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Friday, November 30, 2012

Analysts split Regarding FASB's Continuing Development of Disclosure Framework

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        NORWALK, Conn.--Some analysts on the Financial Accounting Standards Board’s Investors Technical Advisory Committee Nov. 29 said the board should not continue developing its disclosure framework project but instead should focus on completing its project on financial statement presentation. 
        The viewpoint was not unanimous among ITAC members, but could be perceived as ironic considering that the idea of the project came out of ITAC several years ago. Key, some ITAC analysts believe, is that the FASB first needs to address financial statement presentation, a project that is currently suspended, ITAC member Dane Mott explained to the board. 
        Mott said that when the idea regarding a disclosure framework project emerged from ITAC, the project on financial statement presentation was still on the FASB’s joint Memorandum of Understanding with the International Accounting Standards Board and they expected it to have been completed in 2011.
    The FASB in July issued a discussion paper, Invitation to Comment – Disclosure Framework, with an original comment deadline set for Nov. 16. That date was extended however to Nov. 30 as a result of Hurricane Sandy. To date, the board received 53 comment letter responses, according to its website. 
First Fix Financial Statements. 
    Mott, who is also an analyst in JP Morgan Securities Inc.’s U.S. Equity Research—U.S. Accounting & Valuation division, stated that the board first needs to fix debits and credits and reform basic financial statements to reflect the current economy and the way users are using financial statements. “We believe that we can have a much more coherent discussion after that with how to pursue a disclosure framework,” he said. 
    He stated that some of the issues that play into this viewpoint have to do with technology. “Given that the technology is changing so quickly and given that XBRL is very much in its early stages and we haven’t really seen its potential yet, we think not only is there a benefit of waiting to do this project until after financial statement presentation is completed, but we also believe that there’s benefit also for the board to take a step back to look at how the technology changes,” said Mott. 
    “Then use those insights about how the technology is changing to give them insights about how they should be pursuing their work,” he said.
Mott also pointed out other challenges about the disclosure framework project such as: it does not address MD&A. “If we’re dealing with redundant disclosure that’s going to be big part of it,” he said.
Some in Favor of Continuing the Project. 
    Among those in favor of proceeding with the project, were those who felt the development of a disclosure framework would promote consistent decisions of standard setting about disclosure requirements.  They believe that the application of those requirements by companies would be valuable to financial reporting. 
    "[Some ITAC members believe] that a disclosure framework that focuses on principles that address incomplete or missing disclosures rather than on reducing disclosure volume, will likely result in disclosures that provide enhanced information to users," said Standard and Poor’s managing director Joyce Joseph, also an ITAC member. 
    As a result, said Joseph, the ITAC supporters subscribe to a disclosure framework that consists of all three of the following tiers:
• Tier 1: a disclosure set that is principally composed of roll forwards and disaggregation of line items in the primary financial statement
• Tier 2: disclosures based on existing requirements and recommendations established in U.S. GAAP, with the decision questions as presented in the discussion paper, used for promulgating new and changing disclosure requirements going forward
• Tier 3: disclosures that go beyond those set out in Tiers 1 and 2 that the company deems are necessary on the basis of relevance and materiality for users to better understand the financial performance, position, cash flow prospects and risk of the entity. 
    “We do believe that relevance and materiality should be elevated to U.S. GAAP, that is, relevance and materiality concepts are well defined in the conceptual framework in [Conceptual Framework] 8 specifically, we believe that there is an opportunity here to bring this into authoritative literature and also allow auditors the ability to audit this as well under US GAAP,” Joseph said.
Other suggestions. 
    The board should also expand the scope of the project to include the notes of the financial statements, said Joseph. “Financial statement users analyze information in the annual report as a whole, including information contained in the MD&A and of course the financial statements themselves,” she said.
By Denise Lugo 
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