Note Disclosures

FASAB Contact: Grace Wu, WuG@fasab.gov, 202-512-7377

Request for CommentDue DateWord Version of questions for RespondentsComment LettersFinal Pronouncements
Materiality (PDF)March 11, 2019 (updated due to shutdown)Word Version of Questions for Respondents (Download)Comment LettersN/A – Currently Under Due Process

Project Objective:

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.

Disclosure Working Group Roster as of 12/28/2017

HISTORY OF BOARD DELIBERATIONS

August 28-29, 2019

At the August 29 meeting, staff and representatives from the note disclosures working group presented draft research results regarding proposed decision questions that may be considered when establishing disclosure requirements. They discussed the following three areas for each topic: (1) proposed NODI questions for FASAB, (2) applicability to the federal environment, and (3) examples that may apply. The Board generally agreed with the proposed decision questions and the method to categorize the questions by topic. The following eleven decision question topics were discussed in detail during the meeting:

  • New or modified accounting pronouncements
  • Alternative GAAP
  • Line item considerations
  • Budgetary/proprietary impact considerations
  • Method of measurement
  • Uncertainties
  • Phenomenon
  • Binding arrangements/obligations
  • Changes to nonfinancial assets
  • Stewardship
  • Categorization

Staff and the working group will update the topics and proposed decision questions based on the feedback received during the meeting.

Issue Paper for August 28-29, 2019 – Tab F (PDF)

Materiality

At the August 29 meeting, the Board generally supported the latest edits to the proposed Materiality Statement of Federal Financial Accounting Concepts (SFFAC). Members made additional edits and updates to the draft Statement.

Mr. Patrick McNamee indicated his intent to dissent on the draft materiality Statement due to his concern regarding the term “could reasonably be expected” in the materiality definition. Mr. McNamee believes that the Board should defer action on this Statement until the Auditing Standards Board (ASB) completes its project on materiality. In its recently issued ED, the ASB used the term “substantial likelihood” in the materiality definition.

The Board members discussed that materiality definitions vary among other standards-setters’ current and proposed guidance. The Board noted that the accounting and auditing materiality issues are different and, therefore, there is not a need to align the definitions. The Board proposed “could reasonably be expected” in its ED and received positive feedback on the proposed materiality concepts. The Board concluded that the term “could reasonably be expected” is appropriate in assessing materiality in the federal financial reporting environment.

Members other than Mr. McNamee agreed to move forward with an updated draft and a pre-ballot Statement prior to the October meeting. They plan to ballot the proposed Statement at the October meeting.

Issue Paper for August 28-29, 2019 – Tab A (PDF)

June 26-27, 2019

The Board discussed updates to the draft note disclosure principles, including the newly added section related to note content. Members suggested minor edits and suggestions on the draft. Staff and the working group continue their research on the proposed decision questions for the Board to consider in establishing disclosure requirements.

Issue Paper for June 26-27, 2019 – Tab J (PDF)

Materiality

The Board generally supported a pre-ballot draft Materiality Statement. Members made minor edits and updates to the pre-ballot draft. Staff will further develop in the basis for conclusions the Board’s consideration of other standard-setters’ materiality definitions. The Board is expected to review an updated pre-ballot draft at the August 2019 meeting.

Issue Paper for June 26-27, 2019 – Tab C (PDF)

April 24-25, 2019

The working group, in conjunction with staff, continues its research on developing the note disclosure principles, specifically questions for the Board to consider with developing note disclosure requirements.

Issue Paper for April 24-25, 2019 – Tab B (PDF)

Materiality

At the April 2019 Board meeting, staff presented a summary of comment letters from the materiality ED. Nearly all 19 respondents agreed with the proposed materiality guidance and its placement in SFFAC 1, Objectives of Federal Financial Reporting. The respondents agreed that the proposed materiality guidance provides a helpful discussion of users, scope, and factors to consider in the federal government environment. A number of respondents raised concerns about materiality differences by line item. The Board agreed to eliminate the line item discussion from the guidance.

Some respondents suggested different placement for the proposed materiality guidance in SFFAC 1. The Board agreed to insert a chapter titled Materiality between the current chapter 6: Qualitative Characteristics of Information in Financial Reports and chapter 7: How Accounting Supports Federal Financial Reporting.

Members agreed not to add a detailed discussion on quantitative and qualitative considerations for materiality. The Board believes that its emphasis on the importance of evaluating both quantitative and qualitative factors in the determination of materiality, without providing specifics, allows entities broader flexibility in exercising materiality judgments.

The Board agreed not to reference other existing literature. The Board noted that the information would not be valuable and it is not the Board’s intent to endorse or prioritize these sources. Staff will make other minor updates to the proposed guidance based on the feedback from the comment letters.

The Board agreed to forgo a hearing and proceed with finalizing the concepts statement.

Issue Paper for April 24-25, 2019 – Tab E (PDF)

February 27, 2019

At the February Board meeting, the Board approved updated partial draft language for note disclosure principles. This updated version addressed the comments from the last Board meeting and added additional language to help the Board apply the principles. A few minor modifications will be made in this updated version based on the February Board meeting discussion. In addition, the note disclosure working group resumed its activity in February and will continue developing principles.

Issue Paper for February 27, 2019 – Tab B (PDF)

Materiality

Comment letters responding to the proposed Statement of Federal Financial Accounting Concepts titled Materiality were due on March 11, 2019. Those comment letters will be summarized and presented to the Board at the April Board meeting.

The ED and the specific questions raised are available on the FASAB website in PDF and Microsoft Word format, respectively (http://www.fasab.gov/documents-for-comment/).

December 18-20, 2018

Note Disclosures

The Board approved a partial draft of the note disclosure (NODI) principles. The draft covered the disclosure purpose and most of the disclosure content sections from the NODI principles outline. Staff will refine the partial draft based on input from members. Staff will focus on the following areas:

  • Whether the notes can be used as a substitute for the proper recognition and/or measurement of an element in the financial statement
  • Relevance versus materiality
  • Usefulness and disclosure objectives

This partial draft will be discussed with the working group for feedback from preparers and auditors.

Issue Paper for December 19-20, 2018 – Tab B (PDF)

Materiality

(In light of the partial government shutdown, FASAB has extended the comment deadline for the ED Materiality to March 11, 2019.)

FASAB is seeking comments on the proposed Statement of Federal Financial Accounting Concepts titled Materiality. To clarify the materiality guidance, the Board is proposing concepts regarding the application of materiality in the federal financial reporting environment. This concepts statement would (1) provide materiality concepts, (2) specify the scope of materiality, and (3) list factors to consider when applying materiality.

The ED and the specific questions raised are available on the FASAB website in PDF and Microsoft Word format, respectively (http://www.fasab.gov/documents-for-comment/).

October 24-25, 2018

Note Disclosures

The Board approved the proposed outline for the note disclosure principles framework, which included four sections: disclosure purposes, disclosure content, what should not be disclosed, and disclosure style. The Board agreed that the user’s need for disclosures should be incorporated in the disclosure purpose. Members also believed a potential section title such as “list of items to consider in deciding on disclosure” could be used to replace the proposed section title “what should not be disclosed.”

The Board also considered topics related to note disclosure including future-oriented information, the role and content of note disclosure compared to management’s discussion and analysis (MD&A), and sensitive disclosures. The members made the following conclusions:

  • Future-oriented information can be categorized in two ways—future oriented information recognized in the statements and unknown future events.
  • What is required in the notes and MD&A should be driven by what users need. The basic financial statements and the notes should be a standalone portion of each report. The notes are an integral part of the financial statements.
  • Sensitive disclosures may be limited to national security, procurement, and litigation.

Issue Paper for October 24-25, 2018 – Tab B  (PDF)

Materiality

On October 15, 2018, FASAB released for comment a proposed Statement of Federal Financial Accounting Concepts titled Materiality. Comments are due by January 23, 2019.

To clarify the materiality guidance, the Board is proposing concepts regarding the application of materiality in the federal financial reporting environment. This concepts statement would (1) provide materiality concepts, (2) specify the scope of materiality, and (3) list factors to consider when applying materiality.

August 29-30, 2018

Note Disclosures

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)

Materiality

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

Materiality

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)

Note Disclosures

The Board did not discuss the project in June 2018.

April 25-26, 2018

Materiality

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.

Note Disclosures

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).

Issue Paper for April 25-26, 2018 – Tab B & C (PDF)

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.

Issue Papers for October 25-26, 2017 – Tabs H-1 and H-2 (PDF)

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)