FASB takes big steps on disclosure effectiveness

By Ken Tysiac

FASB’s ongoing efforts to improve the effectiveness of disclosures in the notes to financial statements led to multiple changes announced Tuesday by the board.

Two changes to FASB’s conceptual framework will help the board identify and evaluate disclosure requirements in accounting standards and clarify the concept of materiality, FASB Chairman Russell Golden said in a news release.

FASB also issued two Accounting Standards Updates (ASUs) that are designed to improve the effectiveness of note disclosures.

“The new standards improve fair value and defined benefit disclosure requirements by removing disclosures that are not cost-beneficial, clarifying disclosures’ specific requirements, and adding relevant disclosure requirements,” Golden said.

Improving the effectiveness of disclosures has been a goal for FASB for many years. The board has sought to establish rules that would result in the inclusion of the best and most relevant information for investors while eliminating information that is not useful and clutters financial statements.

An invitation to comment issued July 12, 2012, was one of the first steps in this effort. A KPMG and Financial Executives International report in 2011 indicated that the size of 10-Ks had expanded approximately 16% overall during the six-year period prior to 2011 and said footnote disclosure grew 28% over the same period.

“The current state of disclosure requirements plus what is projected from the key convergence projects is unsustainable, yet users continue to say they require even more information,” Gregg Nelson, an IBM vice president, said in a comment letter in 2012.

The changes announced Tuesday address some of those concerns. In the conceptual framework, a new chapter has been added to explain the information the board should consider including in notes to financial statements. The newly added Chapter 8, Notes to Financial Statements, describes the purpose of notes, the nature of appropriate content, and general limitations. The chapter also addresses the board’s considerations on interim reporting disclosure requirements.

The board also updated an existing chapter of the conceptual framework to align FASB’s definition of “materiality” with other definitions in the financial reporting system. As a result, FASB’s materiality concepts will be consistent with the definition used by the SEC, the U.S. judicial system, and the auditing standards of the PCAOB and the AICPA.

Chapter 3, Qualitative Characteristics of Useful Financial Information, is the chapter of the conceptual framework that has been updated with new materiality guidance.

The new fair value measurement disclosure requirements are published in ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The amendments take effect for all organizations for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2019. Early adoption is permitted.

New disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans are published in ASU No. 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans. These amendments take effect for public companies for fiscal years ending after Dec. 15, 2020. For private companies, the amendments take effect for fiscal years ending after Dec. 15, 2021. Early adoption is permitted.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.


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