In an effort to allay confusion among corporate finance and accounting executives and others about what constitutes “material” disclosures in financial statement footnotes, the Financial Accounting Standards Board proposed last week to drop its own definition of the concept of materiality.
FASB noted in a separate proposal that it also wants to amend its standards to make it easier for companies to pare down the number of disclosures they make that aren’t material.
The issue of how to gauge what issues are so material – so important to an organization’s financial well-being that they must be disclosed – is nothing new. Corporate confusion about how to define materiality has spawned an administrative nightmare, critics contend. In 2012, for instance, Intel controller James G. Campbell wrote to then FASB chair Leslie Seidman that “the increasing rate of footnote disclosures is unsustainable. This trend requires swift action to stem the tide of disclosure overload.”
In another letter to FASB that same year, Stephen P. Feltz, then treasurer and controller of Northwest Natural Gas, pointed out the connection between materiality and disclosure overload. Writing on behalf of the American Gas Association, Feltz declared “that the Board should more clearly define both materiality and relevance with a focus on limiting the disclosures in the notes to information and content that is truly material.”
Last Thursday, FASB stated that it wants to make it clear to filers that the only definition of materiality they should use is the one handed down by the U.S. Supreme Court, according to one of two proposals the standard setter issued.
In putting out that concept release, FASB said it was responding to various stakeholders who have asked the board “to eliminate inconsistencies between [FASB’s own Conceptual Framework] and the legal concept of materiality,” according to the proposal.
To avoid any suggestion that it uses its own of definition of materiality in addition to that provided by the courts, FASB wants to make it clear that “[m]ateriality is a legal concept,” rather than an accounting notion, it says in its proposal. “The Board observes but does not promulgate definitions of materiality.”
Further, the standard setter wants to delete this statement from FASB’s Conceptual Framework: “Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report.”
In contrast, the High Court’s definition “generally states that information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information,” according to the FASB proposal.
Because it adheres only to the Supreme Court definition, “the Board cannot specify or advise specifying a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation,” the FASB proposal states.
“Stakeholders indicated that the current discussion of materiality in our Conceptual Framework is inconsistent with the legal concept of materiality as established by the U.S. Supreme Court,” FASB Chairman Russell G. Golden stated in a press release. “This led to uncertainty about organizations’ abilities to interpret what disclosures are material … and the Board’s ability to identify and evaluate disclosure requirements in accounting standards.”
In its other new concept release, FASB says it wants to push corporate filers to use appropriate “discretion … when deciding which disclosures should be considered material in their particular circumstances.”
In short, the board wants to amend existing standards in order to help corporations winnow out immaterial disclosures from the notes to their financials. FASB proposes to change its standards to state that since individual disclosures must be “taken as a whole” along with the rest of the financials, “some, all, or none of the requirements in a disclosure Section may be material[.]”
Further, FASB wants to amend its strictures to specifically state “that an omission of immaterial information is not an accounting error.”
The deadline for public comment on both exposure drafts is December 8.