FASAB Contact: Grace Wu, WuG@fasab.gov, 202-512-7377
|Request for Comment||Due Date||Word Version of questions for Respondents||Comment Letters||Final Pronouncements|
|Materiality (PDF)||January 23, 2019||Word Version of Questions for Respondents (Download)||Comment Letters||N/A – Currently Under Due Process|
The Federal Accounting Standards Advisory Board (FASAB) is undertaking this project primarily because recent FASAB survey results, as well as other accounting standards boards’ activities, suggest that improvements in disclosures are necessary. Note disclosures are an integral part of financial statements. Users rely on them to understand the financial statements and reach conclusions about the operating performance and stewardship of government resources. However, the disclosure requirements have accumulated on a Statement-by-Statement basis over many years. An overall review would improve balance across the disclosures and enhance their understandability to readers.
During the February 2017 meeting, the Board agreed to consider opportunities for streamlining note disclosures and looking at the disclosure principles. To accomplish this task, the Board agreed to a top-down approach: first to develop a framework by concentrating on the principles and the materiality level to guide disclosures, then to identify important individual topics to address next.
The primary objectives of this project are to improve the relevance, clarity, consistency, and comparability of note disclosures among the federal entities. The project is divided into two phases:
- Phase I – Identify and develop a set of principles for disclosure to be used by the Board to reduce repetition and improve relevance and consistency in note disclosure
- Phase II – Use the principles to modify the existing note disclosure requirements for component reporting entities to improve the disclosures’ usefulness and effectiveness
To accomplish these objectives, the project will address the following:
- Research and recommend a principles-based framework
- Evaluate how judgments can be used to increase relevance and minimize burden for note disclosures
- Research and recommend specific improvements in clarity, consistency, and comparability of note disclosures among the component reporting agencies
- Develop and propose amendments to existing FASAB guidance related to component reporting entity note disclosure requirements
A working group was formed in August 2017 to perform the aforementioned research. If you are interested in joining the working group, please contact Ms. Wu.
HISTORY OF BOARD DELIBERATIONS
August 29-30, 2018
The note disclosure (NODI) working group presented its initial research results to the Board through four different topics: NODI communication, NODI questions for the Board, pilot note summary of significant accounting policies (SOSAP), and the pilot note fund balance with Treasury (FBWT). After discussing the working group’s research, the presenters gave the following suggestions to the Board:
- Seven principles of effective communication
- Decision questions that the Board could use when evaluating potential disclosures in the federal environment
- A need for developing guidance in the FASAB Handbook for SOSAP, including developing a principle framework for the SOSAP note and distinguishing SOSAP from content in management’s discussion and analysis (MD&A)
- Potential changes on certain FBWT disclosure requirements
The Board agreed that the activities conducted by the working group are in line with the NODI project’s objectives. Members provided specific guidance on each topic to the working group. The working group will temporary stop research during the year-end busy season.
Issue Paper for August 29-30, 2018 – Tab B (PDF)
The Board reviewed changes to the draft materiality ED. Members decided to remove from the draft the suggested materiality discussion for the component and consolidated levels to avoid contradicting the concept that misstatements should be assessed both quantitatively and qualitatively. The Board also agreed to delete the wording regarding relevance because materiality is entity specific and relevance is a general notion about what type of information is useful to users.
In addition, staff will add to the draft a discussion of separate materiality levels within a single reporting entity. An entity may have a quantitatively significant activity that would lead to a high entity-wide materiality amount. If used to assess materiality for the entity’s other activities, such materiality amounts could allow misstatements that would affect a reasonable financial report user’s judgments regarding the rest of the entity’s activities. In such cases, other qualitative and quantitative factors could lead to a separate materiality level.
The Board agreed to move to a pre-ballot version and vote prior to the next Board meeting.
Issue Paper for August 29-30, 2018 – Tab G (PDF)
June 27-28, 2018
The Board reviewed the draft materiality ED and discussed whether “substantial likelihood” correctly captured the degree of certainty that members had intended regarding material misstatements. Various members expressed concern that materiality required a higher threshold of certainty than “substantial likelihood” communicated and stressed the importance of making this clear to readers. One member suggested adapting language used by both the Auditing Standards Board and the International Auditing and Assurance Standards Board. Both boards utilize “reasonably be expected” in their discussions surrounding materiality. The Board acknowledged the merits of using similar wording in the materiality ED. Ultimately, members decided to replace “substantial likelihood” with “reasonably be expected” in the discussion of material misstatements.
The Board also discussed whether or not to address presentation of irrelevant information in disclosures within the materiality ED. This led the Board to discuss levels of materiality in the context of reporting across the entity. The materiality considerations may change as financial information is rolled up into the reporting entity. Given these considerations, the OMB member offered to draft language regarding levels of materiality and relevance of financial information. After reviewing the language, the Board will make changes and determine whether the new text belongs in the proposed concepts or basis for conclusions.
Issue Paper for June 27-28, 2018 – Tab B (PDF)
The Board did not discuss the project in June 2018.
April 25-26, 2018
The Board’s April meeting discussion on materiality focused on refining the section language to make it more precise and clearer. The Board discussed avoiding over-disclosure, not requiring absolute perfection, not creating quantitative considerations for materiality, and addressing classified information. The discussion on these topics will be reflected in the proposed materiality section.
During the October 2017 meeting, the Board approved the note disclosure (NODI) project’s two-phased project plan. Currently, the project is in the first phase. The NODI working group resumed its tasks after the year-end busy season in December 2017.
During the April 2018 meeting, the Board approved the NODI project’s approach, scope, and some potential principles. Members discussed the following:
- Disclosure objectives for each Statement to help preparers stay focused and potentially use their judgment to remove unnecessary disclosure
- A project approach with the traditional disclosure method and a focus on disclosure principles
- A concentration of the project scope on the disclosure principles and some discussion of non-FASAB information
- The Board did not favor the two-tiered approach suggested by other accounting standards board staff (required summary and potential additional information for each disclosure).
February 21-22, 2018
The Board discussed a new proposed materiality definition. This new definition was introduced in an effort to update the current FASAB materiality guidance so that it is clearer. The materiality definition should also be centralized and provide a thorough discussion of related federal environment considerations.
The Board’s feedback on the new materiality definition was positive, with only minor edits to the current writing. Members agreed that the new definition should be placed in SFFAC 1, Objectives of Federal Financial Reporting. Staff will update the definition based on member feedback and provide it to the Board for review.
Issue Paper for February 2018 – Tab J (PDF)
October 25-26, 2017
At the October 2017 meeting, the Board approved the note disclosure project plan. The primary objectives of this project are to improve the relevance, clarity, consistency, and comparability of note disclosures among the federal entities. It includes two phases:
- Phase I consists of identifying and developing a set of principles for disclosure to be used by the Board and preparers to reduce repetition and improve relevance and consistency in note disclosure.
- Phase II consists of using the principles to modify the existing note disclosure requirements for component reporting entities to improve the disclosures’ usefulness and effectiveness.
On August 31, 2017, FASAB initiated an online note disclosure survey. The survey results confirmed the need to improve disclosures and targeted areas for improvement. Most respondents agreed that providing principle guidance would give flexibility to the agency while adhering to the objectives and increasing consistency. The respondents stated that the causes of note disclosure issues vary. These could be due to compliance with Circular A-136, input from the Certificate of Excellence in Accountability Reporting reviewers, or the auditor’s requirements (which are more rigorous than those required by FASAB).
During the meeting, the Board reviewed the survey results and provided some suggestions on the following topics:
- Audiences of the future note disclosure principles – While it is critical to identify the primary users of both the component reporting entities’ financial reports and the consolidated financial report of the U.S. Government, it might be more relevant to make the note disclosures appealing to different groups. As identified in SFFAC 1, Objectives of Federal Financial Reporting, both internal and external users will be considered in the project: citizens, Congress, federal executives, and federal program managers. Instead of defining the primary users, this project will utilize the objectives defined in SFFAC 1 as guidance to develop the note disclosure principles. SFFAC 1 summarizes the objectives as such:
The objectives are designed to guide the Board in developing accounting standards to enhance the financial information reported by the federal government to (1) demonstrate its accountability, (2) provide useful information, and (3) help internal users of financial information improve the government’s management.
- Principle-based framework with a concentration on providing relevant information – If an entity engages in the type of activity required by a note, and amounts involved are material, then the entity should present the information in the note. Disclosure should not be optional.
- Judgment – Materiality should be described in both qualitative and quantitative terms, and it should be evaluated at the component level.
- Improve clarity, consistency, and comparability – Taking a two-tiered approach to setting standards would not be particular helpful. There are pros and cons for providing illustrations and/or a checklist. Principles addressing readability would help the clarity and increase consistency of the note disclosures.
This project will be challenging considering the broad scope, complexity, and uniqueness of the federal government. The working group will resume its research in November after agencies’ year-end work is complete.
August 31, 2017 Board Meeting
On August 31, 2017, the Board initiated an online note disclosure survey. The objective of the note disclosure survey was to solicit ideas for improving note disclosures and identifying areas where FASAB’s guidance could aid in streamlining the reporting of note disclosures in financial reports.
February 22, 2017 Board Meeting
During its February 2017 meeting, the Board approved a project to review and streamline existing note disclosures. To streamline note disclosures, the Board intends to review the materiality guidance and identify and develop a set of principles for note disclosures.
Issue Paper for February 22, 2017 – Tab E (PDF)