Accounting

3 Things Regulators Need to Consider When Changing Financial Disclosure

Earlier this year, the SEC issued a concept release seeking public comment on how it could update and improve the business and financial disclosures required by Regulation S-K to make them more meaningful to investors.

Financial Executives International added the preparer voice to the discussion surrounding the improvement of financial disclosures when its Committee on Corporate Reporting (CCR) suggested three areas regulators should focus on as it considers changes to the current regime.

CCR made its thoughts known to the U.S Securities and Exchange Commission when it submitted its response to a request for comment on changes to Regulation S-K.

Earlier this year, the SEC issued a concept release seeking public comment on how it could update and improve the business and financial disclosures required by Regulation S-K to make them more meaningful to investors. The concept release is part of a broader effort by the SEC to improve disclosures as part of its disclosure effectiveness initiative.

In the letter, CCR commends the SEC’s efforts to improve disclosures for the benefit of investors and public companies. CCR recommends that the SEC focus those efforts in three key areas:

  • Principles-based Framework: A principles-based framework, appropriately designed with clearly stated objectives, provides the best foundation to achieve the objective of delivering decision-useful information to investors and other users of financial statements.
  • Material Information: Materiality should continue to be the primary consideration for determining what gets disclosed and to what extent.
  • Flexibility: Disclosures in general should be flexible, and based on meaningful and material factors for a registrant’s industry and business. Thus, a materiality-focused and principles-based approach would afford companies the appropriate flexibility to determine how to convey information to investors most effectively within this framework.

In its letter CCR also points out the need for the SEC to continue its encouragement to registrants to take up voluntary initiatives to improve disclosures, while also highlighting many of the innovative and modern ways companies are taking on this task. Some of these disclosure improvements were highlighted in research study conducted by the Financial Executive Research Foundation (FERF) and EY, and during a recent conference at the Lubin School of Business at Pace University (in collaboration with FEI and EY) that brought together regulators, standard setters, preparers and investors to discuss emerging trends in corporate reporting and disclosures.

In its letter, CCR also urged the SEC to avoid calls to expand disclosure requirements intended to address societal issues unrelated to the SEC’s core mission of investor protection, and that may not appropriately consider materiality or whether such information is useful to reasonably knowledgeable investors.

To download a copy of the letter click here.

CCR is a technical committee of FEI that reviews and responds to research studies, statements, pronouncements, pending legislation, proposals and other documents issued by domestic and international agencies and organizations. CCR member companies represent approximately $5 trillion in market capitalization and actively monitor the regulatory and standard setting activities of the SEC, Public Company Accounting Oversight Board (PCAOB) and Financial Accounting Standards Board (FASB).