Proposed Concepts for Recognizing and Derecognizing Financial Statement Items
FASB has issued a proposal for public comment on the concepts it plans to utilize to determine when a company should incorporate an item into its financial statements or remove it. The board published “Proposed Statement of Financial Accounting Concepts 2022-ED400, Concepts 8—Conceptual Framework for Financial Reporting–Chapter 5: Recognition and Derecognition,” to update the recognition and derecognition concepts that have been around since 1984. Proposed Chapter 5 states that recognition is “the process of incorporating an item in financial statements of a reporting entity as an asset, liability, equity, revenue, gain, expense, loss, or investment by or distribution to owners.” A recognized item is depicted in both words and numbers, with the amount included in financial statement totals. For an asset or liability, “recognition involves recording the acquisition or incurrence of the item and later changes in the item (related to measurement), including changes that result in its removal from financial statements,” according to the proposed text. Chapter 5 is the second concepts chapter the board proposed this year, as it moves closer towards completing the conceptual framework. The deadline for submitting comments is Feb. 21, 2023.
More Disclosures Around Cost of Goods Sold Required, Investors Say
The rules FASB is trying to develop around the disaggregation of income statement expenses could help rectify the current habit of companies to skimp on details around the costs they incur to produce goods, board advisers said. Analysts find it difficult to thoroughly understand the cost of goods sold (COGS) line item and those figures can account for 70% of a company’s expenses, according to discussions by FASB’s Investor Advisory Committee (IAC) on Nov. 17. For example, “a company where they have a 25 percent gross margin … any more detail that we can get to understand what’s in COGS is really helpful in comparing what’s happening with them across the industry and how they’re performing,” Heather McPherson, associate portfolio manager at T. Rowe Price Group, said. The disclosure of items such as how much of the COGS is tied to raw materials versus employee compensation would be helpful, McPherson added. Furthermore, users want to understand how much of that employee compensation is stock based compensation versus cash and how much of that cost is fixed versus variable. Her remarks were part of IAC’s discussion about the FASB’s project on disaggregation of income statement expenses. The guidance aims address investors’ concerns that companies aggregate too many expense details under one caption in the income statement, one of the three core statements public companies file with the SEC.
Sustainability Disclosures Should Be Submitted at Same Time as Financial Statements
The International Sustainability Standards Board (ISSB) has affirmed that companies will be required to couple sustainability-related disclosures with their financial statements and submit them at the same time. The pairing and timing will enable investors to easily assess the information about environmental, social and governance (ESG)-related matters in the near term. “Having the benefit for investors to exercise their decisions as to invest, dis-invest, vote at the same time and with the connectivity with the financial statements for me is absolutely fundamental,” ISSB Chair Emmanuel Faber said. “I understand that there might be a challenge to be ready initially to do this, but there is both an absolutely necessary and actually not so sophisticated way of approaching the ability to do this which is what we do in accounting and that’s estimate and soft close,” he said. “In accounting, many companies are doing soft closing from October, November, September sometimes and they rely on very strong processes that have been there in place for years that give them comfort that there won’t be a significant change between what the number is in September and the estimates for the soft close and what’s going to be on the thirty-first of December if that is the year-end.” The decision relates to IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and is in line with feedback the board received. Discussions will continue in December.