I told a brand new PhD student here at The University of Texas, Greg Capps, about my regular blogging on the FASB disclosure project. He had an interesting story to tell me. He said…
“In my auditing days, perhaps the worst thing we did to a client was hand them the 250-page GAAP Disclosure Checklist and tell them we need them to fill it out by Friday. Of course, they would just ask for a copy of last year’s checklist and have one of their staff fill it out verbatim. That exchange is very indicative of what has been the general approach to disclosures for many years: there are an awfully lot of requirements, there isn’t necessarily a clear pattern, and a lot of disclosures will find themselves in financial statements for years after they were last relevant for an entity.”

The FASB Disclosure Project is an attempt to create a forest from the trees and in the process, change the view of disclosure from a compliance exercise to a more organic perpetual process of evaluating the relevance of information.

Born from investor comments that information overload and redundancy were reducing the usefulness of disclosures, the project officially began about 2 years ago. The project is still in the research phase and a discussion paper is still in the works (expected in Q4 of this year) so it is still a project with much plasticity. The high-level objectives could be seen as two sub-projects: to better coordinate disclosures through the development of guiding principles for disclosure and to reduce redundancy in annual reports by integrating MD&A information and footnotes.

For sub-project one, the approach to developing a framework has been an inductive one. The FASB started by classifying existing disclosures into categories of disclosures:
1.) Description of the entity, accounting policies and estimates
2.) Description of processes and significant conditions/events
3.) Disaggregation of accounts and roll-forward of balances
4.) Measurement basis and alternative measures
5.) Analysis of risks and uncertainties of future cash flows
6.) An “other” category for disclosures which do not fit logically in the previous categories

As of February, the FASB was still debating these categories but perhaps the bigger questions are how we get to principles from these general categories. One of the Board’s main objectives has been to point out that they do not want this to be a compliance exercise with a comprehensive list of disclosures. Not all disclosures will be applicable for every company but how do we develop principles that say when a disclosure is applicable? Ultimately, I think the goal would be a model where investors can provide feedback to a company about their disclosure quality and the company can adjust. This way, the application of principles can evolve naturally to meet the information relevance standards of various industries.

The second sub-project has the objective of reducing data redundancy within annual reports. There are a lot of contextual questions around this objective that may become clearer after a discussion paper is issued. How will the FASB work with SEC on reducing redundancy? Adding information to the footnotes from MD&A will raise questions of auditor responsibility (especially in the areas of value uncertainty and forward-looking information). The IASB has been tracking the project but will they move forward with one of their own? If so, they will have different governing authorities over information disclosed outside the financial statements (i.e. the SEC for US Registrants). How will this project interact with the currently deferred Financial Statement Presentation Project? Finally, one intriguing topic is how this project will be used with XBRL and other search technology. There are some great possibilities in this area.

The archived round-table from February 23 provides further details but it will be interesting to see the evolution of this project as it will undoubtedly be far-reaching.