SEC Trends & Developments - Spring 2013 - MD&A and Footnote Disclosures – Where is the Line?

At the Practising Law Institute’s SEC Conference, SEC Chief Accountant Paul Beswick noted that, over the past few years, the FASB has been working on a number of projects related to disclosure, including an overhaul of its entire disclosure framework.

Mr. Beswick noted that the FASB has been receiving feedback on the increasing frequency of information usually included in MD&A now being included in financial statement disclosures. 

According to Mr Beswick, the SEC staff is currently working on a paper about “what is the dividing line,” and hopes the paper will be released in the next few months.  By definition, the MD&A section provides the investor with information which is “management’s” discussion and analysis, which is unaudited, as opposed to footnotes, which are audited.

At the SEC Speaks event, SEC Commissioner Troy Paredes expressed his view of disclosure.  “Disclosure is powerful,” said Mr. Paredes, “but that does not mean that more disclosure is always better than less.”  He expressed his concern on “information overload,” which, in his words, was the risk that mandatory disclosure is exacerbated as disclosures become more complex.  “The information overload concern is that investors will have so much information available to them that they will sometimes be unable to distinguish what is important from what is not.”

Businesses have been critical of the FASB and some of its recent projects because they require disclosure of forward-looking information and repeat information already appearing in MD&A.  The FASB has struggled with these redundancies in its effort to better establish an early warning sign to investors regarding an entity’s ability to continue as a going concern.

Financial statement disclosure is a topic that receives varied marks, depending on who is asked for their opinion.  Users feel that disclosures do not contain enough relevant information and communicate issues poorly, while registrants feel that there is too much disclosure, causing disclosure overload and that the volume of required disclosures is causing the cost of financial reporting to skyrocket.

Mr. Paredes also commented that “…disclosures have continued to pile up, with some of them being of questionable value.  Much more is disclosed today than ever before, be it because of regulatory requirements, because investors demand certain information, or because companies, acting defensively, disclose more information to reduce the risk that they could be challenged in litigation for not having disclosed enough.” 

Hopefully, a review of the disclosure framework by both the SEC and the FASB will help make MD&A and financial statement disclosures more practicable, more meaningful, and more understandable.

SEC Trends & Developments - Spring 2013 - Issue 

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