FASB Releases Raft of New Updates Aimed at Improving Disclosures
The update states that the requirements to provide information in the notes are limited in at least four ways:
Because of these limitations, says the FASB, it is not necessary that notes include all the information that might fit three descriptions outlined above.
The new chapter in the conceptual framework says that, when considering new requirements for disclosure, FASB judgments should include a robust consideration of the objective of general purpose financial reporting, qualitative characteristics of useful financial information, differences in activities among entities, and stakeholder feedback It also noted that disclosures about the correction of an error would likely be of interest to users, as they would want to understand that an apparent change in the reported financial position comes from the correction rather than normal and routine transactions. With this in mind, it said that the disclosure should be seen as a more detailed explanation of a change in a line item.
With regard to interim reporting, because such financial statements are not discrete, the FASB said the notes should provide two specific types of information. First, the notes should provide the differences from the most recent annual financial statements in recognition, measure, or presentation of line items, such as changes in accounting policy or methods of determining amounts and expenses. Second, the notes should explain how the financial position and results of operations for the interim period relate to the entire year. The FASB added that if there are significant changes in financial position since the most recent annual financial statements or significant differences in results of operations that are unclear from the line items, the changes or differences should be explained in the notes.
In its second conceptual framework update, the FASB released an amendment to Chapter 3 of the conceptual framework that is meant to harmonize its definition of materiality with that used by the Securities and Exchange Commission, Public Company Accounting Oversight Board, AICPA and the U.S. judicial system. This is more of a return to form, as the FASB originally had this definition before changing it in 2010. Previously, the conceptual framework said that "materiality" as a concept is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity's report, and so therefore the FASB cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation. The amendment, however, now says that "The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item."
The amendment, though, carries a caveat that magnitude alone is not enough to determine materiality outside the context of the item's nature and circumstances. It also says that no general standards of materiality could be formulated to take into account all considerations entering into judgment by experienced, reasonable providers of financial information, as materiality judgement can only be properly made by those who understand the pertinent facts and circumstances. This means, according to the amendment, that "[w]henever an authoritative body imposes materiality rules or standards, it is substituting generalized collective judgments for specific individual judgments, and there is no reason to suppose that the collective judgments always are superior."
The first accounting standards update in this package concerns fair value measurement disclosure requirements. It removes, modifies, and adds to Topic 820, the standard on fair value measurement in general.
It has removed the requirement to disclose:
The amendments are effective for fiscal years ending after Dec. 15, 2020, for public companies, and for fiscal years ending after Dec. 15, 2021, for all other organizations. Early adoption is permitted.
“The two changes to our Conceptual Framework will help the Board identify and evaluate disclosure requirements in accounting standards and clarify the concept of materiality,” said FASB Chairman Russell G. Golden. “Meanwhile, the new standards improve fair value and defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements, and adding relevant disclosure requirements.”
* The board should require only information that is relevant to existing and potential users of the financial statements of a broad range of entities (or to a broad range of entities within an identified subset of entities).
* The cost constraint applies; that is, the benefits of providing the information should justify the costs of providing and consuming it, as described in paragraphs QC35–QC39 in Chapter 3, Qualitative Characteristics of Useful Financial Information, of the conceptual framework.
* The cost constraint applies; that is, the benefits of providing the information should justify the costs of providing and consuming it, as described in paragraphs QC35–QC39 in Chapter 3, Qualitative Characteristics of Useful Financial Information, of the conceptual framework.
* The board should consider potential unintended adverse consequences that may arise from requiring certain information in notes.
* Including some types of future-oriented information in notes may have negative effects on the cash flow prospects of the reporting entity and its investors, lenders, and other creditors.
* Including some types of future-oriented information in notes may have negative effects on the cash flow prospects of the reporting entity and its investors, lenders, and other creditors.
Because of these limitations, says the FASB, it is not necessary that notes include all the information that might fit three descriptions outlined above.
The new chapter in the conceptual framework says that, when considering new requirements for disclosure, FASB judgments should include a robust consideration of the objective of general purpose financial reporting, qualitative characteristics of useful financial information, differences in activities among entities, and stakeholder feedback
(as well as the previously mentioned limitations).
The FASB recognized that, although the codification addresses most phenomena that an entity needs to account for, there are or may still be gaps or new phenomena that may arise or be created. In such cases, when an entity must determine on its own, by analogy or otherwise, how to account for a significant phenomenon not addressed in the codification, users almost certainly would need information about the method of accounting that the entity has used and possibly even why the entity decided to use that method.
The FASB recognized that, although the codification addresses most phenomena that an entity needs to account for, there are or may still be gaps or new phenomena that may arise or be created. In such cases, when an entity must determine on its own, by analogy or otherwise, how to account for a significant phenomenon not addressed in the codification, users almost certainly would need information about the method of accounting that the entity has used and possibly even why the entity decided to use that method.
With regard to interim reporting, because such financial statements are not discrete, the FASB said the notes should provide two specific types of information. First, the notes should provide the differences from the most recent annual financial statements in recognition, measure, or presentation of line items, such as changes in accounting policy or methods of determining amounts and expenses. Second, the notes should explain how the financial position and results of operations for the interim period relate to the entire year. The FASB added that if there are significant changes in financial position since the most recent annual financial statements or significant differences in results of operations that are unclear from the line items, the changes or differences should be explained in the notes.
In its second conceptual framework update, the FASB released an amendment to Chapter 3 of the conceptual framework that is meant to harmonize its definition of materiality with that used by the Securities and Exchange Commission, Public Company Accounting Oversight Board, AICPA and the U.S. judicial system. This is more of a return to form, as the FASB originally had this definition before changing it in 2010. Previously, the conceptual framework said that "materiality" as a concept is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity's report, and so therefore the FASB cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation. The amendment, however, now says that "The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item."
The amendment, though, carries a caveat that magnitude alone is not enough to determine materiality outside the context of the item's nature and circumstances. It also says that no general standards of materiality could be formulated to take into account all considerations entering into judgment by experienced, reasonable providers of financial information, as materiality judgement can only be properly made by those who understand the pertinent facts and circumstances. This means, according to the amendment, that "[w]henever an authoritative body imposes materiality rules or standards, it is substituting generalized collective judgments for specific individual judgments, and there is no reason to suppose that the collective judgments always are superior."
The first accounting standards update in this package concerns fair value measurement disclosure requirements. It removes, modifies, and adds to Topic 820, the standard on fair value measurement in general.
It has removed the requirement to disclose:
* The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
* The policy for timing of transfers between levels
* The valuation processes for Level 3 fair value measurements
* For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.
It also made the following modifications to existing requirements:
* The policy for timing of transfers between levels
* The valuation processes for Level 3 fair value measurements
* For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.
It also made the following modifications to existing requirements:
* In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.
* For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
* The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Finally, it added new requirements, applicable only to public entities. They must now disclose:
It added, in their place, two new requirements. Entities in the affected areas must disclose:
Finally, it clarified that entities should disclose the project benefit obligation and fair value of plan assets for plans with project benefit obligations in excess of plan assets, as well as the accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets.
Finally, it added new requirements, applicable only to public entities. They must now disclose:
* The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period.
* The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
Finally, the package included changes to disclosure requirements for defined benefit plans, which the conceptual framework had not accounted for before. Removed from the requirements include disclosures about:
* The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted.
Finally, the package included changes to disclosure requirements for defined benefit plans, which the conceptual framework had not accounted for before. Removed from the requirements include disclosures about:
* The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
* The amount and timing of plan assets expected to be returned to the employer.
* The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law.
* Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.
* For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets.
* For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
* For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets.
* For public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
It added, in their place, two new requirements. Entities in the affected areas must disclose:
* The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.
* An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
Finally, it clarified that entities should disclose the project benefit obligation and fair value of plan assets for plans with project benefit obligations in excess of plan assets, as well as the accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets.
The amendments are effective for fiscal years ending after Dec. 15, 2020, for public companies, and for fiscal years ending after Dec. 15, 2021, for all other organizations. Early adoption is permitted.
“The two changes to our Conceptual Framework will help the Board identify and evaluate disclosure requirements in accounting standards and clarify the concept of materiality,” said FASB Chairman Russell G. Golden. “Meanwhile, the new standards improve fair value and defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements, and adding relevant disclosure requirements.”