FASB Chair discusses disclosure overload and cost-benefit analysis of standards
05 Jun 2012
Leslie F. Seidman, Chair of the Financial Accounting Standards Board (FASB), has given a speech to the Compliance Week Annual Conference held on 4 June 2012. In the speech, Ms Seidman discusses the FASB's disclosure framework project and responds to calls for the FASB to extend the analysis of the costs and benefits in standard setting to include the 'economic effects' of standards.
The FASB is expected to issue a Discussion Paper from its disclosure framework project in the coming weeks.
In discussing the project, Ms Seidman noted many themes under US GAAP that are consistent with those expressed under International Financial Reporting Standards (IFRS). (The FASB has been working together with the European Financial Reporting Advisory Group (EFRAG) on their respective projects to develop a disclosure framework, with a view to creating a consistent framework for both United States and international GAAP. The IASB Chairman has also signalled the IASB may consider a project in this area.)
In Ms. Seidman's speech, she points out that "some people would like to start slashing disclosures right now", but she notes "the purpose of this project is to improve disclosure effectiveness, not to single-mindedly reduce disclosure volume". She goes on to state FASB believes it should be "establishing a framework for disclosure first, so that there is a rationale for deleting or modifying existing disclosures and potentially adding new disclosures in the future".
Ms Seidman outlined the expected benefits of the Disclosure Framework, including:
- help the FASB establish consistent disclosure requirements that focus on what is most important to most users
- explain how the reporting entity should evaluate which disclosures are needed under different circumstances at different times
- exploring ways to emphasise the more “newsworthy” information and ways to make it easier for users to find the information that they are most interested in.
The Discussion Paper also will invite comments on the approach to interim disclosures and how to evaluate materiality in the context of disclosures. On the concept of materiality in disclosures, Ms Seidman noted:
... many people struggle with how to apply the concept of materiality to disclosure items. If an item is material in a financial statement, must every prescribed disclosure about it be provided, even if some of that information is immaterial? On the other hand, can a preparer afford to omit immaterial information when they are likely to spend more time explaining to an auditor, investor, or regulator why it was omitted? I call this phenomenon “defensive disclosure.” While I understand why companies do it, I think it contributes greatly to disclosure overload and ineffectiveness.
Costs and benefits of standard setting
In moving onto the analysis of costs and benefits in standard setting, Ms Seidman responded to calls for the FASB to extend that analysis into the 'economic effects' of standards, by studying the broader impact of proposed accounting standards on the economy.
Ms Seidman stated the FASB will issue a standard "if the improvements in the quality of the reporting are expected to justify the costs of preparing and using the information". She noted calls for the FASB to move beyond that paradigm and study the broader impact where particular companies or an industry will be especially harmed, and discussed her concerns with that approach.
Focusing on the role of financial reporting in the economy, Ms Seidman noted "[w]hile new accounting standards may change the way companies report their financial condition, the standards do not create or change the underlying condition itself". She then went on to discuss the benefits from past controversial projects, such as FASB's other post-employment benefits project in the 1980s, which she acknowledged had raised a number of constituent concerns. She continued noting "it is clear that the benefits of better information provided by the standard caused management and investors to think about this form of compensation in a different way" and that the project did have consequences such as "some decided to adjust the forms of benefits being promised to retirees".
In wrapping up her thoughts on this topic, Ms Seidman noted:
Some have suggested that we undertake studies of the adverse consequences that our proposals might have for certain employees, or companies, or sectors of the economy. Some think that the potential for adverse consequences is a reason to not improve reporting. We don’t share that view. We think investors, creditors, donors, and other users, including policy makers, need relevant and unbiased information on which to base their decisions... To do otherwise would be to put the special interests of a few ahead of the broader public interest in unbiased financial information.
Click for the full text of Ms Seidman's speech (link to SEC website).