Recently, the Financial Accounting Standards Board (FASB) proposed updates to the Disclosure Framework redefining materiality and how it's applied. Your CEO relies on your CFO to stay abreast of pertinent changes in accounting standards, but understanding the impact of those changes can help both of them make the best decisions for the organization. Learn how these changes may affect your company and how to stay on top of the changes.
What is the FASB?
The FASB is the standard setter for GAAP, recognized by the Securities and Exchange Commission (SEC), state Boards of Accountancy, the American Institute of CPAs (AICPA) and many other financial standard regulating organizations. The mission of the FASB’s Accounting Standards Updates (ASUs) regarding disclosure is to “improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements.” These updates are in keeping with the due process afforded to investors and other stakeholders in the organization, as well as accuracy in bookkeeping services and tax reporting.
Materiality and Disclosure
Financial statements include many items, but deciding on inclusion requirement depends upon materiality. Materiality means that an item is large enough to influence the users’ economic decisions. Upon determination of materiality, the item must be disclosed as a note to the financial statement explaining the action and its financial results. Errors in the determination of materiality can adversely affect the reporting of:
These errors can occur by omission, reporting in the incorrect period or reporting in inappropriate accounts. Avoiding errors requires careful attention to detail and staying knowledgeable about ASUs.
Proposed Changes to the Disclosure Framework
To address investor concerns, the FASB has proposed changes that will add value to disclosure notes and provide useful information for those entities providing financial resources, including investors, lenders, donors and creditors. In some cases, predictions and forecasts of future cash flows will not be required, unless the information is relevant because of previous recordings on the balance sheet.
The Disclosure Framework project is considering ASUs to four disclosure areas:
- Fair Value
- Defined Benefit Plans
- Income Taxes
The project considers existing disclosure requirements, appropriate use of discretion and new disclosure standards for each area. The proposed changes will affect both public and private entities by requiring the disclosure of the following:
- If the organization’s income tax burden is or may be reduced in a particular jurisdiction because of privileges granted directly to the entity by a government agency (not including grants readily available), the terms and rights of the privilege granted.
- If income taxes equal to the total income tax paid is paid to any country.
- If foreign subsidiaries hold the company’s aggregate cash, cash equivalents or marketable securities aggregates.
- Any circumstance related to changes of indefinite reinvestment and corresponding earnings of undistributed foreign earnings.
- If any tax law enacted is expected to have impacts on future periods, a description of the change.
- Any income taxes paid and disaggregated amounts between domestic and foreign income or losses, income tax expenses or benefits resulting from continuing operations.
- State, federal and foreign carryforwards for both gross pre-tax and tax-affected amounts, but before valuation allowance.
Public entities will need to make additional disclosures if the proposed changes are approved. These include unrecognized tax benefit requirements, separation of settlements in cash and settlements using deferred taxes, valuation allowance and continued disaggregated state, federal and foreign carryforwards for an additional five years.
The Impact of the Proposed Changes
While public entities may not feel much impact of the proposed ACUs because of existing SEC reporting requirements, private companies will be forced to make public much of their financial statement information which was previously not disclosed. CEOs will need to consider how these disclosures will affect their future success. Company growth will hinge on projecting how stakeholders will interpret the disclosures.
In addition to public and stakeholder perception, CEOs will need to meet the other challenges of the proposed changes. To produce accurate financial statements, budgets will need to include updates to or replacement of existing accounting systems, implement new controls to promote information sharing while maintaining data security and evaluate internal and external processes to gather and record the needed information. Especially for international corporations or those transitioning to international status, considering an outsourced bookkeeping service may be beneficial to provide the expertise and support the ACUs will require.
How to Stay Abreast of the Changes
Some of the changes could take effect as early as fiscal years beginning after December 2015, which would mean current financial statements will be subject to the ACUs. Although your financial officers probably already have networks of useful insights and information, it never hurts to connect with the source of the regulations. Updates, deadline dates for comments and enacted decisions can be found on the FASB website. Another resource for CEOs and CFOs is the Pricewaterhouse Coopers (PWC) page for new FASB guidance. This resource outlines effective dates for both public and private organizations and gives links to accounting guides for each proposed change. By staying in the know, you can head off negative perceptions and ensure that all your financial statements are up to date.
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