The preparers and users of financial reports have long clamored for changes in disclosure requirements. Preparers complain of needing to provide excessive and irrelevant disclosures. Investors, of course, would always like to know a little more about where they are committing their money.
The Financial Accounting Standards Board (FASB), which establishes the disclosure standards that the U.S. Securities and Exchange Commission requires public companies meet, has generally been sympathetic to the plight of preparers.
But since the purpose of financial reporting is to protect and inform investors and other stakeholders, standards have generally tended to call for as much useful information as possible. Consequently, footnotes to 10-K filings have grown more than 28 percent in the past six years.
The diverging desires of preparers and stakeholders may have finally gone full circle and met each other in the dense, dark forest of footnotes. The disclosures in financial reports have become so plentiful that users now have a hard time finding what they need to know. Just ask anyone who has read through all 296 pages of Citigroup Inc.'s 2011 annual tome.
FASB RECOGNIZES DISCLOSURE PROBLEM
Recognizing the problem, FASB issued an Invitation to Comment last summer requesting input on a proposal to establish a framework that would help the board decide which disclosures to require and companies to decide which disclosures to provide.
With such a framework in place, the board might be able to weed out unnecessary disclosures from existing standards while avoiding them in future standards. The framework could also guide preparers through the litigious minefield of discretionary decisions about flexible requirements.
"The FASB's disclosure framework project is intended to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each company's financial statements," an FASB spokesperson said. "A sharper focus on important information has the potential to reduce the volume of disclosures in many cases without eliminating useful information, which benefits financial statement preparers, auditors and users."
The European Financial Reporting Advisory Group (EFRAG), which provides counsel to the European Commission on issues relating to International Financial Reporting Standards (IFRS), is working on a similar project. EFRAG and FASB are cooperating and consulting,...