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07.09.2012: FASB sees flexibility, relevance as cures to disclosure overload

As described by FASB member Marc Siegel during a webcast Wednesday, disclosure requirements are becoming increasingly burdensome for financial statement preparers.

One objective of a current FASB project is reducing the volume of those disclosures by enabling flexible requirements geared toward relevance.

Siegel described the disclosure overload problem in detail during the webcast FASB hosted to explain its Invitation to Comment (ITC) in its development of a framework designed to improve the effectiveness of disclosures in notes to financial statements.

According to Siegel, the volume of disclosures required continues to grow as FASB responds to investors who seek more information and to problems such as those that occurred during the recent financial crisis.

“Unfortunately, each and every reporting entity feels it is required to provide every disclosure it possibly can provide,” Siegel said, “and sometimes some of those items might not be really relevant to a lot of entities at that particular time in their business and at that particular time in the economic cycle.”

FASB’s aim is to create a framework for flexible reporting in notes to financial statements that will allow each reporting entity to highlight important disclosures and make them easy for users to access, while eliminating irrelevant disclosures.

The board is conducting outreach, with a Nov. 16 deadline for comments on the ITC. FASB also plans speeches, webcasts, and opportunities for preparers, auditors, and financial statement users to discuss the best ways to achieve flexibility and optimal relevance in financial statements.

In addition, FASB is cooperating with the European Financial Reporting Advisory Group (EFRAG), which is working on a similar project.

“We think that a judgment on the relevance of a particular disclosure and a particular set of circumstances is the best way and maybe the only way to reduce disclosure volume without eliminating disclosures that will be useful to some people,” said FASB research director Ron Lott.

Lott said the goal is to allow businesses and their auditors to consider relevance in notes in a manner similar to the way materiality is applied to line items on financial statements. But rather than using a financial benchmark, the new process for determining appropriate financial statement notes disclosures would be judgmental and based on how users’ assessments of future cash flows could be affected by a particular piece of information, Lott said.

 

Source: Journal of Accountancy

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