Conceptual Framework for Financial Reporting: Chapter 8, Notes to Financial Statements
(A Concepts Statement That Addresses the Board’s Decision Process as Part of the FASB’s Disclosure Framework Project)


The Financial Accounting Standards Board (FASB) on August 28, 2018 issued a chapter of the FASB’s Conceptual Framework for Financial Reporting related to notes to financial statements.
The chapter of the Conceptual Framework for Financial Reporting, Chapter 8, Notes to Financial Statements, comprises the Board’s decision-process component of the FASB’s Disclosure Framework project. The Board’s decision process will help the Board identify relevant information and establish limits on information that should be included in notes to financial statements.

Why Is the FASB Issuing This Chapter?

This chapter will aid the Board in identifying disclosures to be considered when setting disclosure requirements. An item that may be considered for disclosure by the Board because of the decision process will not automatically become a required disclosure. The Board and its staff will continue to evaluate the costs and benefits associated with each potential and existing disclosure.
The chapter will help the FASB improve its procedures and promote consistent decision making when determining disclosure requirements.

How Will the Board Use the Chapter?

This chapter is similar to the rest of the FASB’s Conceptual Framework for Financial Reporting in that it establishes concepts for the Board to use in developing standards of financial accounting and reporting.
This chapter provides the Board with a tool to identify information that could be appropriate for inclusion in notes to financial statements and relevant to the users of those statements.
This chapter identifies, by design, a broad range of possibilities for the Board to consider when deciding on the disclosures related to a particular Topic. From that intentionally broad set, the Board would identify a narrower (and, in many cases, a far more narrow) required set of disclosures for that Topic.
This chapter of the Conceptual Framework does not specify how the Board should accomplish that narrowing of disclosures. That can best be done in the context of individual standard-setting projects.
The Board would have to assess whether the potential benefits of providing specific information justify the costs associated with providing that information, including consideration of whether the information is required to be provided in another context.

What Are the Main Components of the Chapter?

The chapter discusses the information that should be considered for inclusion in notes to financial statements. It first describes the purpose and general limitations of notes and then more directly addresses the nature of their appropriate content in detail.
The FASB and its staff have received significant feedback that forward-looking information should not be included in the notes to the financial statements.
Generally, the Board’s decision process indicates that forecasts, predictions, and expectations about the future should not be disclosed in the notes to the financial statements.
However, there are instances in which amounts recorded on the balance sheet or alternatively measured in the notes incorporate expectations and assumptions about the future. In those specific cases, certain disclosures of those expectations and assumptions that are inputs to those measurements may be appropriate for consideration for disclosure by the Board.

How Does the Chapter Address Interim Reporting?

The Board believes it is important that the Conceptual Framework considers disclosures in financial statements for interim periods, in addition to disclosures in annual financial statements.
Because interim-period financial statements are integral parts of the annual report, and because the accounting during those interim periods is sometimes different than the annual, this chapter states that interim-period notes should describe items such as:
  • Differences from the most recent annual financial statements in recognition, measurement, or presentation of line items
  • How the financial position and results of operations for the interim period relate to the entire year, for example, the effect of seasonal variations in revenues. 
The Board also acknowledges that interim-period financial statements are not designed to be as complete as a set of annual financial statements. Therefore, they are necessarily not as informative. The chapter includes concepts that indicate whether an annual disclosure should be provided at interim periods given the limits of interim-period statements.

Other Disclosure Framework Documents

The Board is issuing three documents along with Chapter 8, Notes to Financial Statements.
The update to the Conceptual Framework for Financial Reporting, Chapter 3, Qualitative Characteristics of Useful Financial Information, aligns the FASB’s definition of materiality with definitions and discussions of the SEC, auditing standards of the PCAOB and AICPA, and the judicial system in the United States.
The Updates to Topic 820, Fair Value Measurement, and Topic 715, Compensation, amend disclosure requirements using the concepts in Chapter 8. 

What Are the Next Steps in the Process?

The Board will continue to use the chapter to examine current disclosure requirements related to income taxes and inventory, as well as for any current or future project in which disclosure requirements may be set or amended. This includes disclosure review projects currently on the research agenda related to intangibles, share-based payments, and foreign currency.
The Board is concluding deliberations on disclosures related to government assistance and has begun deliberations on interim disclosure requirements.

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