Conceptual Framework: Clarifying the disclosure rules

The disclosure requirements under U.S. Generally Accepted Accounting Principles (GAAP) have gotten a bad rap for being overly burdensome and containing too much boilerplate language. In recent years, the Financial Accounting Standards Board (FASB) has responded by attempting to cut back on so-called “disclosure overload.” Its most recent effort is an update to its Conceptual Framework that aims to help FASB members write consistent, effective footnote disclosure requirements in new accounting standards.

Need for change

Complying with the disclosure requirements is cumbersome and costly for a company’s management. In addition, sometimes stakeholders, such as investors and creditors, have felt overwhelmed by the volume of disclosures provided under GAAP.

Another issue is that stakeholders aren’t the only ones sifting through public companies’ disclosures. Competitors also may review the information, which makes many public companies feel that their disclosures give up information that they should be allowed to keep confidential.

The challenge with disclosure reform is balancing 1) a company’s rights to privacy and cost-effective financial reporting, and 2) what stakeholders want and need from the company’s financial reports. So, the FASB’s central focus isn’t to merely reduce disclosures in new accounting standards, but to improve disclosures by making them more effective and efficient. It’s also important to eliminate disclosures that create opportunities for companies to cloud the truth or otherwise make financial statements harder to interpret.

Scope of change

The FASB recently published Concepts Statement (CON) No. 8, Conceptual Framework for Financial Reporting: Notes to the Financial Statements. This update to its Conceptual Framework will serve as a guide for the types of information the FASB should consider when writing new disclosure requirements for accounting standards.

The update attempts to end years of debate on how the FASB should balance asking companies for the right amount of detail against bogging down financial statement footnotes with extraneous information. It describes:

  • The purpose of footnotes,
  • The nature of appropriate content,
  • General limitations on what should be included in financial statement disclosures, and
  • Considerations for quarterly disclosure requirements.

In addition, the FASB updated the definition of “materiality” in the Conceptual Framework. It will now be consistent with the definition of materiality used by the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), the American Institute of CPAs (AICPA) and the U.S. judicial system.

Two FASB members dissented to the concepts statement, however. Christine Botosan dissented because employee benefit plans won’t be assessed the same way as other organizations when the FASB decides whether they should have to disclose certain information. Botosan said excluding one type of entity from a single chapter in the Conceptual Framework would create inconsistencies in the document.

Harold Schroeder dissented because he wanted the FASB to incorporate the use of judgment to determine what information could be omitted from a disclosure. He also criticized the chapter that discusses the “limitations on information.” That chapter requires information to be disclosed when it’s relevant to existing and potential users of financial statements of a “broad range of entities.” Schroeder believes that some information is important to analysts in a subset of industries but may not be important to analysts broadly.

Work in progress

Some businesses and accountants have said the updated framework doesn’t do enough to reduce disclosure overload. Conversely, investors and analysts are more concerned about losing disclosures than managing the volume of disclosures. In an era of electronic consumption of financial reporting data, they say sifting through extraneous information isn’t as burdensome as it was in the past. Only time will tell whether the updated concepts statement will satisfy all stakeholders by helping to make disclosures more effective.

Sidebar: FASB modifies fair value and defined benefit plan disclosures

On August 28, the Financial Accounting Standards Board (FASB) published two narrowly focused updates to the disclosure requirements for fair value measurements and defined benefit plans.

First, Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement: Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, aims to trim irrelevant or redundant information from disclosures related to methods for measuring the fair value of certain assets and liabilities. For example, it removes requirements to disclose 1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and 2) the policy for timing of transfers between the levels.

The amendments for fair value disclosures are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.

The second update — ASU 2018-14, Compensation — Retirement Benefits — Defined Benefit Plans — General: Disclosure Framework ― Changes to the Disclosure Requirements for Defined Benefit Plans — eliminates several disclosures companies highlighted as no longer relevant. Examples include information related to amendments to the Japanese Welfare Pension Insurance Law and the effect of a 1% increase or decrease in assumed health care cost trend rates.

This update also adds two new disclosure requirements:

  1. The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and
  2. An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The changes to pension and postretirement benefit disclosures are effective for fiscal years ending after December 15, 2020, for public business entities. They’re effective for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted.

FASB Chairman Russell Golden said, “[The updated 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.”