The Financial Accounting Standards Board is making progress on its disclosure framework project, which aims to establish an overarching framework to help the board establish requirements for disclosures in notes to financial statements.
The goal of the project is to improve the effectiveness of disclosures by more clearly identifying and communicating the information that is most important to users of each organization’s financial statements. The framework is something that FASB will be using, not a standard that accountants outside FASB will necessarily be using. Still, the framework is something worth watching as it will influence the future work of the board, especially in the area of what goes into the footnotes to financial statements, and it may ultimately lead to an accounting standards update.
“This project is actually a combination of things,” said FASB research director Ron Lott. “People have talked for years about so-called ‘disclosure overload.’ There are also people who say, ‘Yeah, there are a lot of words there, but the stuff I really need isn’t there,’ so you have people talking in both directions. What we’re trying to do with this project is first we’re trying to develop a way for the board to think about disclosure requirements when they do a standards project. Right now, it tends to be one of the last few things in a project that gets done. Not always, but a lot of times you say it takes you so long to work through the recognition and measurement issues that you think about disclosures quickly.”
Lott noted that FASB already has a disclosure framework in place for measurements, along with a conceptual framework for recognition and measurement, and a framework it is developing for private companies. The framework for disclosures primarily involves the notes. There are disclosures on the face of the statements, he acknowledged, but FASB does not have authority over disclosures such as Management’s Discussion & Analysis and the president’s letter.
“The only things we have authority over are the notes and the financial statements themselves,” he said.
Reporting entities would be strongly discouraged from resorting to boilerplate language in most instances. “Ideally the plan would be for them to tailor it to their own circumstances,” said Lott.
Liability fears sometimes lead to a checklist mentality when filling out the notes, he added, and people simply go through a checklist, whether it’s appropriate or not for the reporting entity.
FASB instead wants to provide guidance on how best to communicate and put the notes in order, perhaps in balance sheet order or in order of importance. The SEC would like the disclosures to be more transparent to investors.
“We have been shown a number of examples of this boilerplate sort of thing and I don’t personally believe that serves investors all that well,” said Lott. “People have told us it doesn’t because you may miss the important things.”
FASB is not currently working on the project with the IASB, but the IASB has been encouraging and might join the project later.
“When we first started it a few years ago we invited them,” said Lott. “They said at the time they did not have enough staff, but they encouraged us to work on the project. I cannot speak for the IASB. In the consultation they did a year ago, there were a number of people who encouraged them to work on it, so it’s possible they may decide to join us at some point, or they will do it separately.”
Lott noted that FASB is cooperating with the European Financial Reporting Advisory Group, or EFRAG, the body that advises the European regulators to accept a particular IASB standard as part of the endorsement process for International Financial Reporting Standards. EFRAG has taken on the disclosure framework as a so-called “proactive project.”
“They can’t make any rules, but their objective would be to influence what the IASB or other standard-setters might do,” said Lott. While the disclosure framework is not considered to be a formal convergence project, Lott noted that FASB is working closely with EFRAG, and they are likely to issue similar documents.
As the next step, FASB plans to issue an “invitation to comment,” according to Lott. The document will not be quite as advanced as an exposure draft, but it will describe the board’s thoughts about the disclosure framework. In some cases, it may list alternative approaches to particular issues. EFRAG will release a similar document. FASB will start working toward producing an exposure draft once the comments come back to the board, and ultimately it will issue a final standard. However, the final disclosure framework probably will not be available until 2014 at the earliest.
In the end, there will be two different standards coming out, Lott noted. One would be a concept statement, which is for the board to use, and the other would be some form of guidance, perhaps in the form of an accounting standards update, for reporting entities on how to apply the disclosure standards. The initial step of issuing an invitation to comment is likely to occur this year. That was originally supposed to happen in the second quarter of this year, but Lott acknowledged it’s probably going to be a bit later than that.
Besides accepting comments on the proposals, FASB may organize meetings to get face-to-face feedback as well. The board has not yet decided whether it will organize formal roundtable meetings, or just individual meetings.
“There are a lot of people who need to get involved here: the reporting entities themselves, the auditors, the users, the regulators, the securities lawyers,” said Lott. “All of those people have some concerns about this, and we’ll need to talk with all of those groups.”
FASB has a resource group for the project comprising people from all of those groups, and it includes a representative from the Public Company Accounting Oversight Board who attends the meetings. The PCAOB has been working on a concept release of its own proposing to expand the auditor’s reporting model to disclose more information beyond the standard boilerplate language in the typical audit report. Those efforts may end up dovetailing with FASB’s framework, at least from the auditor’s point of view. “They are well aware of what we’re doing here,” said Lott.
The disclosures in the framework might encompass a broad array of items, such as off-balance sheet transactions and risks faced by an entity. “There’s a pretty wide variety of things that are in the notes now, and we’re not talking about putting drastically new sorts of things in there,” said Lott. “We’re talking about refining what is in there and determining when each one might be necessary.”
One thing FASB wants to avoid at the same time is disclosure overload. “People talk about disclosure overload and certainly that is a concern if the stuff in there is boilerplate and it’s not that important to the particular entity,” said Lott. “We would like for people not to put that in. But our objective isn’t to hack and slash or to reduce disclosures. It is to make them more effective and useful to people who do use them, and we think that if we’re successful in doing that, hopefully there will be less clutter in notes, and more meat.”
