Companies need to update their disclosure controls and procedures now that regulators and standard setters are making good on their promises to trim unnecessary bulk out of disclosure requirements.
The Securities and Exchange Commission recently issued a 314-page release that edits more than 100 specific disclosure requirements found primarily in Regulation S-K, Regulation S-X, and in the 1933 and 1934 securities and exchange laws that gave birth to capital market regulation. The release amends disclosure requirements that the SEC describes as redundant, duplicative, overlapping, outdated, or superseded in relation to other SEC or accounting disclosure requirements.
Soon after the SEC finalized its 2016 proposal that delivers on its promise to clean up disclosure rules, the Financial Accounting Standards Board issued four separate releases that also spring from an effort to freshen up GAAP disclosure requirements. FASB has been on a mission for a few years now to look for ways to simplify and streamline standards where it can make things easier on preparers without sacrificing meaningful information for investors.
Two of FASB’s four recent releases amend disclosure requirements regarding fair-value measurement and defined benefit pension plans. While the amendments eliminate some disclosures that are now considered unnecessary, they also add some new requirements and clarify a few others. Two more releases are focused on adding a new chapter to the FASB “concept statements,” which are rules the board follows as it sets accounting standards, and amending another chapter.
“At the highest level, the objective here is to keep quality and reporting and disclosure all in, but to reduce the compliance burden for companies,” says Charles Soranno, managing director at consulting firm Protiviti.
“At the highest level, the objective here is to keep quality and reporting and disclosure all in, but to reduce the compliance burden for companies.”
Charles Soranno, Managing Director, Protiviti
The SEC release is consistent with Chairman Jay Clayton’s stated objective to find ways to promote capital formation without taking anything away from investor protection, says Mark Miskinis, senior partner in SEC reporting at Deloitte. The SEC release eliminated some disclosures that are also required in Generally Accepted Accounting Principles, he says, and some that are outdated and therefore no longer relevant to include in filings.
The SEC action also removes information that even investors have come to regard as largely unnecessary, says Brandon Landas, a partner in the national SEC practice at BDO USA. A good example is a ratio of earnings to fixed charges. “Most owners or investors don’t believe that ratio is relevant or useful anyway,” he says.
While the SEC action reduces the overall volume of disclosure, the FASB action is a little different. FASB’s revisions to its concept statements give the board some new parameters for how to make decisions on footnote disclosures, and they reinstate an earlier definition of materiality to assure standards emerging from FASB are conceived based on an understanding of materiality that is consistent with that in SEC rules, auditing standards, and elsewhere in capital markets.
“The FASB is also trying to make disclosures more effective, but we should differentiate effectiveness from overload,” says Bob Uhl, partner and managing director of accounting standards at Deloitte. Plenty of capital market participants have vocalized concerns that compliance with GAAP produces too much disclosure, making it difficult for investors to find the information that’s truly most important.
“The FASB’s primary intention is not to address whether financial statements are too voluminous,” says Uhl. “They’re trying to make disclosure more effective.”
The definition of materiality proved controversial when it was first proposed, but experts now say it will have little effect on materiality analyses in practice. When FASB proposed to revise its definition of materiality to revert to an earlier definition that aligned with that understood elsewhere in capital markets, the proposal drew criticism among some investor advocates, like Damon Silvers, policy director and special counsel at the AFL-CIO.
“It is clear that there’s specific language (in the materiality definition) that’s clearly weaker than what it substitutes,” says Silvers. He’s also concerned about language that suggests companies themselves are the only sound judge of what’s material. “I suspect that will generate a substantial amount of confusion.”
Paul Munter, a senior partner at KPMG, says he doesn’t believe the definition will change the understanding of materiality that is deeply rooted in corporate reporting practices. Instead, he says: “What it’s going to do is remind preparers and auditors that materiality is not just for recognition and measurement, but also for disclosure. It’s another part of the broader message to focus disclosure on material information, on information that is useful to financial statement readers.”
Adam Brown, national assurance managing partner at BDO USA, points out that FASB’s edit to the definition of materiality occurred in the board’s conceptual framework, not in authoritative accounting guidance. As such, it won’t directly affect what companies do, but it will remind them to keep materiality top of mind as they make disclosure decisions. “Focus on what’s most important to your investors,” he says.
With the new pronouncements both from the SEC and FASB, it will be important for companies to assure they use updated disclosure checklists for their next regular filings, says Soranno. That will assure they are making disclosure decisions with the latest regulatory guidance in mind, he says.
Munter is advising companies to assure they undertake an inclusive process when they develop their next round of disclosures. “The development of financial reporting information is not the domain of a single function or a single individual,” he says.
While the CEO and CFO must sign off on financial statements, internal stakeholders from throughout the business should be involved, says Munter. That includes representatives of various business activities beyond finance, accounting, and legal, he says.