The following five disclosure techniques are used in varying degrees in contemporary financial statements:
1 Parenthetical explanations
2 Notes to the financial statements
3 Cross‐references
4 Valuation allowances (sometimes referred to as “contra” amounts)
5 Supporting schedules.
Parenthetical Explanations
Information is sometimes disclosed by means of parenthetical explanations appended to the appropriate statement of financial position caption. Parenthetical explanations have an advantage over both notes to the financial statements and supporting schedules. Parenthetical explanations place the disclosure prominently in the body of the statement instead of in a note or schedule where it is more likely to be overlooked. For example:
Example—Parenthetical Explanations
| Common stock ($10 par value, 200,000 shares authorized, 150,000 issued) | $1,500,000 |
Notes to Financial Statements
If the information cannot be disclosed in a relatively short and concise parenthetical explanation, a note disclosure is used. For example, see the following.
Example—Internal Reference to Note
| Inventories (see note 1) | $2,550,000 |
The notes to the financial statements would contain the following:
Note 1: Inventories are stated at the lower of cost or market. Cost is determined using the first‐in, first‐out (FIFO) method.
Cross‐References
Cross‐referencing is used when there is a direct relationship between two accounts on the statement of financial position. For example, among the current assets, the following might be shown if $1,500,000 of accounts receivable were pledged as collateral for a $1,200,000 bank loan.
Example—Cross‐References to Other Line Items
| Accounts receivable pledged as collateral on bank loan payable | $1,500,000 |
Included in the current liabilities would be the following:
| Bank loan payable—collateralized by accounts receivable | $1,200,000 |
Valuation Allowances or Contra Accounts
Valuation allowances are used to reduce or increase the carrying amounts of certain assets and liabilities. Accumulated depreciation reduces the carrying value of property, plant, and equipment, and a bond premium (discount) increases (decreases) the face value of a bond payable as shown in the following illustration.
Example—Valuation Allowances or Contra Accounts
| Equipment | $18,000,000 | |
| Less accumulated depreciation | (1,625,000) | $16,375,000 |
| Bonds payable | $20,000,000 | |
| Less discount on bonds payable | (1,300,000) | $18,700,000 |
| Bonds payable | $20,000,000 | |
| Add premium on bonds payable | 1,300,000 | $21,300,000 |
PRACTICE ALERT
Disclosures have drawn the attention of both the FASB and the SEC. As the disclosure requirements have accumulated over the years, there has been a growing concern about information overload and whether more is necessarily better. Both the FASB and the SEC have initiatives to improve disclosures.
FASB Initiative
The FASB currently has projects on:
Income taxes
Interim reporting
Inventory
Government assistance
Disaggregation of performance information
Not‐for‐profit reporting of gifts‐in‐kind
Segment reporting
Simplifying the balance sheet classification of deb t
The most recent information on the FASB initiative can be found in this volume in the chapter on ASC 105.
SEC Initiative
In August 2018, the SEC as part of its Disclosure Simplification Initiative published a rule reducing the public company's disclosure requirements and asked the FASB to review its corresponding disclosure rules. For more information, see SEC Release No. 33‐10110 on sec.gov.
In December 2015, the Fixing America's Surface Transportation (FAST) Act directed the SEC to modernize and simplify form S‐K requirements. The SEC is reviewing specific sections of regulations S‐K and S‐X, with a goal of updating requirements and eliminating duplicate disclosures. The Commission also wants to continue to provide material information and reduce cost burdens on companies. As part of the project, the SEC amended its rules in August 2018 and March 2019. In January 2020, the SEC, in response to a study mandated by the Jumpstart Our Business Startups Act, proposed amendments to modernize, simplify, and enhance certain financial disclosures required by Regulation S‐K. These proposed changes are designed to eliminate duplicative disclosures and modernize and enhance Management's Discussion and Analysis disclosures. Those interested in the SEC's disclosure project should visit sec.gov.
Suggestions for Improving Disclosure Effectiveness
In an April 2014 speech by Keith Higgins, SEC Division of Corporation Finance Director, Mr. Higgins suggested some ways that all entities can use to improve disclosure effectiveness. The highlights can be found below, and the full speech is available on sec.gov.
Reduce
