Disclosure framework — FASB makes tentative decisions about flexible disclosure requirements and fair value disclosures

Published on: 20 Feb 2015

At its meeting this week, the FASB discussed making disclosure requirements in general more flexible and focused on discretionary verbiage, jurisdictional differences in materiality, and consideration of minimum disclosure requirements. The FASB also discussed disclosure issues related to the fair value measurement guidance in ASC 820.1

Discretionary Verbiage

To encourage entities to use discretion when complying with disclosure requirements, the Board tentatively decided to amend ASC 235 to state the following:

  • Materiality is applied to disclosures individually and in the aggregate; therefore, some, all, or none of the requirements in a disclosure section may be material.
  • A disclosure is material if it meets the U.S. Supreme Court’s description of materiality.2
  • In applying the materiality decision to qualitative and quantitative disclosures, an entity should evaluate whether there is a substantial likelihood that the omitted disclosure would have been viewed by a reasonable user as having significantly altered the total mix of information made available for deciding whether to provide resources to the entity.
  • If an entity does not provide a disclosure because it is immaterial, such omission is not an accounting error.

In addition, the Board tentatively decided that the disclosure section of each Codification subtopic (1) would state that an entity should apply materiality as described in ASC 235 in complying with the disclosure requirements and (2) would not use verbiage that precludes an entity from exercising discretion in determining what disclosures are necessary (e.g., “shall at a minimum provide”).

Editor’s Note: During the meeting, the FASB staff explained that on the basis of its discussion with the PCAOB and auditors during its field study, it understands that when disclosure requirements are written to include “if material” or other qualifying wording that permits discretion, an election by an entity not to provide a disclosure would be viewed as being in compliance with the standard because the entity has determined that the omitted disclosure is not material. Conversely, when there is verbiage that limits discretion (e.g., “shall at a minimum provide”), an entity that chooses not to provide a disclosure must evaluate the omission as an error; such error may be reported to those charged with governance if the omitted disclosure exceeds the “clearly trivial” threshold, which is much lower than the financial statement materiality threshold.

The Board’s tentative decision to remove such “at a minimum” wording would be significant because as a result of its elimination of immaterial disclosure errors, disclosures would be required only if they are material. Accordingly, if a disclosure is not provided for an immaterial item, the omission would not constitute an error under U.S. GAAP regardless of whether the omitted disclosure exceeds the clearly trivial threshold.

Jurisdictional Differences in Materiality

Notwithstanding the Board’s previous decision at its November 19, 2014, meeting that materiality is a legal concept that varies by jurisdiction, the Board tentatively decided this week that its conclusions about discretionary verbiage as discussed above, which are based on the U.S. Supreme Court’s description of materiality, are applicable in all jurisdictions where entities apply U.S. GAAP. Thus, all entities applying U.S. GAAP would need to be knowledgeable of the U.S. Supreme Court’s views on materiality.

Minimum Disclosures

The Board tentatively decided that when setting standards related to disclosures, it would not need to consider both a minimum and an expanded set of disclosures. In addition, the FASB decided that it will take an inventory of the proposals in its existing projects to see which ones contain minimum disclosure requirements.

Editor’s Note: Providing for both a minimum and an expanded set of disclosures was among the items most favored by stakeholders that responded to the Board’s invitation to comment. However, this item may be less important in light of the Board’s previous tentative decision to require a disclosure only if it is material. Further, the concept of minimum and expanded disclosures may be difficult for the Board to apply in practice given the judgment involved in determining a minimum (i.e., what is always material), especially since nearly any disclosure could be relevant depending on considerations such as the entity, the financial statement user, and the economic cycle.

Fair Value Measurement Disclosures

Objective for Fair Value Measurement Disclosures

Providing a disclosure objective based on the decision questions for the Board in its proposed concepts statement3 could help preparers fully meet fair value disclosure requirements by enabling them to assess whether a given disclosure should be enhanced in light of the particular facts and circumstances even though the disclosure may already meet the rigid disclosure requirements. The Board tentatively decided that the following objective as stated in the tentative Board decisions should be added to ASC 820 to help preparers use discretion in complying with the disclosure requirements:

The objective of the following disclosures is to provide users of financial statements with information useful in assessing the following:
a. The different ways an entity arrives at its measures of fair value, including the judgments and assumptions that the entity makes
b. The effects of changes in fair value on the amounts reported in financial statements
c. The uncertainty in the fair value measurement of assets and liabilities
d. How fair value measurements change from period to period.


Industry-Related Topics

As explained in the meeting handout, the industry topics in ASC 905 through ASC 995 “could be used to make [fair value] disclosures more targeted [to reporting entities in specific industries] and reduce costs to reporting entities outside of those industries.” For example, certain fair value disclosure requirements may be more applicable to entities in the financial services industry and thus can be located in ASC 940 through ASC 948 so that other entities do not need to provide disclosures that may be less relevant to them. Accordingly, the Board directed its staff to determine which existing disclosure requirements in ASC 820 may be more relevant to financial institutions than to other entities and indicated that such determinations will be evaluated at a future meeting.

Editor’s Note: Locating certain disclosure requirements in industry-specific topics may be a viable alternative for fair value disclosures. However, the Board acknowledged that this approach may not be possible for most other disclosure requirements because of their broad relevance (e.g., stock compensation and pension disclosures).

Next Steps

At the next Board meeting, the FASB staff expects to discuss ASC 820 disclosures on the basis of its disclosure review.


1 For titles of FASB Accounting Standards Codification (ASC or the “Codification”) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

2 PCAOB Auditing Standard No. 11, Consideration of Materiality in Planning and Performing an Audit, explains that “[i]n interpreting the federal securities laws, the Supreme Court of the United States has held that a fact is material if there is ‘a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ As the Supreme Court has noted, determinations of materiality require ‘delicate assessments of the inferences a “reasonable shareholder” would draw from a given set of facts and the significance of those inferences to him’ ” (footnotes omitted). The FASB further explained at the Board meeting that the Supreme Court’s description of materiality is broad and applicable to all U.S. federal court interpretations and rulings.

3 FASB Exposure Draft, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements.

Disclosure framework — FASB makes tentative decisions about flexible disclosure requirements and fair value disclosures Image

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