The Road to Simplified Government Contractor Financial Statements

There has been a demand from many government contractors to reduce the required number of footnote disclosures in financial reports. Businesses and users of financial statements have complained that the disclosure rules in U.S. Generally Accepted Accounting Principles (GAAP) are redundant, hard-to-follow, and sometimes unnecessary.

With the Disclosure Framework Project, the Financial Accounting Standards Board (FASB) is working on ways to improve the effectiveness of disclosures in notes to financial statements for public and private companies, as well as nonprofit organizations. The objective is to clearly communicate information that is most important to users of financial statements with an emphasis on relevance rather than volume.

“The framework is designed to lead to disclosures that clearly communicate the information that is most important to the users of financial statements. It is intended to promote consistent decisions by the FASB about disclosure requirements and guide reporting organizations when making disclosure decisions,” the FASB stated.

Some of the most notable decisions reached to date from the project are:

• Forecasts, predictions, and expectations about the future should not be disclosed in the notes to financial statements unless balance sheet amounts already recorded were based on assumptions.
• The FASB recognizes that U.S. GAAP applies to a broad range of organizations, many of which are not U.S. Securities and Exchange Commission (SEC) registrants.
• The purpose of notes to financial statements is to supplement or further explain the information on the face of the financial statements.  These notes contain information relevant to existing and potential donors, investors, lenders, and other creditors, allowing them to make informed decisions about providing resources.

The FASB is in the process of conducting a field study to test public, private, and nonprofit organizations’ abilities to exercise discretion over which disclosures they provide in notes to financial statements. In late 2013 or early 2014, the FASB is slated to publish a draft version of guidelines for the board to follow when it writes disclosure requirements for U.S. GAAP.

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