FASB Proposes Disclosure Framework

This blog post was submitted and written by the NCACPA Accounting & Attestation Committee.

FASB recently issued a proposed Concepts Statement aimed at improving its process for evaluating future and existing disclosure requirements for the notes to financial statements. Comments are due by July 14, 2014.

Key Facts

  • The proposed Concepts Statement would be non-authoritative U.S. GAAP guidance.
  • The proposed framework is not intended to be used by companies in their decision process; specific guidance for companies on evaluating disclosures will be issued separately as a later part of the disclosure framework project.
  • The proposed guidance also addresses interim disclosure requirements.

Key Impacts

The proposed guidance is intended to provide a framework to help FASB:

  • Develop disclosure requirements that provide more useful and relevant disclosures for financial statement users; and
  • Be more consistent in developing disclosure requirements in new standards and in evaluating existing disclosure requirements.

Notes to Financial Statements

The information included in the notes to the financial statements should be relevant to capital providers and assist them when assessing cash flows of a reporting entity. The notes should contain information to assist decisions made by users about:

  • Financial statement line items;
  • The reporting entity; and
  • Past events and current circumstances that have not met the criteria for recognition that could affect an entity’s future cash flows.

Limitations of Notes to Financial Statements

While FASB wants to improve the effectiveness and consistency of disclosures in the notes to financial statements, it realizes that excessive disclosure can lead to less focus on important issues and create an undue burden on preparers. Three limitations about what information should be disclosed in the notes are included in the proposed Concepts Statement:

  • Information’s relevance to capital providers;
  • Cost constraint versus benefit; and
  • Whether providing future-oriented information may have a negative effect on cash flow prospects.

The proposed Concepts Statement acknowledges future-oriented information such as future cash flow assumptions used in a fair value calculation may help users assess the entity’s results and future cash flow prospects by comparing those assumptions to their own. The proposed Concepts Statement suggests there are risks in some circumstances of providing future information that couldresult in future litigation or consequences if the actual results materially differ from the guidance provided and those risks should be evaluated in setting disclosure requirements.

Not-for-Profit Entities

The proposed Concepts Statement discusses whether the framework and related decision questions should apply to not-for-profit entities. Their financial statement users also are interested in cash flow assessments and the entities’ ability to provide services. However, some not-for-profit entity financial statement users such as donors may have different needs than a lender or owner in a for-profit entity. FASB indicated that it will consider donor-specific items when addressing disclosure requirements impacting not-for-profit entities.

Employee benefit plan financial statements are not in the scope of the proposed Concepts Statement.