Society sees weakness in FASB materiality proposal
By CHRIS GAETANO | Trusted Professional Staff
The NYSSCPA, in a Dec. 8 comment letter, expressed concern that the Financial Accounting Standards Board’s (FASB) two proposed changes to materiality standards would actually add more complexity and cost to financial reporting, rather than streamlining it.
The proposed changes would state that materiality is a legal concept. The Supreme Court’s view in an antifraud case was that disclosures should be evaluated as material if the omission or misstatement of the disclosure would be something a reasonable resource provider would view as having altered the total mix of information.
Under the proposal, materiality would be applied to quantitative and qualitative disclosures individually, which would mean that, according to the original exposure draft, “some, all, or none of the requirements in a disclosure section may be material.” Even if a topic is material, not every disclosure relating to it has to be considered material as well; materiality would apply, instead, to the disclosure itself, and omitting a disclosure deemed immaterial would not be seen as an accounting error. Language such as “an entity shall at minimum provide” or “disclose at a minimum” would be eliminated from the accounting literature.
The Society, in its letter, recognized that the FASB is trying to address “ disclosure overload,” agreeing that previous concepts created “a significant amount of disclosure that…has little if any impact on the decision making of a reasonable stakeholder, with excessive disclosures providing an avenue for significant information to become lost.”
While the Society said there may be fewer disclosures if this proposal is put in place, CPAs will need additional time to determine whether or not something should be disclosed, thereby delaying the completion of the financial statement. This, in turn, would increase the cost to prepare a statement as well as to audit it.
“The process of justification would be elongated in order to reasonably account for the overall financial reality of the entity and ensuring all ‘material’ information (as legally defined) is included,” said the Society.
The Society also felt that there were issues with setting materiality as a legal concept, not the least of which would be increased legal costs on the part of preparers. Using the legal definition, said the Society, would create uncertainty, as court cases could change or add to how that definition is interpreted. This, in turn, would have regulatory, legal and audit consequences, and, if the proposal is implemented, “we can foresee the use of legal counsel increasing on all fronts.”
And while the NYSSCPA supported removing language such as “an entity shall at minimum provide,” which, it said, “symbolizes the movement of standards from ‘rules-based’ to a ‘principles-based’ system,” it warned that “unsophisticated preparers” could be confused by the shift, due to an absence of guidance.
While the principle of the proposal itself was sound, the Society recommended that the FASB perform a thorough cost–benefit analysis to see whether it’s worth it.
“Overall we believe the amendments could be beneficial; and we fully support any efforts the Board may embark on to improve the decision-usefulness of financial statements, however we believe that time and cost will be the ultimate deciding factors as to the effects of the proposal,” said the Society.
cgaetano@nysscpa.org