Wiley GAAP: Financial Statement Disclosure Manual. Joanne M. Flood
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PRACTICE ALERT
Disclosures have drawn the attention of both the FASB and the SEC. As the disclosure requirements have accumulated over the years, there has been a growing concern about information overload and whether more is necessarily better. Both the FASB and the SEC have initiatives to improve disclosures.
FASB Initiative
The FASB currently has projects on:
Income taxes
Interim reporting
Inventory
Government assistance
Disaggregation of performance information
Not‐for‐profit reporting of gifts‐in‐kind
Segment reporting
Simplifying the balance sheet classification of deb t
The most recent information on the FASB initiative can be found in this volume in the chapter on ASC 105.
SEC Initiative
In August 2018, the SEC as part of its Disclosure Simplification Initiative published a rule reducing the public company's disclosure requirements and asked the FASB to review its corresponding disclosure rules. For more information, see SEC Release No. 33‐10110 on sec.gov.
In December 2015, the Fixing America's Surface Transportation (FAST) Act directed the SEC to modernize and simplify form S‐K requirements. The SEC is reviewing specific sections of regulations S‐K and S‐X, with a goal of updating requirements and eliminating duplicate disclosures. The Commission also wants to continue to provide material information and reduce cost burdens on companies. As part of the project, the SEC amended its rules in August 2018 and March 2019. In January 2020, the SEC, in response to a study mandated by the Jumpstart Our Business Startups Act, proposed amendments to modernize, simplify, and enhance certain financial disclosures required by Regulation S‐K. These proposed changes are designed to eliminate duplicative disclosures and modernize and enhance Management's Discussion and Analysis disclosures. Those interested in the SEC's disclosure project should visit sec.gov.
Suggestions for Improving Disclosure Effectiveness
In an April 2014 speech by Keith Higgins, SEC Division of Corporation Finance Director, Mr. Higgins suggested some ways that all entities can use to improve disclosure effectiveness. The highlights can be found below, and the full speech is available on sec.gov.
Reduce Repetition:Think twice before repeating something.Consider using cross references.
Focus Your Disclosure:Do not simply follow what others have done.Do not include a disclosure because it is a “hot button” issue. Consider whether it applies to the company.
Eliminate Outdated Information: Disclosure should evolve over time. In a survey of 122 public companies, 74% said that once they include disclosure in a public filing in response to an SEC comment, it is rarely, if ever, removed.1Companies and their representatives should regularly evaluate their disclosures to determine whether they are material to investors. If they are not material, and they are not required, take them out.Remove a disclosure when it is immaterial or outdated even if it was included in a prior filing in response to a staff comment. If it remains material, keep it in.
The full speech is available on sec.gov.
DISCLOSURE REQUIREMENTS2
The entity is responsible for adopting and adhering to the highest quality accounting policies possible. In discharging this responsibility, the entity must adopt accounting principles and methods of applying them that are the most appropriate in the circumstances to present fairly in accordance with generally accepted accounting principles (GAAP):
Financial position,
Cash flows, and
Results of operations.(ASC 235‐10‐50‐1)
To achieve this goal, the entity must:
Identify and describe significant accounting principles followed and methods of applying them that materially affect statements; disclosures should include principles and methods that involve:Selection from acceptable alternatives.Principles and methods peculiar to the entity's industry.Unusual or innovative applications of GAAP.(ASC 235‐10‐50‐1 and 3)
Among others, common accounting policies are:
1 Basis of consolidation
2 Depreciation methods
3 Amortization of intangibles
4 Inventory pricing
5 Recognition of revenue from contracts with customers
6 Recognition of revenue from leasing operations(ASC 235‐10‐50‐4)
Accounting policies disclosures should not duplicate details presented elsewhere. It may be appropriate to refer to related details presented elsewhere in the financial statements. (ASC 235‐10‐50‐5) While recognizing the need for flexibility, the Codification notes that it is preferable to disclose significant accounting policies in a separate summary preceding the notes to financial statements, or as the initial note, under the same or a similar title. (FASB ASC 235‐10‐50‐6)
DISCLOSURE EXAMPLES
Accounting Period
Example 7.1: Fiscal Period The Company's fiscal year ends on the Sunday closest to January 31 of the following year, typically resulting in a 52‐week year, but occasionally giving rise to an additional week, resulting in a 53‐week year. Fiscal 20X8 was a 53‐week year. Fiscal 20X7 and fiscal 20X6 were each 52‐week years. Fiscal 20X8, 20X7, and 20X6 ended on February 3, 20X9, January 28, 20X8, and January 29, 20X7, respectively.
Example 7.2: Change in Fiscal Year‐End In January 20X2, the Board of Directors of the Company approved a change in the Company's fiscal year from that of a calendar year‐end beginning on January 1 and ending on December 31 of each year to a fiscal year beginning on July 1 of each year and ending on June 30 of the following calendar year. This change to the fiscal year reporting cycle began July 1, 20X2. As a result of the change, the Company had a six‐month transition period from January 1, 20X2 to June 30, 20X2 (the “transition period ended June 30, 20X18”). Accordingly, the Company is reporting its audited financial results as of and for the fiscal year ended June 30, 20X3, the transition period ended June 30, 20X2, and the calendar year ended December 31, 20X1, in this Annual Report.
Accounts Receivable
Example 7.3: Receivables and Allowances for Doubtful Accounts and Composition of Other Receivables Accounts receivable are presented at net realizable value. The Company maintains allowances for doubtful accounts and for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual receivable balances. In evaluating the collectability of individual receivable