The entire FASB process is one big
cost-benefit analysis, said FASB Chair Leslie Seidman in addressing the intense
focus being placed on the cost-benefit analysis conducted by regulators and
standard setters. In remarks at the Compliance Week Annual Conference, Chairman
Seidman said cost-benefit analysis is not a discrete exercise that FASB staff undertake
at the end of the process. Rather, every step in FASB’s due process is an
effort to gather information about the benefits of a potential change in
accounting standards and identify the most faithful way to present information
about a transaction or economic condition so that users of financial statements
can make well-informed decisions. On a separate topic, the Chair said FASB is
developing a disclosure framework to improve the quality of the information
being disclosed and make financial statements more understandable.
Regarding cost-benefit analysis, Chairman
Seidman explained that FASB’s due process involves collecting information about
the costs of providing new or different information, including the cost of
understanding the requirements, developing systems to collect and process new
information, the cost of training people, and the cost of auditing the
information. The assessment of costs and benefits is unavoidably subjective, she
noted, until investors have experience using that new information. Similarly, until
a company has actually adopted a new standard, cost is based on imprecise
estimates, even in a well-constructed and broad-based field test.
Nonetheless,
throughout the process, FASB staff use a variety of techniques to gather robust
data about both the expected benefits and the expected costs, including academic research about how investors are
using or adjusting information, meetings with preparers, auditors, users, and
regulators, comment letters, surveys, roundtables, and meetings with the Board’s
advisory groups. FASB also conducts many forms of field work, noted the Chair, during
which companies are asked to consider possible alternatives and comment on the
relative costs and the faithfulness of presenting the information in particular
ways.
Moreover, FASB is constantly evaluating ways to improve
its processes. For example, FASB has experimented
with a few new techniques, including an electronic feedback form on Exposure
Drafts, investor road shows, and workshops to discuss specific provisions with
preparers, users, and auditors.
On the issue of disclosure overload, Chairman
Seidman noted that FASB is developing a disclosure framework to improve disclosure
quality and make financial statements more understandable. She emphasized that
the purpose of this project is to improve disclosure effectiveness, not to
single-mindedly reduce disclosure volume. In the coming weeks, FASB will issue
for public comment a Discussion Paper addressing three different areas affecting
disclosures.
First, the framework will help the Board
establish consistent disclosure requirements that focus on what is most
important to most users. Second, the framework will explain how the reporting
entity should evaluate which disclosures are needed under different circumstances
at different times, including determining when it is appropriate to exclude particular disclosures. More
specifically, there appears to be an opportunity for entities with limited
exposures in particular areas to reduce the volume of their notes, such as a
small, frozen pension plan that is still the subject of pages and pages of
disclosure. According to the FASB Chair, eliminating the clutter of immaterial
disclosures can help users find and focus on more important information.
Third, the framework will explore ways to
emphasize the more newsworthy information and ways to make it easier for users
to find the information that they are most interested in. For example, the
notes would be more helpful if the information most likely to influence a
user’s decisions were emphasized in some way, for instance, through a better
ordering of the disclosures. Noting that some companies organize their notes in
the order in which the disclosures became effective, the Chair said there must
be a more logical order than that. Tying the financial statements to the notes
and vice versa could facilitate a user’s analysis of the information.
The Discussion Paper also will invite
comments on the approach to interim disclosures and how to evaluate materiality
in the context of disclosures. The Board is aware that many people struggle
with how to apply the concept of materiality to disclosure items. If an item is
material in a financial statement, queried the Chair, must every prescribed
disclosure about it be provided, even if some of that information is immaterial. On the other hand, she asked if
a preparer can afford to omit immaterial information when they are likely to
spend more time explaining to an auditor, investor, or regulator why it was
omitted. The Chair called this phenomenon “defensive disclosure.” While she understands
why companies do it, the FASB Chair believes that it contributes greatly to
disclosure overload and ineffectiveness.
Once FASB confirms the basic elements of the
disclosure framework, the Board will undertake a review of existing disclosure
requirements. Because one of the known issues is perceived overlap between the
GAAP footnotes and MD&A, the Board will work cooperatively with the SEC
staff. In fact, the topic of disclosure effectiveness is being contemplated for
an upcoming meeting of the Financial Reporting Series, a roundtable including
representatives of the SEC, the FASB, and the PCAOB, as well as participants
from the financial reporting community.
Chairman Seidman said that the Board is thinking
strategically about disclosure requirements based on the key principles
underlying the draft framework. For example, on the revenue recognition
proposal, the Board heard diverse views from preparers who said the disclosure
requirements were excessive and investors who strongly supported the proposed
disclosures. The Board plans to hold a special workshop this Fall that will
include both preparers and users to work through the proposed requirements and
to try to provide the information that users are seeking, but perhaps with
greater focus and efficiency.