The Financial Reporting Executive Committee (FinREC) of the American Institute of CPAs submitted a comment letter to the Financial Accounting Standards Board (FASB) on Dec. 11, 2012 agreeing with the stated goals of the Board’s July 12, 2012, Invitation to Comment (ITC), Disclosure Framework, but raising “significant concerns” that “need to be addressed before this framework could be operationalized by the Board and its constituents.”
The FinREC letter said that “a sound disclosure framework has the potential to yield several benefits to financial statement stakeholders, including more effective communication of information relevant for the decisions those users confront, coupled with the elimination of redundant or irrelevant information from the statement notes.”
FinREC outlined the two proposed decision processes in the ITC. One would be used by FASB in deciding whether to require certain disclosures in a proposed standard, and a second would be used by reporting entities in deciding when to include a specific disclosure in the periodic financial statements.
“As acknowledged by the Board, these two decision processes can be quite different,” FinREC said. “The Board’s decision process, for example, is intended to serve the informational needs of the user community in general, whereas the reporting entity’s decision process is more focused on the relevance and materiality of company-specific transactions and events. Presumptive conclusions about relevance and materiality guide the Board’s decisions about whether certain disclosures are required or recommended, and each reporting entity is then challenged to assess disclosure relevance and materiality given their particular facts and circumstances.”
“We believe that a proposed disclosure framework must clearly distinguish the principles applicable for use by the Board in determining the scope and content of financial statement notes and those principles applicable to preparers in determining how to comply with the Board’s disclosure guidance,” FinREC said in its letter.
Consequently, the letter said, “FinREC recommends that both the Board’s decision framework and the reporting entity’s decision framework be more concise, purposeful, and concrete in specifying the objectives of financial statement note disclosures and in providing a clear path to achieving those objectives. The Board states in the Invitation to Comment that the objective is to improve effectiveness by clearly communicating information that is most relevant to users. However, we do not find in the document a clear understanding of how this objective would be met. That is, what principles should the Board and a preparer use in assessing compliance with the objective?”
FinREC encouraged FASB to continue to reach out to stakeholder groups – especially preparers, auditors, and users of financial statements from private entities and entities in specialized industries – to better understand how the framework might be modified and used in those situations as it further develops the disclosure framework.
More information about the ITC is available on the FASB website.