FASB Seeks to Clear Up Misperceptions on Materiality Proposals

By Steve Burkholder

March 2 — Members of the Financial Accounting Standards Board suggested that the recent, relatively noisy debate over materiality in financial reporting stemmed from misunderstandings of the board's intent in two proposals—and that, in turn, FASB's words on the issue could have been clearer.

At their March 2 meeting, board members sought to clear up the readings among auditors and both preparers and users of financial statements that were set down in dozens of comment letters.

FASB also plans on roundtable discussions on the proposals in the mid-summer or early fall that would shed more light on the issues and the board's aims in a fairly broad project. The effort is intended to both promote “consistent decisions about disclosure requirements by the board” and encourage “appropriate exercise of discretion by reporting entities,” according to a FASB staff update on the disclosure framework project.

As an example of the latter aim, FASB aims to signal that companies would have flexibility in omitting immaterial disclosures.

Roundtable's Likely Broad Sweep

The roundtable talks planned for later this year likely will focus on topics beyond the headline issue of materiality, according to FASB discussions at the March 2 meeting. They would also take in four other topics that are part of the disclosure framework effort, of which the materiality discussions are a part.

The other topics are disclosures about post-retirement benefits; income taxes, including the controversial issue of repatriated earnings; inventory; and fair value measurement.

Debates Last Fall

Late last fall, investors and their advocates voiced concern over the FASB's proposed accounting standards change on assessing whether disclosures are material and in a related concepts statement on “qualitative characteristics of useful financial information.” Investors and other users of financial statements stated worries that useful information could be excluded from footnote reporting because of the definitional and related changes.

“I didn't mean it at all to be a change in practice. I thought this was a way to try to align it with the SEC and the PCAOB.”

For their part, auditors and companies disagreed with viewing materiality as a legal concept, as FASB proposed in its aim to better align financial reporting rules with guidance of the Securities and Exchange Commission and of the Public Company Accounting Oversight Board.

Russell Golden, FASB's chairman, said March 2, on the legal concept issue, “I didn't mean it at all to be a change in practice.

“I thought this was a way to try to align it with the SEC and the PCAOB,” Golden added.

The FASB chairman said he agreed with points made by fellow board member Thomas Linsmeier, who said, in part, that he viewed “materiality as a living concept” that could change over time by court, administrative or executive action.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at sburkholder@bna.com

To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com