A question included in a recently issued FASB exposure draft could result in the FASB considering additional disclosures about potential and existing litigation, suspected or known violations of laws, regulations, or contractual terms, and other uncertain conditions if the FASB believes that such uncertain conditions can affect the assessment of an entity’s future cash flows. The question is included in Appendix A to the FASB’s March 2014 exposure draft of a new chapter related to disclosures in notes to financial statements for its Conceptual Framework for Financial Reporting. The proposed questions in Appendix A, which are intended to be used by the FASB in evaluating the need to require disclosure about specific accounting topics in the notes to the financial statements, address the three types of information that the exposure draft states are appropriate for these notes:
- Information about specific line items to amplify or explain the information on the face of the financial statements
- Information about the nature of the entity, its activities, any special restrictions or privileges that apply to it, and other advantages and disadvantages relative to other entities
- Information about other past events and current circumstances and conditions that will or may affect an entity’s future cash flows but that have not affected a line item.
The exposure draft also discusses forward-looking information, which was a subject of concern based on the scope of the FASB’s “Invitation to Comment, Disclosure Framework” that it issued in July 2012. The exposure draft notes that “it is not necessary for the Board to require that entities disclose in notes to financial statements the types of future-oriented information with the greatest potential for negative consequences to a reporting entity.” The exposure draft states, however, that there are at least three types of future-oriented information that may be useful disclosure in notes to financial statements:
- Information about estimates and assumptions underlying valuations and other amounts reflected in the financial statements
- Information about plans and strategies related to matters under management’s control
- Information about the effect of specified future changes in existing conditions on specific line items or on the entity as a whole.
The third type of information may have led to the inclusion of the question about the effect of litigation, legal violations, and other uncertain conditions on a user’s assessment of an entity’s future cash flows, which appears in Appendix A under “Information about Other Past Events and Current Conditions and Circumstances That can Affect an Entity’s Cash Flows.”