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Materiality and Disclosures: FASB Decides to Maintain the Status Quo

by Ricardo Martinez

On March 21, the Financial Accounting Standards Board (FASB) abandoned plans to 1) amend the definition of “materiality” and 2) give businesses more discretion when determining what to include in their financial statement footnotes. These projects have officially been removed from the FASB’s active agenda―for now.

Defining “materiality”

After many years of research and debate, the FASB decided to return to the concept of materiality outlined in Statement of Financial Accounting Concepts (CON) No. 2, Qualitative Characteristics of Accounting Information. CON No. 2 defines materiality in the context of “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.”

The FASB said this tried-and-true definition aligns with the concept used by the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB) and American Institute of CPAs (AICPA).

FASB member Christine Botosan said that when it comes to defining materiality and providing guidance on how materiality should be applied in a set of given facts and circumstances, she doesn’t view that as the FASB’s role. Instead, she sees that as the role of practice, the courts, auditors and others.

Addressing “disclosure overload”

The FASB started examining disclosures in 2009 amid complaints from businesses about too many disclosures in increasingly lengthy financial statements. However, it recently decided to abandon a controversial plan that would have updated Topic 235, Notes to Financial Statements, to help businesses determine when a piece of information is important enough to include in a footnote.

FASB members rejected the guidance from the September 2015 Proposed Accounting Standards Update (ASU) No. 2015-310, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material, after investors said it would give companies too much leeway to exclude important information from their footnotes. At the same time, businesses concluded that the proposed changes wouldn’t help them reduce costs.

Nicholas Cappiello, the manager of the FASB staff’s work on the materiality of footnote disclosures, said that in their outreach over the years, they found that users do not suffer from overload; they have technological tools at their disposal. The feedback the FASB received was that users are happy to get what they get.

In the past, the term “disclosure overload” was coined to describe a plight that some financial reporting professionals believed forced investors to wade through excessive amounts of information in company financial statements. But securities analysts and portfolio managers rarely described themselves as having to contend with any sort of overload, and some said the FASB project was a solution in search of a problem.

Restart button?

This may not be the last we see of the disclosure project. FASB member Harold Monk believes that companies and auditors still have legitimate concerns about disclosure overload, and there still may be a need for the FASB to address the issue at another time. (Monk recently announced that he is stepping down from the FASB effective May 31.)

June 18, 2018

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