The Financial Accounting Standards Board is inching toward a new position on requirements for financial-statement disclosures. Eventually, companies may be able to cut back on the redundant, often unnecessary notes they attach to financial data.
That cutback may not come for some time, however. FASB first put the project on its agenda nearly three years ago and has yet to publicly release a discussion paper, which is the first step toward finalizing a new framework. Ongoing convergence of its accounting standards with the International Accounting Standards Board has taken higher priority.
Wednesday morning, FASB debated the wording of parts of the discussion paper, which is scheduled to be released publicly later this year. The ultimate goal of the project is to make disclosures more useful and less redundant, which will likely result in less text overall. “If the guidance serves its purpose, most reporting entities would probably eliminate disclosures that do not add to the quality of the information provided,” says FASB research director Ron Lott.
Indeed, FASB board members and staffers have acknowledged that its standards are inconsistent on the matter. That has contributed to bloated financial reports full of notes that are not truly necessary but are included as a safeguard against regulator and auditor scrutiny. Robert Herz, FASB chairman when the board put the project on its agenda in mid-2009, said at the time that unnecessary disclosures have been used as “defensive medicine,” akin to doctors conducting extra procedures mainly to reduce their malpractice risk. Similarly, companies tend to augment their disclosures with extra, immaterial information in an effort to satisfy reviewers.
In the forthcoming document, FASB will be asking companies, investors, and other constituents their views about the proposed framework, as well as for commentary on the costs and consequences of disclosure rules, and the options under consideration for how the board should think about disclosure requirements for quarterly reports (versus annual reports). The paper will also emphasize that FASB will consult with the Securities and Exchange Commission on the project. The board needs the SEC’s cooperation to change companies’ tendency to include redundant data, says FASB board member Thomas Linsmeier. The SEC may need to revisit its own guidance as a result.
At some point during the project, FASB will begin a separate effort to find and revisit disclosure requirements that are inconsistent with the new framework. “That may result in eliminating some existing requirements, but FASB does not intend to indiscriminately eliminate disclosure requirements for the sake of reducing page count,” says Lott.