FASB Proposes Materiality Improvements for Financial Disclosures

By Michael Cohn, Editor-In-Chief, AccountingToday.Com

The Financial Accounting Standards Board has issued for public comment two exposure drafts related to materiality and its Disclosure Framework project with the goal of making financial disclosures more effective.

The objective of the Disclosure Framework project is to improve the effectiveness of disclosures in notes to financial statements by more clearly communicating the information required by U.S. GAAP that is most important to the users of financial statements. As part of the overall project, the exposure drafts address the use of materiality in helping organizations use discretion when determining what disclosures in notes to financial statements should be considered “material” in their particular circumstances, and helping FASB understand the reporting environment in which it sets financial accounting and reporting standards.

“Stakeholders indicated that the current discussion of materiality in our Conceptual Framework is inconsistent with the legal concept of materiality as established by the U.S. Supreme Court,” said FASB chairman Russell G. Golden in a statement. “This led to uncertainty about organizations’ abilities to interpret what disclosures are material; and the board’s ability to identify and evaluate disclosure requirements in accounting standards. These proposals are intended to clarify materiality—which will help organizations improve the effectiveness of their disclosures by omitting immaterial information, and focus communication with users on the material, relevant items.”

One exposure draft contains amendments to FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, to clarify the concept of materiality.

The other exposure draft, proposed Accounting Standards Update, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material, a component of the “entity decision process,” aims to promote the appropriate use of discretion by organizations when deciding which disclosures should be considered material in their particular circumstances. The amendments would apply to all types of organizations—public and private companies, not-for-profit organizations, and employee benefit plans.

FASB is encouraging stakeholders to review and comment on both exposure drafts by Dec. 8, 2015.

More information is available in a FASB in Focus summary.