FASB Chairman Seidman: Focus on disclosure framework and private company decision-making framework

20 July 2012

At the AICPA National Advanced Accounting and Auditing Technical Symposium in Chicago, FASB Chairman, Leslie F Seidman, focused on two important projects that the FASB has underway that are intended to help the Board recalibrate how it approaches the standard-setting process.

The first topic is the Disclosure Framework, for which the FASB issued an Invitation to Comment just recently. The purpose of this first public consultation is to seek input that the Board can improve the effectiveness of disclosures in the notes to financial statements of public, private, and not-for-profit organisations.

The second topic is the Private Company Decision-Making Framework, which tha FASB has been developing in anticipation of the creation of a new body—known as the PCC—to help improve the standard-setting process for private companies and users of their financial statements.

First, based on criteria mutually developed and agreed to with the Board, the PCC will determine whether modifications to existing GAAP are needed to address the needs of users of private company financial statements. The PCC will identify, deliberate and vote on any proposed changes, which will be subject to endorsement by the FASB and submitted for public comment before being incorporated into GAAP. Second, the PCC will serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items on the FASB’s technical agenda. The FASB strongly supports this structural change, because it will bring together professionals with diverse experience in private company matters and continue to enhance the ability to understand what private company users want to know and how to provide that information in a cost-effective way.

The Invitation to Comment on disclosure framework is the FASB’s first step in soliciting broad input on ways to improve disclosure effectiveness. The Invitation to Comment identified several important topics for discussion and deliberation, which include:

• identifying a process that could aid the Board in establishing disclosure requirements that address only relevant information;
• designing flexible disclosure requirements and a judgement framework that could be adapted by each reporting organization to focus on information that is relevant in its circumstances;
• and, establishing organisational and formating techniques that could make the information easier to find and understand.

The FASB believes that its disclosure framework project will lay the groundwork for a robust discussion about how we can all work together to make financial statements a more effective communication tool.

The Private Company Framework is intended to initiate a broad dialogue about how private companies are different and how those characteristics should factor into accounting and disclosure standards. This issue is not unique to the US IFRS has simplified standards for small and medium-sized entities, as have Canada and Japan. However, those simplifications are determined case by case, without the benefit of an agreed-upon framework.

Rather, the Private Company Framework is intended to guide the standard-setter through a set of criteria that are designed to do two things:

1. First, for a particular transaction, let’s identify what information is most important for users. Does it relate to cash flow information, or is it a non-cash charge? Said another way, does it affect EBITDA? Does it relate to the existing commitments or borrowings of the entity or an estimate of a future event? Is it an estimate of something that is likely to happen, or a measure or presentation of something whose occurrence is remote? These are the types of factors that seem to be important in evaluating the type of information that is more relevant to the external users of private company financial statements. The draft framework emphasises that the purpose of financial reporting remains to provide decision-useful information to investors, lenders and other users of financial statements. It suggests that if information would be relevant to most users of financial statements, there should not be a difference between public and private company reporting but, rather, a more cost-effective way of providing the information should be considered.
2. This leads to the second type of factor in the framework—factors that focus on the relative costs of providing the information. For example, is a specialist required to perform the estimate? Is the accounting treatment complex to apply initially and on an ongoing basis? Is the approach challenging to audit or review? The presence of these factors would suggest that the PCC and the Board should carefully consider whether a simpler approach or practical expedient could be used to satisfy the objective.

Full speech

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