Disclosure notes cited as top accounting concern

The Financial Accounting Standards Advisory Council (FASAC) is being urged by preparers and users of financial statements to place a disclosure framework as the top agenda item for US accounting standard setters.

Private equity firms and the portfolio companies they manage have long criticized US standards for resulting in financial statements bloated with disclosure notes. Often, these notes are too complex and difficult to read to be of much value to users of financial statements, critics contend. 

The FASAC advises the Financial Accounting Standard Board (FASB) – the body that sets US accounting standards – on future project priorities and possible new agenda items. On Tuesday, the FASAC released the results of a survey asking stakeholders for their feedback on its mandate.

Over 100 respondents comprised of accounting firms, academics, and preparers and users of financial statements cited a disclosure framework as most in need of FASB’s attention. Coming in second and third place, respectively, were financial instrument reporting and a convergence project that seeks to align US and international accounting standards.

Many survey respondents said disclosure notes are becoming an exercise in compliance rather than a means of transparency and communication.

“Reducing or revamping disclosures might actually encourage users to read them,” said one survey respondent, a preparer of financial statements. “This in turn might encourage preparers to spend more time customizing their notes rather than reverting to examples and/or boiler plate and technical language.”

Another survey respondent and user of financial statements asked for improved “transparency and relevance of information by emphasizing entity-specific – rather than boilerplate information.”

Earlier this year, a FASB spokesperson acknowledged the situation saying “a check-the-box attitude can result in notes that are not terribly useful.”

The spokesperson noted that preparers can rely on “materiality” to help minimize their disclosure burden. “People don’t seem comfortable using materiality when thinking about disclosures, and I’m not sure why that is.” 

Not included in the survey as a requested agenda item was FAS 157 (now Topic 820), which guides GPs' fair value measurements. As PE Manager has been reporting, Topic 820 has been a source of anguish for private equity CFOs who feel auditors are judging their estimates without any practical guidance.

A spokesperson for the FASAC said Topic 820 was left out of the survey on account of a post-implementation review already underway for the item. The Financial Accounting Foundation plans to open a consultation on the review this month and then later share its findings with FASB and others in late 2013 or early 2014.