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SEC’s Investor Advisory Committee concerned over FASB proposals on materiality disclosure

Sharply worded letter to accounting standards body from Dodd-Frank committee

An investor-focused panel set up by the Securities and Exchange Commission under the Dodd-Frank Act and including figures such as Anne Sheehan of CalSTRS and Adam Kanzer of Domini Social Investments has expressed its “concern” over new proposals about corporate materiality disclosure from the Financial Accounting Standards Board (FASB).

Sheehan, CalSTRS’ Director of Corporate Governance, is Vice Chair of the body, the Investor Advisory Committee (IAC). It is chaired by Kurt Schacht, Managing Director of the CFA Institute.

Influential accounting standards body FASB last fall surprised investors in the US by proposing that a very narrow definition of materiality be adopted. FASB said the definition should mirror that which the Supreme Court uses in fraud cases.

Materiality refers to information that companies believe investors (and the public) need to know about their business. Typically this means financial information that the SEC already requires in the so-called ‘10-K’ filing. But it also can include other matters like ESG (environmental, social and governance) issues.

According to the Supreme Court’s definition, information is considered material if there is “a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.”

FASB further proposed widening the discretion of companies to decide what information is material, with the Supreme Court’s definition to be used as guidance.It said this would improve the quality and effectiveness of corporate financial disclosures, as they would be rid of ‘immaterial’ information.

“We urge FASB to reconsider the approach”

How FASB ultimately defines materiality is important, as the SEC has traditionally relied on its expertise in establishing corporate accounting and reporting standards. The Connecticut-based body has not made up its mind yet and is inviting comments from interested parties.

But, in its response, the IAC has sent FASB a sharp letter saying it completely rejects its proposals: “We are writing to express concern over the proposed amendments.”

“As part of its review, we determined that they would more likely reduce disclosure with the potential to adversely affect the quality of financial disclosure without sufficient offsetting benefits to investors,” the IAC said. “We therefore urge FASB to reconsider the approach set out in the proposals.”

IAC’s main complaint is that the proposal would simply lead to companies disclosing less information about their businesses to investors and the public. It said: “Granting issuers (i.e. companies) greater latitude to use discretion in evaluating the materiality of disclosures is fraught with the risk that disclosures that are unfavourable to the issuer are disproportionately viewed as immaterial and hence excluded from financial statements.” Link