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U.S. comment letter on conceptual framework

Published on: Jul 15, 2014

An excerpt from the comment letter is shown below:

We support the Board’s efforts to develop a disclosure framework to improve the effectiveness and efficiency of disclosures in the notes to the financial statements. We also support the Board’s stated objective for this project “of establishing an overarching framework intended to make financial statement disclosures more effective and coordinated and less redundant.” We agree that this objective will not be attained solely through an amendment to the conceptual framework and will require other phases within this project (e.g., a phase to address the reporting entity’s decision process).

The proposed framework in the ED provides a useful tool in identifying a broad range of possible disclosures for consideration when developing a new standard. That is, the ED contains useful information for the Board to consider in identifying potential disclosure requirements to include in new standards. However, we believe that the proposed framework should also include guidance on (1) narrowing the range of possible disclosures, (2) coordinating the proposed disclosures with existing disclosures, and (3) assessing whether the benefits of disclosures outweigh their costs.

With respect to the narrowing process, the ED indicates that its objective is to identify an “intentionally broad set” of potential disclosures through the use of the decision questions. Then, within specific standard-setting projects, “the Board would identify a more narrow (and, in many cases, a far more narrow) set of disclosures . . . to be required.” Further, the ED notes that the proposed “chapter of the framework would not specify how the Board should accomplish that narrowing of disclosures.” We disagree with this view. We believe that the framework should cover considerations related to the narrowing process, since we think it is an important concept in the disclosure framework, and that the framework should include tools to foster consistent application of this process.

We also believe that an important element in ensuring that financial statement disclosures are effective and coordinated is periodic reviews of existing disclosure requirements. Although such a process would not be included in the conceptual framework, it could help ensure that the current disclosure requirements remain relevant. As part of this process, the Board should consider obtaining feedback on current disclosures. For example, workshops similar to those the FASB staff organized while finalizing the disclosure requirements in the recently issued revenue standard could help the Board evaluate existing disclosure requirements (as well as proposed disclosure requirements).

We also encourage the Board to consider exploring other ways to support the project’s goals, such as how to use current technology to increase the effectiveness of financial reporting and how the Board might adapt the framework in response to future changes in the financial reporting model.

While there have been expansions and refinements of financial disclosure requirements, the basic model of public-company financial reporting has not changed in more than 50 years. When one thinks of other changes in our capital markets in that same time (e.g., changes in the investor base, technology, stock trading, the size and complexity of companies), it seems likely that more fundamental changes in the public-company reporting model are on the horizon. With this in mind, it is especially important for the Board to work with regulators and other standard setters to increase the effectiveness of the entire integrated reporting package. It is especially important to collaborate with the SEC, given its role in the financial reporting system, especially in light of its own current considerations of ways to improve financial disclosure effectiveness.



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