GAAP now contains a shorter list of disclosure requirements for fair-value measurements and defined benefit plans, along with a reprised definition of materiality.
The Financial Accounting Standards Board finalized four new documents that begin to deliver on its promise to comprehensively reconsider all disclosures required under Generally Accepted Accounting Principles. Two documents revise Concept Statement No. 8, which is part of a rulebook the FASB follows as it sets accounting standards. Two more documents revise the disclosure requirements around fair-value measurements and defined benefit plans, removing several disclosures but also adding a few new ones and clarifying a few more.
The FASB added a chapter to its concept statements regarding notes to financial statements that are intended to help direct the board’s thinking as it identifies and evaluates disclosure requirements in any accounting standard, both for annual and interim period reporting. They tell the board to consider the cost and benefit of disclosures before requiring them, to consider unintended consequences, and to assure requirements are not so prescriptive that companies can’t make their own materiality judgments.
Even more specific to materiality, the board issued an amendment to its concept statements to revise its formal definition of materiality, making it conform with the definition generally observed throughout the financial reporting supply chain. The board’s definition of materiality had been consistent with that contained in International Financial Reporting Standards, but that put the GAAP definition at odds with how materiality was understood by the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and American Institute of Certified Public Accountants, and even the U.S. judicial system, the board said.
The FASB’s new language, which reverts to prior language before the board converged its definition with that in IFRS, says relevance and materiality are defined by whatever influences or makes a difference to an investor or other decision maker. The new language says materiality is specific to each entity. “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 FASB says.
When the board proposed revising its definition to bring it back into alignment with the SEC, PCAOB, and U.S. Supreme Court, investor advocates cried foul, believing it would reduce the disclosure threshold for companies. In its revised concept statements, the FASB says having the definition out of alignment “does not help the board to understand the environment in which reporting entities operate.” While the FASB says it would be preferable to have U.S. and international definitions converged, it’s not possible given the misalignment with the definition understood in the United States and the current reconsideration of the definition internationally.
With respect to fair value, the board issued ASU No. 2018-13 to amend Accounting Standards Codification Topic 820 to remove some specific disclosures that are currently required. When the new pronouncement takes effect for calendar-year companies in 2020, they can quit disclosing the amount of and reasons for transfers of items between levels 1 and 2 in the three-level fair-value hierarchy. They can also stop disclosing the policy for the timing of transfers between levels and the valuation process for measurements in level 3, which is where companies establish values for items that are hard to observe in the marketplace.
The ASU on fair-value measurements also modifies some disclosure requirements related to investments in certain entities that calculate net asset value and in explaining measurement uncertainty, and it adds a few new requirements regarding changes in unrealized gains and losses and in the range and weighted average of certain inputs used in level 3 measurements.
As for defined benefit disclosures, the FASB issued ASU 2018-14 to amend areas of ASC Topic 715. The changes drop five specific requirements for public companies, but also add a few new requirements and clarify a few others. The board decided to drop required disclosures regarding certain amounts accumulated in other comprehensive income, the amount and timing of plan assets expected to be returned to the employer, amendments to Japanese law, certain related party issues, and certain effects of a one-percentage-point change in health care cost trends.
The board also added new requirements, however, relating to certain weighted-average interest crediting rates and reasons for certain gains and losses. It also added clarifications to requirements regarding projected benefit obligations and accumulated benefit obligations.
The changes to disclosures regarding defined benefits take effect for calendar-year companies in 2021. The board continues to work on other aspects of its disclosure requirements, including those regarding income taxes, inventory, government assistance, and interim reporting.