What You Need To Know About Disclosure Framework

The 10-Ks and Qs filed by U.S. publicly-traded companies seem to be getting thicker every year.

A 2012 Ernst and Young study1 found that disclosures have quadrupled in the past 20 years. If the rate of increase continues, the report said, organizations by 2032 will devote more than 500 pages in their annual reports to footnotes and Management’s Discussion and Analysis.

While the burgeoning volume of the notes is a concern, a more vexing issue is the abundance of irrelevant disclosures.
While the burgeoning volume of the notes is a concern, a more vexing issue is the abundance of irrelevant disclosures. Investors are finding it much more difficult to sort through the financial reports to identify the important (and useful) information they need to make decisions.

The FASB is moving forward with a project intended to better define the limits of information that can and should be provided in a set of general purpose financial statements—including the notes.
To address both problems, the FASB is moving forward with a project intended to better define the limits of information that can and should be provided in a set of general purpose financial statements—including the notes. The anticipated result is that preparers will be able to provide more relevant disclosures that investors and other users will find useful.

The project is focused on the development and application of a decision-making framework that will:
  • Guide the FASB when developing disclosure requirements, and
  • Promote the appropriate exercise of discretion by organizations when meeting those disclosure requirements.
The three components of the project are:

The Board’s Decision Process will help the FASB improve its procedures and promote consistency when determining disclosure requirements for future accounting and financial reporting standards.

The Board’s Decision Process, which is intended to aid the FASB in developing disclosure requirements for notes to financial statements. The process will help the FASB improve its procedures and promote consistency when determining disclosure requirements for future accounting and financial reporting standards.

In this process, a disclosure item that may be considered by the FASB will not automatically become a required disclosure. The Board and its staff will, for example, have to evaluate the costs and benefits associated with each potential disclosure.

The FASB is considering the following types of disclosures that should be considered for inclusion in notes to financial statements:
  • Information about financial statement line items
  • The reporting organization, and
  • Past events and current conditions and circumstances that have not met the criteria for recognition that can affect an organization’s cash flows.
Additionally, the Board is considering the following limitations when assessing disclosures:
  • The Board should only require information that is relevant to the organizations to which it applies.
  • The benefits of providing the information should justify the cost.
  • Future-oriented notes that may have negative effects on cash flow prospects should be avoided.
The parameters were further detailed in a proposed Concepts Statement, Conceptual Framework for Financial Reporting: Chapter 8: Notes to Financial Statements, which was issued in March. The FASB will start redeliberations on the proposed Concepts Statement now that the comment period just concluded.

The Entity’s Decision Process is intended to identify ways in which the FASB can enable preparers of financial statements to exercise appropriate discretion when addressing disclosure requirements.
The Entity’s Decision Process, which is intended to identify ways in which the FASB can enable preparers of financial statements to exercise appropriate discretion when addressing disclosure requirements.

This past year, the FASB conducted a field study which tested the ability of public and private companies and not-for-profit organizations to exercise discretion over the disclosures they provide in notes to financial statements. In this study, preparers explained that there are obstacles to exercising discretion when it comes to disclosures. However, the FASB learned that if the disclosure requirements in GAAP were written in a way that allowed for discretion, organizations thought they could make judgments and their auditors could get comfortable with those judgments.

The FASB also heard from those in the study that the notes became more effective as a result of the exercise of discretion. Based on results from the field study and other stakeholder feedback, the Board is developing ways to further promote the appropriate use of discretion.

Topic-Specific Disclosure Reviews, which will incorporate what the FASB learns regarding both Board’s Decision Process and Entity’s Decision Process.

The reviews will comprise:
  • An evaluation of existing disclosure requirements within a Topic after applying the concepts currently out for comment in the Board’s decision process, and
  • Consideration of ways to promote the appropriate use of discretion specifically within that Topic.
The FASB is reviewing the disclosure requirements for the following areas: disclosure of defined benefit plans in employers’ financial statements, income taxes, fair value measurement, and inventory. The plan is to expose the proposed changes that result from the application of the framework for public comment.

The Board also is discussing interim reporting requirements and use of discretion.

For stakeholders interested in sharing their input on the project, the FASB will hold an event (date and details TBD) at Pace University in the near future that will focus specifically on matters related to disclosure effectiveness.

For more details, please visit our website.


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1To the Point: Now Is The Time To Address Disclosure Overload, Ernst & Young, 2012