Fine-tuning financial statement disclosures.

• Author: Wells, Mark W.
• Position: Report

Private companies have to walk a fine line to meet the disclosure requirements of U.S. generally accepted accounting principles--without providing too many details--while providing enough information for bankers and other financial statement users.

It is no secret that the world of financial reporting grows more difficult by the day. There is a fine line private companies must walk to meet the disclosure requirements of U.S. generally accepted accounting principles--without providing too many details--while providing enough information for bankers and other financial statement users.

Thus, what follows is a quick refresher on some of the common issues in preparing general financial statement disclosures. These recommendations are designed to save financial executives time and--ultimately--compliance headaches. For purposes of this article, general disclosures in financial statements are defined as "frequent disclosures that do not relate to a financial statement caption or that relate to several captions, such as related parties."

The recommendations here concern several specific disclosures (though not all) that may cause problems, and ways to avoid them.

Employee Benefit Plans

Required disclosures for defined benefit plans. U.S. GAAP affects employers that sponsor one or more defined benefit pension (DB) plan or other defined benefit postretirement plans. Disclosures about DB pension plans cannot be combined with disclosures about defined benefit postretirement plans, except for certain multiemployer plans.

However, an employer with two or more DB plans may combine the disclosures for all of the employer's plans and separately combine the disclosures for all of the employer's defined benefit postretirement plans.

Required disclosures for defined contribution plans. Employers must disclose the cost recognized for all periods presented for defined contribution (DC) pension plans separately from the cost recognized for DB plans. The disclosures must describe the nature and effect of any significant changes during the period affecting comparability (e.g., a change in the rate of employer contributions, a business combination, or a divestiture).

* RECOMMENDATION: Even though U.S. GAAP does not require general descriptive information to be disclosed (e.g., employee groups covered, type of benefit formula, types of plan assets held and funding policy about DB or DC plans), employers should strongly consider such disclosures because that information is often useful to financial statement users.

Restrictive Debt Covenants

Loan agreements often contain several complicated restrictive covenants. If the borrower does not comply with the requirements, a default will occur and the debt will be callable by the lender...