Disclosure Effectiveness

The FASB and the SEC each have projects underway to look at and understand how to increase the effectiveness of disclosure. While most preparers hope these projects will reduce the volume of disclosures, I think recent comments make it clear that the ability to do that is really in the hands of preparers themselves already.

GAAP already includes a requirement that the codification, including disclosures, does not apply to immaterial items. And, the SEC is clear that they allow cross-reference to other disclosures and do not want, or expect, the repetition of the same language from section to section in the 10-K. For example, the critical accounting estimates section is not supposed to be a repeat of accounting policies from footnote 1. Instead, this section of MD&A is supposed to have information about the assumptions and process of developing critical estimates, rather than the policy statement.

The issue with reducing disclosure is twofold. First, there is no penalty for over disclosure, but there is risk related to under disclosure in the form of comment letters and lawsuits. When asked at the AICPA SEC and PCAOB Developments Conference if the SEC would ever provide a comment on a company including excessive disclosures which might therefore make it harder to determine the relevant, important information, the answer was a quick no. So the legal situation is there is no penalty for over disclosure and there is a possibly significant penalty for under disclosure. Given that dynamic, is it any surprise that we are being overwhelmed in disclosure.

A statement was also made at the AICPA conference that what it really takes to eliminate disclosure is courage by the preparer to hold their ground with the auditor, and audit committee, that certain disclosures are not material. The reality is that even if a disclosure is not material today, you have to set up the infrastructure to monitor every year in the future to continue to conclude it is immaterial. So you are essentially asking a preparer to save no time and resources, and have a discussion every year about why something should not be disclosed. That may actually take more time for the preparer than just simply providing the unnecessary disclosure. As the saying goes, “I apologize for the length of this letter, but I didn’t have the time to make it short.”

Given the risk math discussed above and the lack of savings from the preparer perspective, is it any surprise we are disclosing more than ever? I say no, and until these root causes are addressed, we won’t ever be able to reduce the volume of disclosures.

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