The Public Company Accounting Oversight Board (PCAOB) recently issued a white paper discussing its intent to look at auditor responsibilities for financial statement disclosures. Although the PCAOB has jurisdiction over only public companies, the topic has great relevance for private companies as well, and also for issuers in addition to auditors.
This topic is being driven in part by the increased requirements for disclosures in financial statements. Examples include the significant disclosure requirements supporting fair value disclosures and the proposed expansion of revenue recognition disclosures. Increasingly, accounting rules focus on disclosures as much as numbers. This focus emphasizes a position that we have discussed previously: the importance of the disclosures accompanying the basic financial statements. Without disclosures, numbers are numbers.
The concerns with footnotes are twofold: are they right and are they informative? Of course, the former is factual and the latter is, at least partially, subjective. That said, companies and auditors have a responsibility to inform users of information relevant to their understanding of the statements. The FASB has moved issuers in the direction of disclosures through the topic of disclosure requirements but there is more to be done.
Issuers and auditors too often attempt to meet the letter of the law but not the spirit. How often do you see boilerplate disclosures? Frequently, a standard disclosure is appropriate and meets a requirement. However, this can be taken to an extreme and, too often, it reflects a lack of focus on meeting the needs of the users.
Because of the already-present and expanding footnote requirements, you should expect to see the footnotes attain increasing prominence as an integral part of the financial statements in the future. We do not see this as inconsistent with the direction of private company reporting, which may reduce some of the accounting rules and disclosures. The convergence of the two trends is to meet the needs of users.
As users of private company financial statements, you have direct interaction with the issuing company. This affords the opportunity to steer the disclosure of information in the direction of the needs of you, the user. Don't be afraid to ask! Clearly, certain matters that users want to see are outside the scope of financial statements, but there may be ways to get what you would like to see.
Here are a few questions that you may want to consider:
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Does the scope of the reporting meet my needs? Would combined or combining statements (which combine entities with significant common ownership that have a brother-sister relationship) better meet my needs? |
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Are there particular footnotes that could be expanded to provide information particularly relevant to my needs? |
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If the basic financial statements, including footnotes, are not the proper place for increased disclosures, can I get this information as supplementary data? This is, of course, a very common "add-on" to the required financial statements and can take many forms. For example, it is common to provide details of contracts in progress for contractors supplementally and to provide various ratio calculations. |
We hope the above will help in your interaction with your issuers. As many of you know, the intent of these articles is to look at financial reporting from the view of the user, particularly the lender user.
If you have questions, PLEASE CONTACT OUR OFFICE.
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