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What's On Tap for FASB's Disclosure Forum

by Edith Orenstein

Initiatives to improve, enhance and simplify company disclosures appear to be kicking into high gear, with the announcement of an upcoming FASB Forum on Disclosure.

Last week, the Financial Accounting Standards Board (FASB) announced plans to convene a Forum on Financial Disclosure on December 1. According to FASB's announcement, the forum,“is designed to provide an opportunity to engage in a constructive dialogue regarding the current state of financial disclosure and some of the current efforts that are underway to improve the effectiveness of such disclosures.”

With "efficiency" and "effectiveness" generally going hand-in-hand, presumably the forum will also address calls for simplification and reducing complexity in financial reporting, a subject near-and-dear to the heart of FASB Chairman Russell Golden, identified as a major goal in this speech speech and others.

Disclosure Initiatives at FASB, SEC, IASB

Depending on who is selected to share in this “constructive dialogue,” hard hats typically used at construction sites may be necessary. Calls for disclosure reform – by other names: simplification, streamlining – have been running around for some time now.

To their credit, leadership at FASB and the U.S. Securities and Exchange Commission have recognized the need to look at reducing complexity with an eye toward simplification in their respective disclosure projects, although the primary aim of those projects is to improve disclosure for investors.

Some may remember the Pozen Committee (aka the SEC Advisory Committee on Improvements to Financial Reporting), chaired by Robert Pozen, which issued recommendations to the SEC, FASB and the Public Company Accounting Oversight Board (PCAOB) on reducing complexity and other improvements to financial reporting.  Coincidentally, the senior staff supporting the Pozen Committee included then-SEC Chief Accountant / now FASB Vice Chairman Jim Kroeker, and then-FASB Technical Director / now FASB Chairman Russell Golden. The current initiatives may in part be seen as an outgrowth of that committee, formed at the recommendation of Financial Executives International and others to combat complexity.

Other voices calling for simplifications and improvements in financial reporting have included the report of the Blue Ribbon Committee on Private Company Reporting, which served as the catalyst to form FASB's Private Company Council (PCC).

The PCC’s role in the disclosure debate is pivotal. Private companies argued for decades that some of the highly complex recognition, measurement and disclosure requirements they were subject to had little revelance for the users of their financial reports, yet they were subject to the GAAP same requirements driven largely by public company ‘users’ of financial reporting, particularly public company analysts and others with an interest in public company reporting, including the SEC. The PCC’s group of experts, working closely with the FASB board and staff, have developed alternative treatments under GAAP that aim to retain the meaningful information in private company financial reports, while allowing for less costly and complex methods of reporting and disclosure, where the benefits (simpler presentation, less time and resources consumed in financial reporting) would essentially exceed the costs (change in information available to investors).

In a speech last year, FASB Chairman Russell Golden indicated simplifications formulated by the PCC may lead to simplifications for public company reporting as well, noting, "The FASB's collaboration with the PCC will help the FASB identify aspects of GAAP that might be streamlined for all companies -  both public and private – as well as for not-for-profit organizations.  In a sense, the PCC process represents the first step in simplifying all accounting."

Separately,  Congress called for review of the public company disclosure regime, prompting the SEC Division of Corporation Finance to publish its Dec. 20, 2013, Report of Review of Disclosure Requirements in Regulation S-K, leading to SEC's Disclosure Effectiveness Initiative.

SEC’s's Disclosure Initiative

SEC Chair Mary Jo White has thrown her support behind the Commission's disclosure initiative, calling on the Division of Corporate Finance to "begin an active review of our disclosure rules," as noted in remarks at the Securities Regulation Instiute Jan. 17, 2014 speech. Those remarks built on White's earlier remarks to the NACD in October, 2013, entitled The Path Forward on Disclosure.

Calling for "staff to seek input from issuers, investors, and other market participants in 2014 as part of this effort," White stated at the start of this year, "The ultimate objective is for the Commission to improve the disclosure regime for the benefit of both companies and investors." Keith Higgins, Director of the SEC's Division of Corporation Finance, has spoken on this project as well; see our earlier posts, SEC Looks at Changing Audit Commitee Reports, and Higgins Frames SEC's Disclosure Project.

Fast forward to this fall. In a speech entitled, Shaping Company Disclosure, Higgins emphasized the need for a ‘principles-based’ approach, talked about calls from some quarters to potentially remove the requirement to include the third prior year in MD&A comparative information - if investors would not miss that third year currently provided for comparative purposes, and indicated the staff may consider the role of, and possibly reducing 'industry specific' guidance vs. general guidance.

“If the goal of disclosure is to put material information into the hands of investors” said Higgins, “it seems axiomatic that what is material — and therefore what must be disclosed — must be viewed through the eyes of the reasonable investor. After all, the reasonable investor is a bedrock concept in federal securities regulation.”

However, ‘materiality’ is not a hard-stop in determining disclosures, as the Corp Fin Director continued. “[A]lthough the reasonable investor is a useful standard for liability purposes, our disclosure system does not specify that companies provide only material information. In fact, the Commission has rulemaking authority to require the disclosure of information “necessary to carry out the provisions” of the federal securities laws."

Another voice frequently heard from at the SEC on disclosure reform - and specifically disclosure overload, is Commissioner Dan Gallagher. In a wide-ranging speech entitled, Whatever Happened to Promoting Small Business Capital Formation, Gallagher made numerous recommendations that he believed the SEC should consider, to boost the ability of small companies to raise capital. Among those recommendations, he included,  “I hope that as part of the Division of Corporation Finance’s examination of disclosure effectiveness—or, as it used to be called, “disclosure overload”—Commission staff is examining which of our current disclosure rules could be scaled more effectively for smaller reporting and emerging growth companies.”

“I hope Corp Fin staff is giving serious attention to simplifying disclosure through this project, rather than treating it as largely confirmatory of our existing disclosure regime. There’s already a plethora of good ideas out there, we should move forward with them,” added Gallagher. [In related news, the SEC announced yesterday that its Annual Government Business Forum on Small Business Capital Formation will take place on November 20.]

Separately, BloombergBNA’s Richard Hill, citing remarks of Corp Fin Chief Accountant Mark Kronforst, reported earlier this month in SEC Accountant Says Disclosure Review Has Staff Considering Changes to EDGAR (subscription required), that the SEC is considering benefits of moving to a 'company file' approach.

According to BBNA’s Hill, "Such a system would replace the current platform for such reporting—EDGAR, which Kronforst characterized as “really just a digital filing cabinet,” and that. “We're thinking about [whether there are] ways to make it easier to consume the information.”

The SEC has called for input as it travels down the path of its Disclosure Effectiveness initiative; thoughtful commentary can be found in the comment letters sent to SEC.

Further background on the major disclosure initiatives under way can be found at: SEC’s Disclosure Effectiveness initiativeFASB’s Disclosure Framework project, and the IASB's Disclosure initiative.

The Time is Right: Seidman

FASB’s December 1 forum will take place at the Lubin School of Business, Pace University, home of the Center for Excellence in Financial Reporting (CEFR), led by former FASB Chairman Leslie Seidman.

“Disclosure Effectiveness continues to be a priority, and many organizations are separately taking steps to make

disclosures more helpful for investors, including the SEC, FASB, individual companies and auditing firms,” Seidman shared with FEI Daily.

I think the time is right,” said Seidman, to hold a forum to bring stakeholders together to share their plans and perspectives and keep the positive momentum going on this important issue. She added, “Pace University is honored to host this FASB Forum on Financial Disclosures.”

Seidman, the Executive Director of the CEFR, added that students and faculty will be invited to attend the forum “to observe the process at work.”  Members of the public interested in observing the forum are asked to register in advance. 

According to FASB Spokesman John Pappas, participants are currently being confirmed for the December 1 forum. “We plan to have participants and observers from auditing, preparer, user, law and regulator backgrounds, he noted.