from a Standards-Setting and Regulatory Perspective,” at the AICPA spring Council meeting in Washington, Seidman explained that the disclosure framework is an answer to one of the most common complaints she hears from all sectors.

Business leaders, investors, and auditors all express concerns about disclosure overload and ineffectiveness to Seidman.

“We know that people would really like to take out the red pen right now and start slashing through the footnotes and other elements of the financial statements,” Seidman said, “but actually the resource group we set up to advise us on this advised against that.”

The project was added to FASB’s agenda in July 2009 in an effort to create a framework that would make financial statement disclosures more effective, coordinated, and less redundant. Reducing the volume of footnotes to financial statements is not the primary focus, but FASB hopes that focusing on important information will cut down on footnotes in most cases.

The first section of the framework is designed to have FASB require only disclosures that are essential to investors, Seidman said..

“It really gets at what information is essential to an investor,” Seidman said. “Not [information that’s] nice to have. Not [information] a few of them would like to know. But really, what’s essential to any investor, in a company like this.”

The second section is geared toward preparers, asking them to evaluate what information is most relevant when they prepare financial statements. Seidman said that once a footnote is placed in a statement, it stays there in perpetuity and remains the same length or grows over time.

She said such footnotes can have the undesired effect of obscuring other information that might be more relevant.

“So we’re introducing a notion of dynamic disclosure and also scalability, so you’re spending the most ink on the things that are most relevant,” Seidman said.

The third section is designed to facilitate better organization of financial statements, so that the most newsworthy footnotes come first. She said the footnotes in most companies’ financial statements currently are organized in the order in which FASB requires them. She said there has to be a better way.

In addition to issuing a document for public comment, FASB plans to hold meetings to provide more information, get feedback, and help stakeholders understand the purpose of the project.

“We acknowledge that there’s a major problem out there [with disclosure overload],” Seidman said, “and that’s what we’re doing to try and solve it.”

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