For the Investor
By Marc Siegel, FASB Member
Disclosure Effectiveness—New Disclosures
In a prior column, I discussed how the concept of materiality fits in to the FASB’s Disclosure Framework project, which seeks to improve the effectiveness of information provided to investors in notes to financial statements.
The FASB’s proposals on materiality have generated a good deal of feedback for the Board to consider. Unfortunately, these Exposure Drafts have in some ways overshadowed the disclosures that were included in recent standards, or are being proposed as a direct result of the application of the FASB’s Board Decision Process.
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.
The Board Decision Process was described in FASB’s 2012 Invitation to Comment and a 2014 Exposure Draft. It is in essence a series of questions the Board should ask itself when contemplating what disclosure requirements should be for a specific accounting topic.
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.
In recently completed major projects such as Revenue Recognition, Leases, and Credit Losses, the proposed framework was applied to help the Board consider different alternatives for disclosure packages.
Specifically, in Revenue Recognition, the FASB included the following new disclosures:
For public companies with a calendar year end, these new disclosures are required beginning in 2018, although companies can elect to adopt the new standard in 2017.
Below are some of the disclosures the FASB included for lessees in the recently issued Leases standard. These disclosures will be required for public companies with a calendar year end in 2019, although again companies could elect to adopt the standard sooner.
Many companies, especially financial institutions, will be affected by the new Accounting for Credit Losses standard. Again, the Board Decision Process helped the FASB determine what the requirements should be. These will be effective for public companies with calendar year ends beginning in 2020.
The objective of the disclosures are to enable users to understand:
- Credit risk inherent in the portfolio
- How management monitors the credit quality of the portfolio, and
- Management’s initial and updated estimates of expected credit losses.
Additionally, a further breakdown of financial assets—like loans—will be required to show the credit quality indicators by the year of origination (vintage). The effect would be as follows:
All of these disclosures will find their way into financial statement footnotes in upcoming years.
The FASB has continued to test the Board Decision Process before finalizing it. Specifically, proposals were issued during the first half of 2016 to modify disclosures in defined benefit plans (pensions) and fair value measurement. The FASB also recently issued a proposal that is intended to enhance disclosure requirements on income taxes.
A further proposal will be issued in the second half of 2016 to modify disclosure requirements for inventory.
The final Board Decision Process will affect how the FASB considers disclosure requirements for years to come.
We will hold roundtables in November on the individual topic areas of fair value, defined benefit plans, income taxes, and inventory—as well as the broader subject of materiality. Following these roundtables, the FASB will develop a plan for finalizing the Board Decision Process and the specific disclosures proposed in each of the individual topic areas.
To the extent you have feedback on any of these proposals, and especially about the implications it has for the efficacy of the Board Decision Process, please let us know. The final Board Decision Process will affect how the FASB considers disclosure requirements for years to come.