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Disclosure Framework American Accounting Association Financial Accounting and Reporting Section February 23, 2011 Akwasi A. Ampofo, FASB Project Manager Phil Shane, FASB Academic Fellow. Disclaimer. The views expressed are my personal views and do not represent positions of the FASB.

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Disclosure FrameworkAmerican Accounting AssociationFinancial Accounting and Reporting SectionFebruary 23, 2011Akwasi A. Ampofo, FASB Project Manager Phil Shane, FASB Academic Fellow


Disclaimer
Disclaimer

The views expressed are my personal views and do not represent positions of the FASB.

Positions of the FASB are arrived at only after extensive due process and deliberations.


Content outline
Content Outline

  • Background to disclosure framework project

    • Agenda decision

    • Pozen Committee (CIFR) recommendation

    • ITAC proposal

  • Project objectives

  • Project timing

  • Key project issues

    • Disclosure categories/framework

    • Disclosure principles

  • Expected outcomes

    • Questions for roundtable participants

  • Q&A


Background agenda decision
Background – Agenda Decision

  • Added to FASB’s agenda on July 8, 2009.

  • Response to:

    • ITAC’s December 2007 proposal for a “principles-based” disclosure standard

    • Recommendations of SEC’s Advisory Committee for Improvements in Financial Reporting (CIFR) August 2008

    • CIFR also called Pozen Committee.


Background cifr recommendation 1 2
Background - CIFR Recommendation 1.2

  • The SEC and the FASB should work together to develop a disclosure framework to:

    • Integrate existing SEC and FASB disclosure requirements into a cohesive whole to ensure meaningful communication and logical presentation of disclosures based on consistent objectives and principles.

    • Require disclosure of the principal assumptions, estimates, and sensitivity analyses that may impact a company’s business, as well as a qualitative discussion of the key risks and uncertainties that could significantly change those amounts over time.


Background itac s proposal
Background - ITAC’s Proposal

  • Principles-based framework to be used for disclosures in U.S. GAAP that would articulate the types of disclosure necessary for significant financial statement items.

  • Envisions information presented in three predominate areas:

    • General – outlining the basis of presentation for a particular financial statement line item

    • Composition – outlining the composition of line items and analysis of changes period over period for material line items

    • Assumptions and Uncertainties – outlining principal assumptions, estimates, sensitivity analyses, and a qualitative discussion regarding risks and uncertainties and the potential of the amounts to change over time.


Project objectives
Project Objectives

  • Establish overarching framework to make financial statement disclosures more effective, coordinated, and less redundant.

    • Staff disclosure categories/taxonomy

    • Disclosure principles

    • Elimination of certain disclosures

  • Seek ways to better integrate information disclosed in:

    • Financial statements and notes

    • Management’s discussion and analysis (MD&A)

    • Other parts of a company’s public reporting package.


Project timing
Project Timing

  • Ongoing activities

    • Research and education

    • Informal outreach

  • Activities to be done at a future date (TBD)

    • Discussion paper

    • Exposure draft

    • Final guidance

  • Staff is currently working on developing disclosure categories using an iterative, inductive “bottoms-up” process


Expected outcomes
Expected outcomes

  • Under discussions… some viewpoints

  • Immediate expected outcomes:

    • U.S. GAAP disclosure categories and principles of required disclosures guidance

    • Elimination of unneeded disclosures

    • Conceptual criteria for the Board to use in requiring disclosures?

  • Other “possible” long term outcomes

    • Better coordination with SEC/PCAOB to minimize redundancies in disclosures

    • Quality reviews of disclosures by SEC/others


Key project issues
Key Project Issues

  • Disclosure categories or framework

  • Relevance and materiality of disclosures

    • Criteria for required disclosures

  • Disclosure overload and how/why to eliminate which disclosures.

    • Minimizing unnecessary repetition between MD&A and footnote disclosures

  • Public versus private company and not-for-profit impact

  • Other issues (e.g., convergence, regulatory and legal impact, proprietary costs etc)


  • Staff disclosure categories draft
    Staff disclosure categories (draft)

    • Category 1: Description of accounting policies, accounting estimates, and the reporting entity

    • Category 2: Description of relevant business processes and activities, including significant terms of material transactions, events, and conditions

    • Category 3: Disaggregation of material accounts using component and roll-forward analysis

    • Category 4: Measurement basis, alternative measures, and measurement uncertainty analysis

    • Category 5: Analysis of risks and uncertainties of future cash flows.

    • Category 6: Disclosures that do not fit into categories1 to 5


    Observations on disclosure categories
    Observations on disclosure categories

    • Board and staff working on disclosure principles

    • Categories are not final; still under discussions

    • Categories are not a checklist and not every category applies to every entity

    • Do we need additional categories for disclosures that do not fit into categories 1 to 5?

    • Need to differentiate between risk and uncertainty, including categories 4 and 5

    • Develop disclosure principles as a set of instructions for preparers and the Board on the circumstances under which to disclose or require specific categories of disclosures

    • What disclosures should be eliminated and why?


    Barth and murphy study 1994
    Barth and Murphy Study 1994

    • Framework which categorizes, summarizes, and analyzes required financial statement disclosures according to the purpose of the disclosure

    • Identified 17 specific purposes belonging to 6 primary groups of disclosure categories.

    • Study found that :

      (1) The most frequently required disclosures relate to amounts recognized in the financial statements, particularly to disaggregating them and providing relevant measures other than the measure in the financial statements—disaggregation of recognized amounts represents 26 percent of all required disclosures.

      (2) Six subjects—stockholders' equity, leases, pensions, income taxes,

      other postretirement employee benefits, and commitments and contingencies—account for 43 percent of all required disclosures; five standards—SFAS 13, 87, 88, 106, and 109—account for 28 percent.

      (3) Few disclosures explicitly provide information on future cash inflows or outflows.

      (4) Few disclosures provide measures of unrecognized items.

      (5) Increased disclosure requirements over time with few disclosures eliminated.



    Questions for roundtable participants
    Questions for Roundtable Participants

    Q1. How could the FASB staff’s disclosure categories be improved? What is missing?

    Q2. Can the Board and staff derive principles of disclosures (deductive) from the categories of disclosures (inductive)? If yes, explain.

    Q3. How would you differentiate between categories 4 and 5 of FASB staff disclosure categories? That is, what is the difference between risk and uncertainty regarding disclosures?

    Q4. Do you think creating a 6th category for disclosures that do not fit into categories 1 to 5 is appropriate? Why or why not?

    Q5. Do you have any suggestions to reduce disclosure overload in financial reporting?

    Q6. What additional feedback would you provide to the disclosure framework project team?



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