For the Investor:
Disclosure Effectiveness—How Materiality Fits In

By Marc Siegel, FASB Member

There has been discussion lately amongst our stakeholders and the media about “materiality” and questions as to how it relates to the FASB’s Disclosure Framework project.

With this in mind I want to take this opportunity to communicate my thoughts about how materiality fits into the entire project.

But first, let me provide quick overview of the project.

The FASB’s Disclosure Framework project seeks to improve the effectiveness of information provided to investors in notes to financial statements. The project is being conducted in three parts (Board Decision Process, Entity Decision Process, and Disclosure Topic Reviews) as you can see in the diagram below.



In the fall of 2015, as part of the Entity Decision Process, the FASB issued two proposals to help clarify how the concept of materiality applies to the notes to financial statements.

Many investors and investor groups have provided feedback and expressed concerns on these proposals, both through comment letters as well as in other venues. The FASB staff is currently in the process of analyzing the feedback received from all stakeholders.

While these proposals are fresh in everyone’s minds, the project actually goes back a few years.


In the FASB’s 2012 Invitation to Comment and the 2014 Exposure Draft, the Board proposed a framework (the Board Decision Process) to use only when developing disclosure requirements related to standard setting for a particular accounting area.

I believe that the Board Decision Process is a necessary part of the overall Disclosure Framework project because, over its forty years of existence, the FASB has addressed disclosures on an ad-hoc basis. This approach led to inconsistency in how the Board reviews and develops disclosure requirements in various topic areas.

For example, in some topic areas, such as inventory, there are very few requirements. In other areas addressed more recently, such as fair value measurements, there are many disclosure requirements. These areas are currently being addressed in the Disclosure Topic Reviews phase of the project.

Investor feedback on our Board Decision Process was minimal.

However, some believed that it was still unclear how materiality should be taken into account by reporting organizations when creating their financial statement footnotes.

These stakeholders provided several reasons why the FASB should provide more guidance in this area. Among them:
  1. Some disclosure requirements contain phrases such as: “Provide, at a minimum, the following disclosures….” Some have said this language appears to override any judgment about materiality.
  2. While there is a single sentence in the Accounting Standards Codification that states that “Provisions of this Codification need not be applied to immaterial items,” this language is not located near or referenced by any of the disclosure requirements. Additionally, some stakeholders have questioned whether the general immateriality language just deals with assessments of entire topics or individual disclosure requirements. (The 2015 Exposure Drafts on materiality clarified that those individual requirements need not be complied with if that disclosure is not material.)
  3. The definition of materiality currently in Concepts Statement 8 does not conform to any of the others currently in place in the U.S. financial reporting system. The Securities and Exchange Commission (SEC) rules and guidance (including Staff Accounting Bulletin 99), auditing standards, and decisions made by courts are more similar to our prior definition in Concepts Statement 2, which was replaced in 2010 by Concepts Statement 8. The Concepts 2 definition existed for decades and is still referenced today by the SEC and the auditing literature1. As such, some stakeholders suggest it is unclear how to think about materiality when it comes to decisions about footnote disclosures. The 2015 Exposure Drafts comes much closer to aligning the definitions already in place—closer to the prior, longstanding definition from Concepts Statement 2.
For these reasons, I believe that for the Entity Decision Process, our recent proposal clarifies that organizations should apply materiality to individual disclosure requirements, just as materiality is applied to other accounting requirements.

I also believe that when the FASB changed the Concepts Statement 2 longstanding definition and adopted the broader definition of materiality from Concepts Statement 8 in 2010, there was no noticeable change in the Board’s practice when determining disclosure requirements. Therefore, the change in the definition of materiality in 2010 did not affect the range of disclosures offered to investors.

My personal view has been that realigning our thought process with that of the SEC and audit guidance on materiality would not have a significant impact.
I believe that this is because the auditors, regulators, and courts are all still judging materiality in the old way—the way that is consistent with the definition in Concepts Statement 2. Therefore, my personal view has been that realigning our thought process with that of the SEC and audit guidance on materiality would not have a significant impact.

Nonetheless, we want to fully understand any concerns expressed by investors as well as the feedback on the direction of the initiative as a whole. To that end, the Board’s next steps regarding the two proposals on materiality are to analyze the feedback we received and prepare a public summary of comment letters.

Additionally, as part of the Disclosure Topic Reviews, the Board has been using the Board Decision Process to review a number of disclosure areas, such as defined benefit plans, fair value measurement, and income taxes. After we issue Exposure Drafts on the disclosure areas, we intend to hold public roundtables during 2016 to garner additional feedback on these reviews and the two materiality proposals.

We will decide how to best proceed with the project after holding the roundtables.

Visit our website to further track our progress.




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1Paragraph 132 of Concepts Statement 2 (1980) states: “The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” This definition was in place from 1980 until 2010.