Disclosure Framework

American Accounting AssociationFinancial Accounting and Reporting

Section

February 23, 2011

Akwasi A. Ampofo, FASB Project Manager

Phil Shane, FASB Academic Fellow

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.

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Disclaimer

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

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Content Outline

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.

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Background – Agenda Decision

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.

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Background - CIFR Recommendation 1.2

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.

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Background - ITAC’s Proposal

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

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Project Objectives

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

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Project Timing

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

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Expected outcomes

1. Disclosure categories or framework2. Relevance and materiality of disclosures

o Criteria for required disclosures

3. Disclosure overload and how/why to eliminate which disclosures.o Minimizing unnecessary repetition between

MD&A and footnote disclosures

4. Public versus private company and not-for-profit impact

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

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Key Project Issues

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

Staff disclosure categories (draft)

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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?

Observations on disclosure categories

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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.

# FASB staff taxonomy

Barth and Murphy (1994)

ITAC (2007)

1 Category 1: Accounting policies(1a) Accounting policies and basis(1b) Accounting changes(1c) Transition (new guidance)

Accounting policies(4a) Policies(4b) Effect of unusual transactions(4c) Effect of usual transactions on prior year

Generala. Accounting principles used and basis for selection

2 Category 2: Relevant business processes and activities

Economic situation(3a) Description of economic situation

General

3 Category 3: Disaggregation(3a) Component line items(3b) Roll forwards

Disaggregation(1b) Disaggregate item(2b) Disaggregate item(3a) Description of economic situation

Compositionb. Sufficient account detailc. Roll forward of activity

4 Category 4: Measurement basis and uncertainty(4a) Measurement basis(4b) Sources of inputs and assumptions(4c) Significant accounting estimates

Critical assumptions(1d), (2d) Assumptions(3d) Info for independent calculations(1c), (2c) Alternative measure(3c) Maximum amount(6) Info to help investors determine return on investment

Assumptions and uncertaintiese. Principal estimatesf. Basis for selecting assumptionsg. Risks and uncertainties of particular accounts

5 Category 5: FCF Risks and uncertainties (4a) Risks and uncertainties and risk management techniques(4b) Commitments, contingencies(4c) Other risks (e.g., concentrations, political/legal risk)

Future cash flows(5) Info about future cash inflows and outflows

Assumptions and uncertaintiesh. Best estimate of

commitments cash flows

i. Nature and magnitude of nonrecurring items

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Comparative Frameworks

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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Questions for Roundtable Participants

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Q&A