FASB Issues and Amends Conceptual Framework for Financial Reporting Chapters
On August 28, 2018, the FASB issued Chapter 8, Notes to Financial Statements (“Chapter 8”), and amendments to Chapter 3, Qualitative Characteristics of Useful Financial Information (“Chapter 3”), of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting.
Background and Decisions
Disclosure Framework
At its July 8, 2009, meeting, the FASB added the disclosure framework project to its technical agenda with the intent to improve the effectiveness of financial statement disclosures by more clearly aligning disclosure information required by U.S. GAAP with information most important to financial statement users.
On March 4, 2014, the Board issued an exposure draft, Conceptual Framework for Financial Reporting — Chapter 8, Notes to Financial Statements.1 In its final issued version, Chapter 8 provides the Board with a broad basis of information to consider when establishing disclosure requirements. The framework is intended to promote consistency in the Board’s decision-making process about disclosure requirements across various topics. From the broad set of information, the Board will determine a narrower set of disclosures for a specific topic, which will include consideration of whether the potential benefits of providing the specific information justify the costs.
The Board has leveraged the concepts in Chapter 8 to modify the disclosure requirements and improve the disclosure effectiveness related to the following topics: inventory, income taxes, fair value measurements, and defined benefit plans.
The amendments to Chapter 3 replace the current definition of materiality with the definition that was in FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information (superseded), which states:
The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.
In addition, Chapter 3 adds language similar to that in Concepts Statement No. 2, which discusses (1) how materiality differs from relevance and (2) that materiality assessments can only be made by an individual with an adequate understanding of the entity’s specific facts and circumstances.