Point of View Financial Statement Disclosures

7/24/2019 Point of View Financial Statement Disclosures

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April 20

viewpointof

Preparers and others have a role in making sure footnotedisclosures are clear and understandable

Investors and other stakeholders benefit from clear and understandable financialstatement footnote disclosures when evaluating a companys performanceand prospectfor future cash flows.

The FASB is developing a framework to increase the effectiveness of footnote disclosureThe framework will address both the FASBsprocess for establishing disclosurerequirements and preparers processes for determining which disclosures to make. Thesuccess of the Boards project to develop the framework will ultimately depend on theextent to which capital market participants support the projects objectives. In themeantime, there are steps that preparers and other capital market participants can taketoday to enhance the clarity and understandability of disclosures.

Preparers can work to ensure that footnote disclosures clearly communicate relevantpolicies, provide clarity about significant transactions, give prominence to significantitems, eliminate duplication, and provide meaningful, company-specific information.Use of proper organization and formatting, cross-referencing, plain-English, and tabulapresentations also can enhance navigation within the financial statements.

Other capital market participants have a role as well. When reviewing preparersfinancial statements, auditors and securities lawyers should maintain an ongoingawareness that employing a checklist or risk-based mentality may lead to inclusion ofimmaterial, or otherwise not-useful, disclosures. Standard setters and regulators canemphasize preparers ability, within established rules, to use flexibility and well-reasonjudgment to determine their disclosures and encourage disclosure of information that irelevant and important for users to understand.

Financial statementdisclosuresEnhancing their clarity and understandability

Highlights

Disclosure requirements haveaccumulated over many years. Thisinformation overload has led toquestions about relevancy and

usefulness of certain information.

Preparers can take actions today tomake sure they are preparing clear andunderstandable disclosures. Othercapital market participants also have arole to play by encouraging disclosureof only important, relevantinformation.

Within established rules and legalrequirements, exercising well-reasoned judgment to determinerelevant disclosures should streamlinefinancial statement presentation and

provide users with the informationthat is most important for decision-making.

Organization and formatting can alsoenhance navigation within thefinancial statements.


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Background

Financial statement disclosures canbecome cumbersome

Background

The idea of promoting clear andunderstandable communications betweenpreparers and users is not new. For manyyears, stakeholders have said thatinformation in the footnotes could benefitfrom a framework that would producemore decision-useful, less redundant, andbetter organized information. Many,including the FASBs Investor AdvisoryCommittee, recommended that the Board

address note disclosure overload andrelevancy concerns. The Board recentlypublished an exposure draft of concepts tobe used to develop future, and evaluateexisting, disclosure requirements.Comments are due on July 14, 2014.

The disclosure framework project includesa separate component that addresses thedecisions preparers make when evaluatingwhich disclosures to include in theirfinancial statements. The Board isconducting a field study to assesspreparersabilities to exercise discretionover which disclosures they provide infootnotes to financial statements. Theresults of the field study and other feedbackwill be used to develop an exposure draftaddressing the preparers decision process.

In December 2013, the SEC published areview of Regulation S-K requirements.Chair White has called for the Staff to beginan active review of existing disclosure rulesfocusing on not only the type ofinformation that should be disclosed, buthow it is presented, where it is disclosed,and how technology can be used tofacilitate investors access to theinformation.

Objective of financial reportingA primary objective of financial reporting isto provide information to investors,lenders, creditors, and others for use inmaking decisions about whether to commitresources to the company. These decisionscould bebased, in part, on the usersassessment of the company's performanceand prospects for future cash flows.Footnote disclosures are one valuablesource of information for that purpose.

Current concerns

Financial statement footnote disclosurerequirements have accumulated, standardby standard, over many years. This has leto an increase in the volume of disclosurewhich can cause cumbersome and unwielpresentations and result in questions abothe continued relevancy and usefulness ofcertain of the information provided.

All or nothing checklist approach

Some view existing requirements as callinfor an all or nothing level of footnotedisclosure.Given this view, some preparedo not believe they can exercise discretionwhen drafting footnotes on a particulartopic. That is, if a company applies anaccounting standard, all of the disclosurecalled for by the standard must be maderegardless of whether it is important to ausers understanding of the financialstatements (e.g., whether it is material).Thus, some companies view footnotedisclosure requirements as completeinseparable sets, whereby disclosures areincluded in their entirety rather than

viewed as scalable based on facts andcircumstances, as the rules permit.

Strict adherence to a list of requiredfootnote disclosures may reduce thelikelihood of preparers getting questionsfrom auditors, regulators, and users.Therefore, it is understandable that somepreparers gain comfort by using an all ornothing checklist approach rather thanapplying appropriate judgment todetermine what information to disclose.

Cost of compliance

Extensive footnote disclosure requiremen

impose costs on both companies andinvestors. The costs to the company inclupreparing and analyzing information,maintaining internal controls, and auditcosts. In addition to indirectly bearing succosts, an investors costs include the timeneeded to assess the large amount of datapresented in the footnotes to determinewhether it is relevant for their decisionmaking.

When disclosure getsto be too much orstrays from its corepurpose, it could lead

to what some havecalled informationoverload.-Mary Jo WhiteChair of the SEC(October 15, 2013)

Improvingcommunications

between preparersand users of financialstatements is a long-standing goal shared

by all stakeholders.


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Considerations for preparing disclosures

Analysis

The purpose of footnote disclosures

In preparing footnote disclosures,consideration should be given to theirintended purpose. We believe their purposeis to provide information to assist users inassessing both a companys historicalperformance and cash flow prospects.Disclosures should amplify informationreported on the face of the financialstatements, and focus users attention onmatters that are most relevant tounderstanding those financial statementareas.

Which type of information is appropriatefor footnote disclosure is an importantquestion. Consistent with applicable rules,we believe footnote disclosures should belimited to information about a companyshistorical transactions, financial position,and estimates and assumptions thatunderlie the financial statements. That typeof information is subject to accountingstandards and can be audited underapplicable auditing standards.

In contrast, forward-looking information isbest suited for managements discussionand analysis (MD&A), for which public

companies are provided certain safe harborprotections. Outside of certain limitedareas (e.g., contingency disclosures)predictions about future events are notappropriate for footnote disclosures.

Exercising judgment

Both US generally accepted accountingprinciples and SEC disclosure regulationsgenerally allow omission of a requireddisclosure if it is not considered material tothe financial statements taken as a whole.Companies may exercise discretion to fullyomit or abbreviate certain aspects of anotherwise required disclosure if judged to

be immaterial.

Using well-reasoned judgment, preparersshould assess the disclosures required byaccounting standards and, guided bymateriality considerations, select those thatare relevant to their users. In somesituations, companies may need tosupplement required disclosures withadditional information to provide contextor further clarification that they believewould be meaningful to users. Likewise,disclosures need not be included if they are

not relevant, and accordingly, disclosuresmade in prior periods should be removedthey are no longer relevant. In making thidetermination, preparers should assess thmateriality of the information based ontheir facts and circumstances, consideringcourt and SEC interpretations and advicefrom their legal counsel, when needed.

Other factors to consider that may make atransaction or event relevant for disclosurinclude: the magnitude of the transactionor account balance on the companysresults of operations, financial position,

and other performance indicators; theimportance of the item relative to thecompanys industry; whether the event is change in business strategy; the uniqueneof the transaction; and the use of relatedparties.

When applying judgment to decide whichdisclosures to include, preparers shouldfocus on matters that are important to theusers understanding of the companysperformance and prospects. While somepreparers may find identifying such matteto be a challenge, the active engagement ousers, auditors, and regulators in this moshould facilitate this process.

Format and organization

Enhancing the format and organization ofthe footnotes should also be a focus.Hallmarks of appropriate footnotedisclosures include clarity about relevantpolicies and significant transactions as weas organization that eases navigation.Preparers should consider employing bespractices such as using plain-English todescribe industry and company-specificpolicies, eliminating overly technicalreferences, grouping related data togetherusing tabular formats, and cross

referencing information from the face ofthe primary statements to the relatedfootnote or between footnotes.

In conclusion

While the Board and SEC have disclosurereform on their agendas, clear andunderstandable footnote disclosure shoulbe a focus of preparers today. Weencourage preparers to work with theirauditors to take a fresh look, and weencourage regulators, and securitieslawyers to do their part as well.

Disclosures shouldamplify the financialstatements andprovide users withrelevant informationto assess performanceand prospects.

Preparers, auditors,and regulators shouldembrace the use of

well-reasonedudgment to

determine relevant

footnote disclosures.


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Contact Information

To have a deeper discussion aboutour point of view on disclosureeffectiveness, please contact:

Beth PaulU.S. Strategic Thought Leader,National Accounting Services GroupPhone: 973-236-7270Email:[email protected]

Sara DeSmithPartner, Accounting Services GroupPhone: 973-236-4084Email:[email protected]

2014 PricewaterhouseCoopers LLP, aDelaware limited liability partnership. All rightsreserved. PwC refers to the United Statesmember firm, and may sometimes refer to thePwC network. Each member firm is a separatelegal entity. Please seewww.pwc.com/structufor further details. This content is for generalinformation purposes only, and should not beused as a substitute for consultation withprofessional advisors.

Questions and answers

Q: What are some examples of howpreparer judgment could be applied indetermining disclosures?

A: One example involves determiningpension disclosures. Often disclosuresrelated to immaterial or frozen pensionplans still include extensive informationthat generally may not have a significantimpact on a users decision making.Another example involves stock-based

compensation. For companies where thenumber and value of stock optionsoutstanding is not significant to dilution orresults of operations, the disclosure mightbenefit from greater consideration as towhat information would be meaningful toinvestors.

Q: How are the digitization of informationand its consumption affecting disclosure?

A: Electronic consumption of informationis becoming widespread through the use ofdevices such as tablets and smart phones.In certain instances, analysts use digitalinterfaces to upload information into their

valuation models. Investors also have theability to access certain types of data, suchas a companys historical stock price,reliably and instantaneously. We believeexisting tools will continue to evolve and

new tools will be developed as digitaldelivery and consumption of informationcontinue to advance. Standard-setters andregulators may decide to eliminate certaindisclosure requirements if the data isreliably and easily accessible from othersources. Accordingly, we believe thatdigitization and use of new technology wicontinue to provide avenues to morequickly access the information available.

Q: Is the FASB project being conductedjointly with the International AccountingStandards Board (IASB)?

A: No. However, while this is not a jointproject between the Boards, the IASB doehave a broad-based disclosure initiative oits agenda to explore how disclosure inIFRS financial reporting can be improvedThe initiative was informed by a DiscussiForum on Disclosure in FinancialReporting held in January 2013 and arelated survey conducted by the IASB StafThe initiative comprises a number ofprojects, including an exploration of howmateriality is applied in practice, researchto evaluate the possibility of a projectaddressing debt disclosures, and a reviewof existing IFRS disclosures to identify anassess conflicts, duplication, and overlaps
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Point of View Financial Statement Disclosures

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