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SEC suspends effort to streamline corporate disclosure documents.

The Securities and Exchange Commission has postponed adopting a proposal that would have allowed companies to use an abbreviated financial statement in annual reports to shareholders. The proposal was issued in August 1995 and included several initiatives intended to reduce corporate disclosure burdens.

The proposal would have eliminated the footnotes from financial statements in the annual reports delivered to investors. (Anyone who wanted to see the footnotes could have requested them from the company.) Companies still would have been required to file the footnotes with the SEC. The SEC received over 1,500 letters concerning the proposal.

Meredith Cross, deputy director of the division of corporation finance of the SEC, told the Journal that although all of the comment letters agreed that disclosure documents were too complex, there was no consensus on how to achieve simplification. "Many users did not want to have to ask for the information in the footnotes," said Cross. "Companies urged the SEC to allow much greater streamlining, such as using selected financial data or summary annual reports. And organizations directly involved in financial statement preparation said the issue of information overload and disclosure effectiveness needed to be addressed at a more fundamental level and should involve the Financial Accounting Standards Board and the American Institute of CPAs."

Cross said the SEC was committed to working with the FASB and the AICPA to enhance the usefulness and cost effectiveness of financial reporting. "We felt that we needed to consider all the concerns and decide whether there were alternative approaches to financial reporting that would better serve both investors and companies," said Cross. She said the SEC would remain committed to tackling the issue of information overload and overly detailed financial reports.

Serious concerns

In a comment letter to SEC secretary Jonathan G. Katz, the AICPA supported the commission's objective to streamline financial information but urged the SEC not to proceed with its proposal to eliminate certain disclosures. The AICPA said the proposal would override the private-sector standard-setting process and was not in the public's interest. "We also believe that the SEC proposal undermines the relevancy of financial statements prepared in conformity with generally accepted accounting principles by implying that users do not need the information in financial statements," the letter said. The AICPA said the proposal had broad implications and should not be finalized before the FASB completed its own research and analysis.

The FASB expressed its own concerns about the SEC proposal. In a comment letter to SEC chairman Arthur Levitt Jr., FASB chairman Dennis R. Beresford said that financial statements were incomplete without their footnotes because they "provide information necessary for understanding the context and assumptions underlying the information reported in the financial statements." The letter also said abbreviated financial statements would lead ordinary investors to erroneously believe the abbreviated statements were all they needed to make informed investment decisions. "Inappropriate reductions in disclosure could increase market uncertainty and have serious consequences for capital formation."

Both comment letters warned that AICPA and FASB projects under way to improve the understandability of financial statements could be undermined by the SEC's proposal if it results in the assumption that only professional analysts need complete financial statements.
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Publication:Journal of Accountancy
Date:Jan 1, 1996
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