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FASB Issues Update to its Conceptual Framework

The Financial Accounting Standards Board (“FASB”) continues to advance efforts to write consistent and effective disclosure rules in its standards. On August 28, the board published Concepts Statement (“CON”) No. 8, Conceptual Framework for Financial Reporting: Notes to the Financial Statements, which the FASB will use as a guide clarifying what information to consider when developing new disclosure requirements for future Accounting Standards Updates.

Known as the “disclosure framework,” CON No. 8 will attempt to resolve a years-long debate over how much information should the board require from companies without them overloading financial statement footnotes with irrelevant details. The framework explains why footnotes exist, when to use relevant content, and what the general limitations are for financial statement disclosures. It also offers guidance for addressing quarterly disclosure requirements.

The framework also includes an update to the “materiality” definition as applied under the Conceptual Framework. The updated meaning aligns the FASB’s idea of materiality to decide what information in a financial statement should be included and what can be left out. The board’s materiality definition is now consistent with definitions by the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the American Institute of Certified Public Accountants, and the U.S. judicial system.

In a statement, FASB chairman Russell Golden said the latest changes to the Conceptual Framework would help the FASB identify and review disclosure rules in its standards and clear up the concept of materiality.

It is uncertain whether CON No. 8 will satisfy everyone. Companies and preparer groups argued that the FASB fell short in reducing disclosures, and investors and analysts informed the board that it gave up too much. Also, two FASB members voted no on issuing the final document.

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