FASB’s Proposed Disclosure Framework Needs Shoring Up
Seeing the need for an overarching framework to identify information appropriate for the notes to financial statements and relevant to users of those statements, the Financial Accounting Standards Board (FASB) published an exposure draft in March 2014. The Board intends to use the concepts developed in the draft — Proposed Statement of Financial Accounting Concepts, Chapter 8: Notes to Financial Statements — as a basis for establishing disclosure requirements in the future, as well as evaluating existing ones.
Overall, CFA Institute supports FASB’s goal of forming this overarching framework. As currently articulated, however, the framework is difficult to readily access and consume — for even the most technical of accountants. Although there are many useful concepts and ideas embedded in the proposal, they are challenging to glean because of the format of the exposure draft — a list of questions for the FASB to ask itself in determining disclosure requirements, without categorization according to concepts. Substantial effort would need to be expended to carefully study the proposal to understand its construction, the disclosure areas it is meant to touch upon, and the key messages being communicated. Furthermore, it is unclear how the FASB will answer the decision questions and how they will apply them to determine disclosure requirements. Also unclear is how the FASB arrived at the initial set of questions or how boundaries of these questions have been defined (i.e., the process by which the FASB decided that they have produced a complete list of questions to be considered).
We are also aware that the framework would not be considered “authoritative” guidance. Thus, if guidance for a transaction is not specified within a source of authoritative guidance, an entity must first consider accounting principles for similar transactions within authoritative guidance and then consider nonauthoritative guidance. Therefore we question how useful the framework will prove to be, given that it is not authoritative, but the actual disclosure requirements in the accounting standards are.
In light of its nonauthoritative status and given the aforementioned difficulties in the proposal, it is challenging to understand what impact it will have on actual disclosures. Investors need to be able to understand how these changes will actually impact financial statements in order to engage meaningfully on these issues.
For it to be useful to accountants and users of financial statements, the Board should give further consideration to the manner, style, layout, and presentation of the disclosure framework to best communicate the concepts it is intended to convey. As an alternative to the decision question format, we suggest that the FASB consider articulating both the objective of disclosure and a set of disclosure principles that should be applied to achieve the objective. The starting point would be the objective that disclosures must provide all the additional information investors would consider material and require to understand the items recognized in the financial statements, their measurement properties, and risk exposures. In addition they must explain how economic assets and liabilities that are not currently reported in the financial statements may affect the company’s operations. We recommend the FASB set forth some of the ideas and concepts already included in the proposal more clearly as disclosure principles.
We also believe that a simple focus on certain communication “best practices” would substantially improve financial statement presentation and allow disclosures to be more transparent and effective. As our 2012 survey of members indicated (see survey results in our financial disclosure report), investors are more concerned with improved financial statement presentation and enhanced communication principles than they are in the development of a disclosure framework. Accordingly, we suggest the FASB incorporate communication principles in the disclosure framework, such as emphasizing matters of importance, greater use of tables and charts and elimination, and providing greater disaggregation.
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