December 7, 2015
Sent via electronic mail: [email protected]
Ms. Susan M. Cosper
Technical Director
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
Re: File Reference No. 2015-300 on Conceptual Framework for Financial Reporting and No. 2015-310 on Notes to Financial Statements (Topic 235)
Dear Ms. Cosper:
On behalf of the American Federation of Labor and Congress of Industrial Organizations (the “AFL-CIO”), I am writing to comment on the Financial Accounting Standards Board’s (“FASB”) Exposure Drafts on Conceptual Framework for Financial Reporting (“Conceptual Framework”), and Notes to Financial Statements (Topic 235) (“Notes”), on materiality, dated September 24, 2015. We are deeply troubled by FASB’s proposals to redefine materiality and we believe the proposals should be withdrawn.
The AFL-CIO is the umbrella federation for U.S. labor unions, including 56 unions representing 12.5 million union members. Union-sponsored and Taft-Hartley pension plans hold $587 billion in assets. Union members also participate directly in the capital markets as individual investors and as participants in pension plans sponsored by corporate and public-sector employers. The retirement savings of America’s working families depend, in part, on companies making effective disclosures to investors.
The existing FASB definition of materiality states that “Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.” (Chapter 3, Qualitative Characteristics of Useful Financial Information, FASB Concepts Statement No. 8). In the Conceptual Framework, FASB proposes to replace this definition to state: Materiality is a legal concept. In the United States, a legal concept may be established or changed through legislative, executive or judicial action.
In the Conceptual Framework, FASB observes the U.S. Supreme Court’s antifraud definition of materiality—“information is 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.”
In the Notes exposure draft, FASB explains that adopting a legal definition of materiality is intended to “improve the effectiveness of disclosures in the notes to financial statements.” Specifically, FASB states the new definition of materiality would promote “discretion,” and could reduce or eliminate “irrelevant disclosures.” The notes to the financial statements provide important context for the numbers provided by companies in their financial statements, so any changes to the definition of materiality for notes disclosure will have a major impact on financial reporting.
We strongly oppose redefining materiality based on a legal definition rather than as an accounting concept that has long been familiar to investors. A legal definition of materiality will unacceptably narrow the amount of information that is required to be disclosed. The proposed legal definition shifts the determination of materiality from information that “could influence decisions that users make” to a “substantial likelihood” that the disclosure will “significantly alter the total mix of information.” In other words, information that could influence the decisions of investors would no longer need to be disclosed unless it has a high probability of having a significant impact.
We are also concerned that the proposed legal definition of materiality will insert the subjective opinions of attorneys into the disclosure decision-making process. At present, the preparers of financial statements and their auditors determine whether information is material and should be disclosed. In close questions of whether information is material, the current definition of materiality encourages disclosure. Under the new standard, lawyers will be the ultimate arbiters of what must be included in financial statements. Accordingly, the definition of materiality will be subject to significant uncertainty given that different courts may issue varying decisions.
In our opinion, the proposed legal definition of materiality appears intended to benefit the preparers of financial statements without regard for the costs imposed on the users of financial statements. If adopted, financial statement preparers will have far greater latitude to avoid making disclosures. They may cherry pick the information they choose to disclose, opting to disclose favorable information, while omitting information which may be unfavorable. Providing less information in financial statements does not make the remaining disclosure more effective. To the contrary, investors are clamoring for more, not less, information in financial statements.
We are troubled by the manner in which FASB prepared the exposure drafts, apparently without seeking input from investors. FASB has stated that the proposals originated from the concerns of unidentified “stakeholders.” According to FASB’s website, it does not appear that FASB’s own Investor Advisory Committee has met in recent years. We also note that FASB’s Investor Advisory Committee does not include any representatives of beneficial asset owners such as pension plans. At a minimum, FASB should slow down and set up a panel of investors to solicit their views.
In conclusion, we urge FASB to withdraw the proposals and seek more input from users of financial statements. Thank you for taking the AFL-CIO’s views into consideration regarding this matter. If the AFL-CIO can be of further assistance, please contact Brandon Rees at (202) 637-5152 or [email protected].
Sincerely,
Heather Slavkin Corzo, Director
Office of Investment