As part of its effort to improve disclosure requirements, the Financial Accounting Standards Board is proposing some new disclosure provisions around fair value measurements that the board believes will make fair value disclosures more meaningful to investors.
This specific proposal on fair value disclosures is an extension of an earlier proposal FASB issued to revise its guidance on materiality. FASB’s earlier proposals on materiality of disclosures drew early criticism from investor advocates who were concerned FASB was raising the bar on disclosures in a way that would reduce the information provided to investors. FASB says it is aligning its guidance with legal concepts around materiality as it is understood in the United States and clarifying language in GAAP so that preparers do not feel bound to make disclosures they plainly believe to be immaterial.
FASB says the current fair value proposal is a kind of trial run to see how standard setting might go if the board follows the proposed changes to its concept release. By applying that proposed guidance to fair value disclosures, FASB came up with the newest proposal that is aimed at making disclosures better by giving preparers some room to omit disclosures they consider to be immaterial.
The proposal says entities would provide required disclosures if they are material, and would remove phrases such as “an entity shall disclose at a minimum,” which some stakeholders have told FASB make it difficult to omit immaterial disclosures. The proposal would refer to guidance elsewhere in GAAP that addresses the appropriate exercise of discretion.
In addition, FASB proposes eliminating a handful of disclosure requirements that now are explicitly required, such as the amount and reason for transfers between “Level 1” and “Level 2” fair value measurements under the fair value measurement hierarchy. It also would eliminate the requirement to disclose the policy for the timing of transfers between levels, and the valuation policies and procedures for “Level 3” fair value measurements.
Accompanying, the proposal, FASB also produced a five-page document explaining its reasoning for the proposal by describing the questions it addressed as it considered amending the existing disclosure requirements. The board says it took into account the changes it has proposed to its concept statements, which serve as FASB’s guidance to itself for how to write accounting standards, to help guide the discussion about which disclosures should be eliminated. Certain fair value disclosure requirements were removed, FASB says, “because they are not consistent with the concepts and decision questions in the proposed concept statement.”