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Colleen Cunningham
Colleen Cunningham

Disclosures: A return to relevance

FASB hopes sharper focus on important information will result in reduced volume.

August 2, 2012
by Colleen Cunningham, CPA

Much has been written and debated about the growing complexity and technical demands of accounting standards, financial reporting, and disclosures. It has gotten to the point where many otherwise capable accountants are not confident that they can apply the new requirements without outside assistance from subject matter experts.

This is happening at a time when, in the financial reporting environment, there has been heightened sensitivity and attention given to accounting and financial reporting. Users of financial statements have also expressed concerns with the volume of information required to be disclosed—it makes it difficult for them to discern what is really relevant and important to an individual company. They can’t adequately decipher what factors really drive the company’s performance.

Over the past 15 years or so, we have seen many new rules (pensions, fair value, etc.) that are unduly complex—essentially impeding, rather than improving, the ability of preparers to provide relevant and transparent information. Recently issued accounting standards are not always reflective of the current conceptual framework, but rather rely on changes to the conceptual framework that have not yet been proposed, let alone finalized as “generally accepted.” Why not make the conceptual framework project a priority?

I believe that the reason that the FASB and the International Accounting Standards Board convergence activity has been so difficult is because they failed to prioritize converging their separate conceptual frameworks. How can they come to converged standards, when the concepts upon which they are based are not in alignment? Similarly, with respect to the “complexity conundrum,” if FASB addressed the inconsistencies and issues with the current conceptual framework before it tackled new standards, perhaps the simplification goal could be more easily achieved.

No doubt, the growing complexity of business transactions adds to the challenge of trying to develop accounting standards. Additionally, the litigious environment creates the need for preparers and their auditors to seek additional guidance to ensure that they are “doing the right thing.” Essentially, they are asking for more prescriptive requirements that may or may not be relevant to each company.

The topic has also been discussed in congressional committees. I testified on this topic in 2006. And the topic was prominent in the final 2008 report from the SEC’s Advisory Committee on Improvements to Financial Reporting.

FASB, for its part, recently issued an invitation to comment on its disclosure framework project. The objective and focus are to improve the effectiveness of disclosures in notes to financial statements, clearly communicating the information that is most important to users of each company’s financial statements. While the goal is not to reduce the volume of disclosures, FASB hopes that a sharper focus on important information will result in reduced volume in many cases. Current disclosure requirements do not address specific companies, and companies aren’t generally permitted to use discretion and judgment in determining which disclosures are important to them.

This has created a constant flow of new, additional requirements, without any reduction in previous disclosure requirements. For example, investors frequently ask for specific disclosures, particularly when there is a business downturn, or an increase in risk. Preparing financial statements has become an exercise in compliance rather than in communicating useful information. The invitation to comment outlines specific options to improve the effectiveness of disclosures by providing more flexibility to include only relevant information to investors. This is an interesting concept—but one that may be difficult to apply in our litigious environment.

The FASB project addresses only part of the problem, though: the base financial statements and footnotes. For SEC registrants, there are many other requirements, including management discussion and analysis (MD&A). Many have cited the repetition of requirements in the MD&A and the footnotes as one of the primary issues with the growing volume of disclosures and complexity. Additionally, the SEC has been essentially adding to the disclosure burden through its issuance of “Dear CFO” letters to companies. These letters have been issued on emerging topics to ensure that companies are disclosing items that the SEC believes are relevant.

In 2008, the SEC announced the formation of the 21st Century Disclosure Initiative. In 2009, the Initiative issued a report describing a modernized disclosure system and recommended future SEC action for a transition to the new system. The proposed new system would use new technology to collect, manage, and provide disclosure information that is intended to be dynamic, accessible, and easier to use. Unfortunately, the SEC has been inundated with new regulatory requirements (Dodd-Frank, etc.), and dealing with the financial crisis — so this project has had very little recent activity.

I would encourage the SEC to reinvigorate that project. I also encourage all stakeholders to be part of the solution by taking the time to read and comment on FASB’s discussion paper. Comments are due Nov. 16. This is a great opportunity to provide feedback on how we might begin to simplify financial reporting.


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Colleen Cunningham, CPA, is global managing director of finance and accounting at Resources Global Professionals, a financial reporting consulting firm. Cunningham, the former chief executive of Financial Executives International, also has served as a member of the standards advisory committees of both FASB and the International Accounting Standards Board.