Reducing Unnecessary Complexity in Financial Reporting
For example, reducing unnecessary complexity:
- Enables financial statement users to more easily identify and understand financial information about an organization, while making comparisons across organizations more effective and efficient
- Lowers preparers’ implementation costs, and makes transactions in the financial statements more consistent and straightforward by allowing for similar economic transactions to have similar accounting
- Reduces the attestation effort and cost for auditors, which in turn, reduces costs passed on to preparers.
The FASB’s Process to Reduce Unnecessary Complexity
Many suggestions to reduce unnecessary cost and complexity come directly from the FASB’s stakeholders. The FASB receives ideas from individual preparers, auditors, investors, and others; members of the FASB’s advisory groups; and industry organizations.
The FASB first talks to the stakeholder who sent us an idea. We want to make sure we understand the stakeholder’s concerns and suggestions. Our next step is to perform more research and outreach with other stakeholders:
- How widespread is the problem?
- What is the full range of potential solutions?
- How important is this issue relative to other improvements the FASB could make to GAAP?
- What new costs and benefits would arise from making a change?
- Is there a compelling argument to move forward?
Even projects designed to simplify GAAP can involve one-time costs to transition to the new guidance. During the standard-setting process we always conduct a thorough cost-benefit analysis to ensure that the expected improvement in the quality of the information provided to users—the benefit—justifies the cost of preparing and providing that information—and that we have reduced unnecessary complexity when we can.
Simplification as a Mindset
Simplification as a “mindset” helps the FASB identify opportunities to reduce unnecessary cost and complexity from the start of a project. Addressing unnecessary complexity from the beginning removes a potential impediment to an improvement: the resistance to future change.
The FASB launched a Simplification Initiative a few years ago to make more narrowly targeted improvements and simplifications to financial reporting through a series of short-term projects.
What we have learned from that initiative is simplification by reducing unnecessary complexity (and costs) is a concept that we can apply to all our projects.
Reducing Cost and Complexity Isn’t Always Simple
Although reducing unnecessary cost and complexity benefits all stakeholders, sometimes simplification is not easy. It can be a complex process that requires ongoing dialogue and strong cooperation among the FASB, investors, preparers, auditors, and other stakeholders.
This is because:
- The U.S. economy is a large, diverse and ever-changing environment. New industries, new financial products and structures, and new approaches to transactions sometimes push accounting standards to address business transactions that are inherently complex.
- Even simplification means change, and change is naturally hard for stakeholder organizations. The effects of change vary widely among organizations. Some stakeholders may be enthusiastic about a simplification opportunity, while others may not benefit as much and, therefore, may be less supportive.
We Welcome Your Feedback and Ideas
We are proud of the considerable progress we have made thus far in reducing unnecessary costs and complexity in financial reporting. The FASB plans to continue our efforts. Feel free to read more about the FASB’s current simplification projects, and other simplification projects that the FASB successfully completed.
We also welcome your feedback about our efforts to reduce unnecessary cost and complexity in financial reporting. A great place to start the conversation is by submitting new ideas for simplification in other areas of accounting. Please email your suggestions to email@example.com.