Reg FD, the Securities and Exchange Commission rule that governs the way public companies release information to investors, apparently doesn’t go far enough, according to the Financial Accounting Standards Board.
FASB, in fact, is proposing that companies disclose more information— and do it voluntarily.
On January 29, FASB released a study recommending that companies should disclose more business data and management analysis of that data, forward-looking information, facts about intangible assets, and much more. The standards board proposes that all news should be reported–the bad as well as the good.
Disclosures are most useful if they report on previously disclosed plans and goals and the results achieved in meeting them, the study also claims.
At the same time, the FASB study acknowledges “companies need to make difficult cost-benefit decisions when determining how much voluntary disclosure is appropriate.”
A variety of companies in different industries are choosing to disclose information that goes beyond what’s required of them by Generally Accepted Accounting Principles or SEC standards, the FASB study shows.
“Effective voluntary disclosure can provide more transparency and understanding about the company to investors and creditors…and help investors better understand a company’s strategy,” according to the study, “Improving Business Reporting: Insights into Enhancing Voluntary Disclosures” Click here for the study.
The underlying premise is that in today’s information age, the more companies disclose about themselves, the cheaper it is to raise capital.
Baruch Lev, professor of accounting and finance at New York University’s Stern School of Business, contends that FASB’s study is a valuable step toward more comprehensive business disclosure. “There is much value in documenting what corporations are disclosing and particularly what they are not disclosing,” he tells CFO.com.
Lev says disclosures about intangible assets should increase significantly, claiming that companies have largely kept the public in the dark about important information concerning intangibles.
“Corporations hardly disclose anything about intangibles, and given that intangibles really propel the economy, and [that] their value is now substantially higher than that of tangible assets, providing no information about intangibles is very harmful,” he asserts.
FASB’s goal in issuing the study is to help companies improve the quality of their reporting by providing concrete examples of ways in which some of them, including General Motors, Dow Chemical, Dell Computer, and Phillips Petroleum, have voluntarily disclosed information about their operations.
The information on the disclosures is not identified by individual company, however, but by industry. Eight industries—automobiles, chemicals, computer systems, foods, oil, pharmaceuticals, banking, and apparel—are represented.
The FASB study classifies voluntary disclosures of information outside of financial statements into six categories:
Although corporate America’s resistance to recognize intangibles in financial statements is to some extent warranted by the unpredictable nature of these assets and the difficulty of gauging their value, Lev contends, companies should not refrain from disclosing more detailed information about intangibles.
“Even if companies are reluctant to recognize intangible assets on the balance sheet, there is a huge amount of useful information they can still provide,” he comments.
That information includes investments made to train employees, acquire customers, expand Internet activities, and create incentive-based compensation schemes. Companies have unfortunately gotten away with not having to disclose this kind of information by burying it in the “selling, general, and administrative expenses” category, he says.
One incentive that would motivate companies to voluntarily disclose more information is if greater disclosure were to reduce the cost of raising capital, he says.
“Theoretically, better information does reduce the cost of capital,” says Lev. But he concedes that in the correlation is really more tentative than that. “The downside is that once you have committed yourself to voluntary disclosure, in bad times you can’t stop disclosing that information. In capital markets, `no news’ is bad news,” he says, and that could come at a cost.
Lev contends that only a concerted effort from Wall Street to demand more comprehensive business information, and a serious initiative from standard bodies such as FASB and the SEC to create models and guidelines for “good disclosure” will lead companies to disclose more information voluntarily. And as more companies take the initiative to disclose additional information in a voluntary fashion, a snowball effect could occur, leading others to follow.
“The FASB study is definitely a positive step, but it shouldn’t stop here,” says Lev.
Indeed, FASB is encouraging companies to continue to experiment with the type of information they disclose and the way in which it is disclosed. It is also calling on the American Institute of Public Accountants and industry organizations to study voluntary disclosure practices within their industries and widely disseminate their findings and recommendations.