FASB-CAQ Forums Examine Notes to Financial Statements as Part of Disclosure Reform

FASB and the Center for Audit Quality issued a summary of observations from two forums on the effectiveness of disclosure. The forums keyed on FASB's Invitation of Comment, Disclosure Framework, which outlines possible approaches to improving the effectiveness of disclosure in the notes to financial statements. Forum participants provided insight and feedback on a number of topics, including the role of the notes, streamlined disclosure in the current environment, the prescriptive nature of current accounting guidance, and the overlap of notes and Management’s Discussion and Analysis (MD&A). PCAOB Chief Auditor Marty Baumann was a forum participant, as well as former SEC Chief Accountant Don Nicolaisen, and former FASB Chair Robert Herz.

Many participants voiced general support for the FASB’s ITC as a good starting point for discussing disclosure effectiveness. Many also noted that it would be difficult to maximize financial statement disclosure effectiveness without also considering SEC disclosure requirements

and presentation of information in the primary financial statements. Many participants also thought that providing flexibility in future disclosure requirements could significantly improve disclosures, although there was diversity in views on how to achieve such flexibility.

Regardless of the manner in which the preparer would carry out its decision making, many participants gravitated toward the idea of always providing a minimum set of disclosures that would allow users to compare entities on some uniform basis.

While some participants generally supported relevance as an appropriate criterion for determining which disclosures to provide, others indicated that, because relevance has not been used as a basis for reporting entities’ decisions, it might be more confusing to use relevance instead of the term materiality, which is already familiar to preparers. The language in the ITC that a disclosure would be relevant if it “could be useful to investors’’ was considered too broad and too low a threshold.

Participants generally favored using “would be useful” instead of “could be useful.” Moreover, while many participants did not favor using a new term in describing how to identify appropriate

disclosures, some stated that a clear explanation of how relevance differs from materiality is necessary if that term is used.

There was some discussion on the overlap of disclosures relating to future returns and other forward-looking information in the notes and in MD&A. Participants also discussed the differences between disclosures in MD&A and financial statements, noting that the former may be subject to forward-looking statement safe harbors and the latter are audited. Some participants at both forums encouraged the SEC and the FASB to agree on where a particular disclosure should be presented and only require it once. However, a minority of participants felt that MD&A and the notes should each stand on their own, and opposed cross-referencing.