Disclosure

overload and
complexity:
hidden in
plain sight
kpmg.com

2 | Disclosure Overload and Complexity: Hidden in Plain Sight

Contents
Executive summary

Introduction 4
Historical financial reporting initiatives

Recently adopted disclosure requirements

Review of academic and other relevant literature

10

A. Recent academic literature on disclosure complexity

10

B. Other relevant literature

11

Review of reports on Form 10-K

A. Observations from review of reports on Form 10-K
Survey of FEI members: JanuaryFebruary 2011

12
12
16

A. Significant survey results

18

B. Survey results applicable to sources of disclosure overload and complexity

20

C. Survey results applicable to possible solutions to

disclosure overload and complexity

32

D. Results from the Audit Committee Institute Conference

36

Recommendations for reduction of disclosure overload and complexity

38

Appendix A Comparative volume analysis for 25 selected companies

43

Appendix B P
 ension and other post-retirement benefit plan
footnote disclosures

45

Appendix C Fair value, derivatives and hedging footnote disclosures

47

Appendix D Survey for financial executives

49

Bibliography 52

2 | Disclosure Overload and Complexity: Hidden in Plain Sight

Executive summary
The sheer quantity of financial
disclosures has become so excessive
that weve diminished the overall value
of these disclosures.1
Although this statement could easily be made today, this quotation
is from an article that was written by Ray Groves, a former partner
in the firm of Ernst & Young in 1994. In the 17 years since Groves
article appeared, financial disclosure has expanded significantly.
Financial reporting standards setters, including regulators in their
role as financial reporting standards setters, have issued more
than 200 new documents in the form of Emerging Issues Task
Force (EITF) consensuses, accounting standards, Accounting
Standards Updates (ASU), Securities and Exchange Commission
(SEC) Staff Accounting Bulletins and Financial Reporting Releases
as well as interpretive guidance in letters and speeches. Post-1994
disclosure standards expansions have included very significant
new requirements such as the SECs 1997 rule making requiring
disclosures about derivatives and market risk, the Financial
Accounting Standards Boards (FASB) Statement No. 132 as
amended addressing Employers Disclosures about Pensions
and Other Postretirement Benefits, FASBs expanded disclosure
requirements relative to fair value measurements and numerous
SEC staff letters referred to as Dear CFO Letters that require
various industry and event-specific types of disclosures.2
As financial standards setting is moving toward convergence with
International Financial Reporting Standards (IFRS) and as there
is expectation that future standards setting will be based more
heavily on principles with a resultant increase in the need for
disclosure, the consideration of optimal disclosure becomes more
critical. Additionally the SECs mandate for detailed XBRL tagging
of information in financial statement footnotes raises another
consideration relative to the cost of each quantitative disclosure;
that is the XBRL mandate magnifies the overall cost of each
incremental disclosure requirement. For purposes of this paper,
the research has examined financial disclosure expansion over

Groves, Ray J., Financial Disclosure: When More Is Not Better, May 1994. Financial Executive.
Securities and Exchange Commission Release 33-7386, Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of
Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments, and Derivative Commodity Instruments, January 31, 1997.
Also referred to as Financial Reporting Release No. 48. See http://www.sec.gov/divisions/corpfin/
cfacctfinrptfrms.shtml.

1
2

the last six years and has confirmed double-digit volume growth
in this period.
Financial disclosure complexity and overload issues have been
explored and debated by many individuals, groups and institutions.
Our research into disclosure overload and complexity consisted of
three major activities:
1 Reviewing relevant academic and other literature
2 Reviewing annual reports on Form 10-K filed by 25 FORTUNE 100
companies
3 Sending a survey to 6,500 financial executives.
Our goal was to obtain empirical evidence about disclosure
expansion over the last six years, determine some of the sources
of the expansion and consider the qualitative value of disclosure
observed in the annual reports. Additionally, we explored the
question of whether more disclosure is always good or whether
there are factors that limit the value of expanded disclosure.
An important finding in the academic research indicates that
disclosure has grown in volume and complexity and that it poses
a dilemma particularly for smaller investors who may make
suboptimal investment decisions due to the inability to absorb the
volume and complexity of literature.3
The results of the Form 10-K filing review confirm that disclosure
has expanded approximately 16 percent overall during the six-year
period and footnote disclosure has grown 28 percent over the
same period. Footnote disclosure has grown at a faster pace than
overall disclosure and has been particularly acute in the pension
and post-retirement benefits, fair value, financial derivatives and
hedging areas.
The survey results from financial executives were consistent with
our observations in the review of the annual reports. Respondents
indicated that the complexity of financial standards and the volume
of mandated disclosures are the most significant contributors to

Miller, Brian P... 2010. The Effects of Reporting Complexity on Small and Large Investor Trading.
Working Paper. Indiana University. The Kelley School of Business.

Disclosure Overload and Complexity: Hidden in Plain Sight | 3

the issue of disclosure overload and complexity, and footnotes are

the most significant source or cause of complexity. Respondents
identified fair value, derivatives and hedging as a particularly
problematic disclosure area. They also identified concerns about
materiality as contributing to increased disclosure volume.
Based on the research results, the authors of this paper present
the eight recommendations to the right to address the disclosure
complexity and volume challenges.
Views on disclosure overload and complexity necessarily include
different perspectives because the views of preparers of financial
information will be different than those of users of information.
Data gathered for purposes of this paper included views of
preparers gathered via a survey sent to members of Financial
Executives International (FEI), which is predominantly a preparer
community. If financial information users such as an investor
community group had been surveyed, other valuable perspectives
would have been obtained. Since the data collection in this
phase of this project did not solicit user input except through the
consideration of academic literature and the consideration of the
results of a single polling question posed at the winter 2011 Audit
Committee Institute conferences, this paper is limited in that regard.
An important contributor to disclosure overload and complexity
is increased complexity of transactions, investments, financial
instruments, and relationships. This research did not attempt to
identify the extent to which these considerations contributed to
disclosure expansion. Anecdotally, it was observed that some
annual reports expanded in years in which there were significant
complexities reported such as acquisitions, restructurings, spinoffs and similar events; however, since such events occurred in a
limited number of companies and were present in both the earlier
and later years for which reviews were conducted, the effects
appeared to be neutral as to the annual report review results.

1 The SEC should issue an interpretive release to address the

permissibility of cross-referencing and manner of addressing

immaterial items to reduce redundant and unnecessary
disclosures.

2 Summaries of significant accounting policies and discussions

of newly implemented or soon to be implemented accounting

policies should be streamlined to eliminate unnecessary
redundancy and patently immaterial disclosures.

3 Preparers should expand their use of tabular and graphic

information delivery formats.

4 The SEC should move forward with its 21st Century Disclosure

Project to enable greater use of technology to avoid unnecessary

repetition of information in multiple filings.

5 The FASB should accelerate consideration of the Disclosure

Framework to establish a systemic approach to disclosure that

properly balances disclosure considerations.

6 Preparers should confine disclosure of risk factors to company

specific unique risk factors as contemplated by Item 503(c) of
Regulation S-K.

7 Accounting standards that mandate disclosure in interim

period financial statements should include provisions similar

to that found in Regulation S-X that specifically permits
omission of disclosure where there has been no significant
change in the item since the date of the latest annual financial
statements.

8 The FASB and SEC should undertake incremental procedures

to ensure that there is an appropriate and adequate costbenefit analysis in support of all new disclosure requirements.
This should include expanded field testing of disclosure
proposals.

4 | Disclosure Overload and Complexity: Hidden in Plain Sight

Introduction
The topic of disclosure overload and complexity has been
addressed by multiple organizations over many years. Someusers
of financial information seem to have an insatiable appetite for
more information. Others observe that finding the truly significant
information among the volume of routine and otherwise
uninformative information is a challenge.
While regulatory and standards-setting requirements and other
factors have resulted in a proliferation of disclosure, some
observers have noted that even increased disclosure did not
adequately provide investors with the information needed in the
recent financial crisis. In an April 2011 press release announcing the
publication of Cutting Clutter: Combating Clutter in Annual Reports,
the Accounting Standards Board of the U.K.s Financial Reporting
Council observed, Clutter in annual reports is a problem,
obscuring relevant information and making it harder for users to
find the salient points about the performance of the business and
its prospects for long-term success.4 One author has suggested
that the Enron issues were obscured by disclosures that were
buried in footnotes.5
Our papers objective is to examine relevant data to determine
the sources of disclosure overload and complexity and to
identify opportunities and provide recommendations for practical
improvements. In addition to the U.K. projects that propose better
and more efficient financial reporting, other initiatives to improve
disclosure are under consideration.
In July 2009 the FASB added a specific project to its overall project
plan with the objective to:6
(1) Establish an overarching framework intended to make financial
statement disclosures more effective and coordinated and (2)
seek ways to better integrate information provided in financial
statements, Management Discussion & Analysis (MD&A), and
other parts of a reporting entitys financial reporting package.

Financial Reporting Council. Cutting Clutter: Combating Clutter in Annual Reports, April 2011,
available at www.frc.org.uk.
5
Radin, Arthur J., Have We Created Financial Statement Disclosure Overload? The CPA Journal.
November 2007.
6
Financial Accounting Standards Board. Current Technical Plan and Project Updates. www.fasb.org.
4

Theproject objective is not intended to be additive but, rather,

todevelop a framework for improved U.S. GenerallyAccepted
Accounting Principles (GAAP) that promotes meaningful
communication and logical presentation of disclosures and avoids
unnecessary repetition.
In August 2011 the FASB discussed this Disclosure Framework
project at two public meetings. At the second of these
twomeetings the FASB discussed the first of three parts of the
Disclosure Framework project. That first part included discussion
of a draft of a decision process that would be used in establishing
financial statement disclosure items. The FASB Web site
description of the process states:
The goal of the decision process is to improve the efficiency and
effectiveness of financial statement disclosures by focusing on
matters that are most important to users of a particular entitys
financial statements. The desired result is a net reduction
in disclosure volume and a net increase in the utility of the
information disclosed.
The FASBs technical project plan indicates that the anticipated
next step is the issuance of an initial due process discussion
document in early 2012.
In 2008 the SEC announced a project dubbed the 21st Century
Disclosure Initiative.7 There does not appear to be any recent
activity on this project at the SEC as it is not included on the
SECWeb site in the Topics of Current Interest. However,SECstaff
members have commented in recent months about their continuing
interest in developing approaches to advance the transparency and
understandability of financial and other disclosures.

The 21st Century Disclosure Initiative, established in June 2008, is a broad internal effort to
reconsider the manner of delivery of financial disclosure. In January 2009, a report was issued
describing disclosure system and recommended future Commission action for a transition to
the new system. The proposed new system that would use technology to collect, manage and
provide disclosure information structured in a manner that builds on a basic disclosure model with
periodic amendment to the basic disclosure.

6 | Disclosure Overload and Complexity: Hidden in Plain Sight

Historical financial reporting initiatives

The Wheat Commission chaired by Francis Wheat, a former SEC
Commissioner, issued its report in 1971. TheWheat Commission
was established to consider financial accounting standards
setting in the U.S. TheCommission report recommended the
establishment of an independent accounting standards setter
whose members had severed other ties with the financial reporting
and accounting communities. That standards setter, theFASB,
was established in 1973 and was recognized by the SEC as the
authoritative accounting standards-setting organization in the U.S.
The Wheat Report recommended the establishment of the FASB
as an independent standards setter and initiated the concept that
accounting standards setting should be an independent process
that is not tainted by political considerations.
In 1971, the American Institute of CPAs (AICPA) establishedthe
Accounting Objectives Study Group chaired by Robert
Trueblood, who was chairman of Touche Ross & Co. The
TruebloodCommission Report was issued in 1973. The introduction
to the report indicates that:
The main purpose of the study is to refine the objectives of
financial statements. Refined objectives should facilitate
establishment of guidelines and criteria for improving
accounting and financial reporting.
The study solicited the views from diverse participants in the
financial reporting environment, including preparers, members of
accounting firms, public interest groups, national and international
accounting organizations and financial publishers. The study group
held 35 public meetings and reviewed relevant published literature.
Not surprisingly, the first objective of financial reporting identified
was that financial information should provide useful information
for making economic decisions. The report identified a number
of necessary or desirable financial reporting characteristics such
as reliability and freedom from bias and consistency, but did not
address the topic of disclosure as a specific consideration.
In 1991, the AICPA established the Special Committee on Financial
Reporting chaired by Edmund Jenkins, a partner with Arthur
Andersen, from whom the committee derived its popular name,

the Jenkins Committee. That committees report, Improving

Business Reporting A Customer Focus, was issued in 1994 and
took a broad view of its mission. Rather than being limited to an
examination of the content of financial statements, the Jenkins
Committee looked at the topic of business reporting generally.
The Jenkins report advocates using a mandatory reporting
framework for business reporting to:
1. Promote a common understanding of terms and alternatives
that facilitate negotiations between users and companies
about the content of business reporting.
2. Promote neutral, unbiased reporting.
3. Improve the comparability of information across companies.
4. Permit audits of information. Auditors verify that information
is reported in accordance with standards; without standards,
audits would be less meaningful.
5. Facilitate retrievability of information by organizing data
according to a framework.
Of particular relevance to this paper the Jenkins report states:
The Committee acknowledges that reporting standards could
inflict costs on some companies without resulting benefit.
That could occur, for example, if a company was required to
report information that users do not need. However,reporting
standards need not eliminate flexibility in reporting, nor
increase costs without benefit. The solution is not to do
away with reporting standards but rather, to design
standards flexible enough to be responsive to the costs
and benefits companies face in particular circumstances.
(emphasis added)

Disclosure Overload and Complexity: Hidden in Plain Sight | 7

Throughout the last two decades, additional projects, reports,

studies, and papers have focused on the challenge of optimal
business and financial reporting including disclosure complexity
and overload.
In the late 1990s the FASB launched its Business Reporting Research
Project that resulted in the issuance of its report in January 2000.
That project explored the effects that the expanding Internet had
on dissemination and retrieval of financial and other business
information. The report indicates, The basic premise underlying this
Business Reporting Research Project is that improving disclosures
makes the capital allocation process more efficient and reduces the
average cost of capital.8

As noted previously, there are multiple projects, reports, and

recommendations concerning financial and business reporting,
including the Enhanced Business Reporting Consortiums ongoing
projects, documents issued by accounting firms and business
organizations as well as initiatives by the FASB, SEC and U.K.
Financial Reporting Council discussed in the introduction to this
paper.9 Notwithstanding the quantity and quality of resources
devoted to the goal of disclosure rationalization, the debate about
disclosure overload and complexity persists.

Financial Accounting Standards Board, Business Reporting Research Project. 2000 Part II, page v.
See www.fasb.org.
The Enhanced Business Reporting Consortium defines itself on its Web site as The Enhanced
Business Reporting Consortium (EBRC) is a collaborative, market-driven initiative that provides an
opportunity for users and providers of capital to work together for the public interest to improve
the quality of information provided to capital markets. See http://www.aicpa.org/interestareas/frc/
accountingfinancialreporting/enhancedbusinessreporting/pages/enhancedbusinessreporting.aspx.

8 | Disclosure Overload and Complexity: Hidden in Plain Sight

Recently adopted disclosure requirements

Financial statement disclosure requirements are found
in the FASBs Accounting Standards Codification (ASC),
AICPAAccounting and Audit Guides and, for public companies,
additional disclosures requirements are found in SEC regulations.
The SECs rules and regulations specify disclosure requirements
both within and outside of financial statements. One of the
most frequently discussed disclosures outside of the financial
statements is the requirement in Regulation S-K, Item 303 that
specifies the disclosure requirements for MD&A.
Disclosures that are provided in response to mandatory
requirements are supplemented with expanded disclosures both
inside and outside of the financial statements for various purposes
including incremental information about the entity, its environment,
forward-looking information and, in many cases, extensive details
about current and potential litigation.
The plethora of financial statement requirements presents a
challenge to the financial statement preparer to identify all of
the disclosure requirements and to apply all of the necessary
resources to draft those disclosures. The ASC includes disclosure
requirements under Subsection 50 of each accounting topic and
this has facilitated the identification of the disclosure requirements.
However, new disclosure requirements have been added over the
last several years at an unprecedented pace. Some of the more
significant disclosure requirements adopted in the last five years
include those related to the FASB standards and SEC rule-making
activities at the right.

Date of Adoption

Topic

June 2006

Accounting for Uncertain Tax Positions

September 2006

Fair Value Measurements

December 2006

Executive Compensation for Stock and

Option Awards (SEC requirement)

February 2007

Fair Value Option

December 2007

Accounting for Business Combinations and

Non-Controlling Interests

March 2008

Disclosures about Derivative Instruments and

Hedging Activities

May 2008

Accounting for Certain Convertible Debt That

May Be Settled in Cash

September 2008

Disclosures about Credit Derivatives and

Certain Guarantees

December 2008

Disclosures about Transfers of Financial

Assets and Involvement With VIEs

January 2009

Disclosures about Postretirement Benefit

Plan Assets

June 2009

Transfers of Financial Assets and Variable

Interest Entities

January 2010

Fair Value Measurements and Disclosures

July 2010

Credit Quality and Allowance for Credit Losses

Disclosure Overload and Complexity: Hidden in Plain Sight | 9

A sense of the extent of current disclosure requirements can

be gleaned from looking at any of the auditing firms standard
disclosure checklists. These checklists illustrate the challenge of
identifying the extensive range of disclosure requirements. These
checklists are typically several hundred pages long and may be
supplemented with additional checklists for certain industries such
as financial services (including banks and insurance companies)
and oil and gas exploration, development and production
companies.
Contributing to the expansion of disclosure requirements is
the inclination to resolve difficult account issues by expanding
disclosure requirements and the tendency to frequently require
disclosures in the interim, as well as in annual periods. Wenote
that the issuance of disclosure requirements contained in FASB
Statement 132 as originally issued in 1997 and as revised in late
2003 related to pension and other post-retirement benefits is
seen by some as the solution to the inability to timely address the
further issues in accounting for pensions and other post-retirement
obligations.10 As indicated in Appendix B our research determined
that there has been approximately 50 percent growth in the
volume of footnote disclosures related to pensions and other postretirement benefits over the six-year period.11
It appears that FASB may also be pursuing the disclosure route as
an alternative to the issue of balance sheet offsetting. OnAugust 10,
2011 the FASB voted to proceed with a disclosure requirements
only document after failing to reach an agreement with the
International Accounting Standards Board (IASB) on a common
approach to accounting for balance sheet offsetting.12

about the Credit Quality of Financing Receivables and the Allowance

for Credit Losses. Although this new accounting requirement is
addressed primarily to disclosures about credit quality of financial
receivables and the allowance for credit losses, thestandard
reaches into interim reporting generally because FASB ASC Section
270-10-50 specifies a list of approximately 30 discrete pieces of
financial information that must be reported by public and private
companies that regularly report quarterly information. The research
for this paper did not include specific observation and comparison
of interim reports, but the increase in interim disclosure has
been reported and observed anecdotally and is confirmed by the
observation of new interim disclosure requirements.
Some observers assert that more public disclosure enables
more informed investor decision making and thus
all new disclosure requirements can be supported.
Therefore,expandedand more frequent disclosure is always
considered an improvement. Thefact that there should be some
limit to disclosure requirements was noted in the Jenkins report
cited. Substantiallyall rule-making and standards-setting bodies
are subject to requirements to consider costs and benefits of
new rules, in recognition that unlimited disclosure cannot be
provided without cost. Some academic literature concludes that
excessive disclosure may actually lead to suboptimal decision
making by at least some investors as discussed in the report.

The expansion of disclosure requirements applicable to interim

periods is evidenced in the extensive disclosures about fair value
measurements required by FASB ASC Section 820-10-50 that was
originally issued as FASB StatementNo.157 in September 2006
and was effective beginning in periods after2007. Thesignificant
expansion of interim period disclosure requirements was recently
repeated in July 2010 with the issuance of ASU 2010-20 Disclosures

FASB Statement No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits, available at www.fasb.org.
This research has used page volume as a proxy for volume. The researchers observed and recorded page counts for total size of
reports on Form 10-K, MD&A total footnotes and specific footnotes. Hence the conclusion that disclosures pertaining to pensions
and other post-retirement benefits have increased approximately 50 percent over the period from 2004 to 2010 is based on the
observation that the number of pages of footnote disclosure has increased by 50 percent.
12
BNA Accounting Policy and Practice Report, FASB Drafting Final Disclosure Requirements for Balance Sheet Offsetting, August 19, 2011.
10
11

10 | Disclosure Overload and Complexity: Hidden in Plain Sight

Review of academic and other

relevant literature
The research team identified academic reports and other
publications that discuss the topic of disclosure overload and
complexity within financial reporting and how it affects both the
users and preparers. The research team conducted a search of
articles, reports and papers published by academic institutions,
industry analysts and accounting and economic organizations
published from 2005 to July 2010 as well as identifying other
selected relevant literature from earlier periods.

Longer annual reports are associated with reduced consensus

and short-term trading profits for small investors in comparison
to larger investors. Smaller investors reduce their trading when
filings increase in length.

A. Recent academic literature on disclosure complexity

The issue also arises that disclosure complexity affects the

preparers of the financial reports. Some of the key findings in the
research for this group are:

The research indicates that disclosure complexity affects both

users and preparers. It is apparent to investors that annual reports
filed by U.S. companies are increasingly complex. From the point
of view of the user group, many issues arise from the quality of the
disclosure to the readability issue when trying to comprehend the
information in the financial reports. Many believe that complexity
in financial reporting confuses investors and therefore they cannot
make optimal decisions. Many questions arise when studying this
topic such as why regulators should be concerned with reporting
clarity. Some of the key findings from the user group include:
It is becoming a concern that the proliferations of required
disclosures that accompany financial reports make it difficult
to decipher a companys performance and factors that drive
performance.
Investors are concerned with longer and more opaque
annual reports.
One study examined the determinants of FASB Interpretation
No. 48 disclosure qualities among S&P 1500 firms and predicted
that firms with the highest proprietary costs of disclosure use
discretion to limit the information contained in the disclosure.13
More complex (longer and less readable) filings are associated
with lower overall trading. The study found that the association
between report complexity and lower abnormal trading is driven
by both cross-sectional variation in firms disclosure attributes
and variation in disclosure complexity over time.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, available at www.fasb.org.

13

Although the MD&A was established to facilitate the forecasting

task of investors, MD&A lacks a definitive requirement for a
strategic analysis of a company.

Many preparers of financial statements find the requirements

for reporting financial instruments too complex. TheInternational
Accounting Standards Board (IASB) and the FASB have been
urged by many to develop new standards of financial reporting
for financial instruments that are more principle-based and less
complex than todays requirements.
The Chartered Institute of Management Accountants (CIMA)
research, based on a global International Federation of
Accountants (IFAC) study into the financial reporting supply
chain, concluded that preparers of accounts are struggling
to communicate the true drivers of their business through
regulated financial reports.
Preparers are also concerned about the amount and speed of
changes in regulations governing financial reporting. Changes
emerge from local regulators, legislation, international standards
setters and even market practice.
While there is some support for recent improvement in
accounting for impairments, there is also frustration that
some standards seem inconsistent, which makes it harder
for preparers to see financial reports as a fair reflection of the
business in question.
Some preparers feel that many of the disclosures are either
unnecessary for their businesses or create confusion around
the total remuneration for executives when they use complex
reward mechanisms.
Accounting professionals need to readdress the concept of
materiality and also need sunset provisions on disclosures.

Disclosure Overload and Complexity: Hidden in Plain Sight | 11

B. Other relevant literature

In addition to the academic papers that address disclosure overload
and complexity, other recent commentators on financial reporting
complexity include the SECs Advisory Committee on Improvements
to Financial Reporting (CIFR), theFASB, and the IFAC.
CIFR issued its report in August 2008 and notable among its
recommendations were those that addressed disclosure.
Recommendation 1.2 inferred disclosure challenges in that the
report included a recommendation that:
The SEC and the FASB should work together to develop a
disclosure framework to...integrate existing SEC and FASB
disclosure requirements into a cohesive whole to ensure
meaningful communication and logical presentation of
disclosures, based on consistent objectives and principles.
Thiswould eliminate redundancies and provide a single source
of disclosure guidance across all reporting standards.
Shortly after the issuance of the CIFR report, the FASB added
a project to its agenda identified as the Disclosure Framework
project. At the time the project on the Disclosure Framework
was added to the FASB agenda, the FASB chairman acknowledged
disclosure complexity in his quote in the financial press saying
improving the way (such) disclosures are integrated can help
decrease complexity.14 Unfortunately the FASB Disclosure
Framework project has been delayed due to the many other
projects on the FASB agenda particularly those related to
convergence with IFRS. Because the convergence standards
include significant disclosure components, the result of the
prioritization is that many significant disclosures will be debated
and adopted before the framework for the disclosures has been
formulated.
A positive note in this regard is that in August 2011, the FASB held
public meetings to discuss the Disclosure Framework project
and has indicated its intention to publish an initial due process
discussion document in early 2012. Less positive is the plan and
likelihood that major standards-setting projects including the
project on financial instruments classification, measurement and

FASB Fights Disclosure Overload. July 10, 2009. WEBCPA. See http://www.accountingtoday.com/
news/FASB-Fights-Disclosure-Overload-51022-1.html.
See http://www.ifac.org/frsc/.
16
Paredes, Troy A. Blinded by the Light: Information Overload and Its Consequences for Securities
Regulation. Washington University Law Quarterly. Summer 2003. Pp 417485.
14

15

impairment will be finalized before any final document on the

Disclosure Framework will be completed.
IFAC established a working group in 2007 to determine whether
financial reporting in recent years is more relevant, reliable and
understandable.15 The study group issued its report in 2008
entitled, Financial Reporting Supply Chain: Current Perspectives
and Directions. In the section that addressed the usefulness of
financial reports, areas of concern that were identified included
reduced usefulness due to complexity, regulatory disclosure
overload and difficult and frequently changing financial reporting
standards.
In 2003, current SEC Commissioner Troy A. Paredes wrote an
article specifically addressing information overload.16 In his article
he observes:
To the extent that investors, analysts, and other securities
market participants are subject to information overload,
themodel of mandatory disclosure that says more is better than
less is incomplete and may be counterproductive.

12 | Disclosure Overload and Complexity: Hidden in Plain Sight

Review of reports on Form 10-K

The research team examined the quantity and quality of financial
reporting and other disclosure complexity and volume by reviewing
the annual reports of 25 FORTUNE100 companies with two
companies from each of 12industries. The 25th company selected
for review was BerkshireHathaway, whichwas selected solely for
the contrasting view of a multi-industry company.
The reviews consisted of reading and compiling data from each
of the 25 companies annual reports for their fiscal years ending
in 2004, 2009 and 2010. The 2004 and 2009 data were included to
provide a basis for five-year trend analysis while the 2010 reports
were reviewed to assess the impact of very recent specific
standards changes. Appendix A presents a chart that identifies
the companies and data about the numbers of pages contained in
Parts I, II, and III of the Form 10-K as well as the number of pages
of footnotes.17 Appendix A also indicates the relative increase
or decrease in number of pages over the periods. The following
table summarizes data included in Appendix A and indicates the
mean and median change in volume of Form 10-K and footnote
disclosures observed from the data on the 25 companies.
Table 1

2010/2009

2010/2004

Mean volume of Form 10-K (pages)

+3%

+16%

Mean volume of footnote disclosure

(pages)

+6%

+28%

Median volume of Form 10-K (pages)

+17%

Median volume of footnote disclosures

(pages)

+4%

+24%

Table 1 indicates that the relative volume of footnote disclosure

has grown at a faster rate than overall disclosure for the six-year
period as well as year-over-year between 2009 and 2010. Analysis
of Appendix A demonstrates, somewhat surprisingly, that overall
Form 10-K disclosure may have stabilized or declined somewhat
for some companies in the past year and six years although
undoubtedly, if proxy disclosure were added to the total mix, that
would not be thecase.

As noted previously, page count is used in this research as a proxy for volume of disclosure.

17

Putting aside the proxy disclosure component, whichadmittedly

ignores a very significant consideration, thereis no question that
financial statement footnote disclosure has grown at a faster pace
than other disclosure requirements.

A. Observations from review of reports on Form 10-K

This section discusses the reviewers observations in terms of
redundancy, immaterial disclosures and volume expansion due to
new requirements.
Substantially all companies had some level of cut-and-paste
redundancy throughout the Form 10-K. It appears that SEC
guidance to provide disclosure of critical accounting policies has
led to repeating a large part of the significant accounting policy
footnote in MD&A.
Disclosures that address aspects of the business description
are repeated throughout most documents. Business description
appears in the introduction to each document as required by
Item #1 of Regulation S-K. Parts of it are then repeated in MD&A
and footnotes including segment footnote and risk factors.
Forexample, the Berkshire Hathaway Form 10-K business
description posed an interesting question in terms of disclosure
redundancy. The Form 10-K for the fiscal year ended December 31,
2010 begins with the Regulation S-K Item1 required disclosure
of the business description. Noting that BerkshireHathaway is a
very complex company with diverse business activities including
insurance, railroad operations, manufacturing, service, public
utility and retail operations, theinitial business description is
presented in 18 very detailed pages. The MD&A, which is a 30page presentation, repeats a significant amount of the information
that is included in the business description albeit in the context
of the operations and financial position. A short, one-page further
description of the business is provided as the introduction to
the financial statement footnote on segments. From a review
perspective an argument could be made that the repetition of
the description of the various business activities is beneficial to
the understanding of the complexity of the company. From the
perspective of volume and redundancy it is conceivable that some
might see the repetition of information as distracting.

Disclosure Overload and Complexity: Hidden in Plain Sight | 13

Outside of the financial statements, risk factors frequently

repeat some aspects of the business description, and many
include grossly obvious disclosures. A slightly modified risk
factor disclosure, which was not untypical of otherrisk factor
disclosures identified throughout the Form 10-K reviews,reads:
If overall demand for (the companys products and services)
decreases, whether due to general economic conditions or a
shift in (customers) buying patterns, the companys revenues
and profits could be impacted.
Declining economic conditions could adversely affect our
results of operations and financial condition.
Our operations and performance depend on economic
conditions in the United States and other countries where we
do business. Deterioration in general economic conditions
could adversely affect the amount of (category of) products
purchased by consumers and, therefore, reduce purchases
by our customers, which would negatively affect our revenue
growth and cause a decrease in our profitability. Interestrate
fluctuations, financial market volatility or credit market
disruptions may also negatively affect our customers ability to
obtain credit to finance their businesses on acceptable terms.
Reduced purchases by our customers or changes in payment
terms could adversely affect our revenue growth and cause
a decrease in our cash flow from operations. Bankruptciesor
similar events affecting our customers may cause us to
incur bad debt expense at levels higher than historically
experienced. Declining economic conditions may also
increase our costs. Ifthe economic conditions in the United
States or in the regions outside the United States where
we do business do not improve or deteriorate, our results of
operations or financial condition could be adversely affected.

significant accounting policies and, inparticular, disclosures that

involve:
(a) A selection from existing acceptable alternatives
(b) Principles and methods peculiar to the industry in which the
entity operates, even if such principles and methods are
predominantly followed in that industry
(c) Unusual or innovative applications of GAAP. 18
The mean average number of pages dedicated to the significant
accounting policies footnote in the surveyed companies annual
reports on Form 10-K for 2010 was five pages with the range of
one to 13 pages. Keeping in mind the circumstances cited in FASB
ASC Section 235-10-50 that require accounting policy footnote
disclosure, we noted the following disclosures (slightly modified) in
footnotes on significant accounting policies:
Cash and cash equivalents
Cash equivalents consist of funds invested in U. S. Treasury
Bills, money market accounts, demand deposits and other
investments with a maturity of three months or less when
purchased.
Recently Adopted Accounting Guidance
On January 1, 2010, the Company adopted Accounting
Standards Update (ASU) 2009-16, Transfers and
Servicing (Topic 860): Accounting for Transfers of Financial
Assets. This ASU is intended to improve the information
provided in financial statements concerning transfers of
financial assets, including the effects of transfers on financial
position, financial performance and cash flows, and any
continuing involvement of the transferor with the transferred
financial assets. The Company evaluated the impact of
adopting the guidance and the terms and conditions in
place at January 1, 2010 and determined that certain sales

Within the financial statements we observed arguably immaterial

disclosures in the accounting policy footnotes. FASBASC Section
235-10-50 requires financial statement footnote disclosure of all

18

See FASB ASC paragraph 235-10-50-3, available at www.fasb.org.

14 | Disclosure Overload and Complexity: Hidden in Plain Sight

of accounts receivable would be classified as secured

borrowings. Under the Companys sale of accounts receivable
arrangements, the maximum amount of receivables available
for participation in these programs was immaterial to the
financial statements at January1,2010.
Accounting Guidance Issued But Not Adopted as of
December31, 2010
In October 2009, the FASB issued ASU 2009-13,
RevenueRecognition (Topic 605): Multiple-Deliverable
Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force, which amends the criteria for when to
evaluate individual delivered items in a multiple deliverable
arrangement and how to allocate consideration received.
ThisASU is effective for fiscal years beginning on or after
June 15, 2010. The adoption of the guidance on
January1,2011 is not expected to have a material impact
onthe Companys consolidated financial statements.
Subsequent Events
We have evaluated material events and transactions that
have occurred after December 31, 2010, and concluded
thatno subsequent events have occurred that require
adjustment to or disclosure in this Form 10-K.
The reasons for which preparers include disclosures that are
identified as not having a material impact on the financial
statements are not discernable from a reading of the documents.
However, based on the preparer survey responses, it can be
speculated that at least one possibility is to anticipate comments
from the outside auditors, the SEC staff, or both.

We noted one Form 10-K in which the issuers footnote

disclosures consisted of 30 pages of which approximately
25percent were the significant accounting policies footnote. In
considering the topic of disclosure volume and the findings in the
academic research, it is questionable how financial statement
users are served by extensive footnote recitations of very
general accounting principles that are immaterial to the financial
statements. ASC Section 235-10-50 requires this footnote to
address all significant accounting policies. An important question
to address is what is significant and what is the optimal level of
accounting policy information that is useful without blinding the
user with distracting and irrelevant information.
Although some of the companies provided concise accounting
policy footnotes that provided useful information, a significant
observation about the accounting policy footnotes was that for
some annual reports the volume and lack of significant information
resulted in the temptation to flip through the pages without
reading. This presents the risk that useful information may not be
apparent because it is buried in a section that is predominantly not
informative. As with any challenge in which it is necessary to digest
a large volume of data, readerswill be tempted to look for the parts
they can skip through. Thus,volume that appears to lack critical
information has a high likelihood of not being read.
This is not to suggest that the research team concluded that
accounting policy footnote information is not of immense value.
Rather the research team observed that a streamlined and
targeted approach to footnote disclosure that focuses the user on
truly useful information is preferable to an approach in which all
possible disclosure is provided making discernment of important
disclosures more difficult.

Disclosure Overload and Complexity: Hidden in Plain Sight | 15

16 | Disclosure Overload and Complexity: Hidden in Plain Sight

Survey of FEI members:

JanuaryFebruary 2011
Between January 17 and February 22, 2011 a Web-based survey
was conducted. The survey consisted of sending electronic forms
to 6,500 members of the Financial Executives International. The
survey consisted of 20questions. A copy of the survey form is
attached as Appendix D. Theobjective of the survey was to obtain
feedback from preparers of financial statements and related
disclosure documents about the resource costs and benefits of
financial reporting requirements. In particular, the objective of
the survey was to enable us to gain insight into the effectiveness
of current disclosure requirements, the perceived causes of
disclosure complexity and overload and how the perceived
disclosure complexity and overload impacts preparers.
Responses were received from 216 companies of which
127respondents identified themselves as public companies and
88 identified themselves as private companies. Demographicsof
respondents are illustrated in the following charts.

Company type
Q1. Is your company publicly traded on a stock exchange
or privately held?
100%

80%

59%

60%

41%

40%

20%

0%
Public (n = 127)

Private (n = 88)

 Total (n = 215)

Annual Revenue
Q2. Annual revenues are:

100%

80%

60%
51%
39%

40%
30%
20%

21%
14%

25%
18%

17%
9% 8%

11%

23%

21%
11%

1%

0%
$100 million or less

May not equal100% due to rounding

Greater than $100 million

but less than $500 million

 Total (n = 216)

Greater than $500 million

but less than $1 billion

 Public (n = 127)

Greater than $1 billion

but less than $5 billion

 Private (n = 88)

Greater than $5 billion

Disclosure Overload and Complexity: Hidden in Plain Sight | 17

Industry

Market capitalization at 9/30/2010

Q3. Which of the following best characterizes

the industry your company is in?

Q4. If company is publicly traded, market capitalization

at 9/30/2010 was:

15%
14%
16%

Electronics, Technology,
Software & Services

1%

Energy, Natural
Resources & Chemicals

10%
13%
6%

Greater than $75 million

but less than $200 million

Healthcare &
Pharmaceuticals

10%
13%
6%

Greater than $200 million

but less than $500 million

Banking & Finance

10%
9%
13%

Greater than $500 million

but less than $1 billion

Diversified Industrials

8%
10%
5%

Building, Construction
& Real Estate

8%
7%
10%

Food, Drink &

Consumer Goods

5%
6%
2%

Insurance

5%
5%
6%

Retail

3%
3%
3%

Communications
& Media

3%
3%
2%

Investment
Management

Other

0%
8%
13%
0%
4%
6%
1%
38%
61%
0%

Company not
publicly traded

May not equal100%

due to rounding

2%
2%
2%
21%
16%

Total (n = 216)

5%
9%

Greater than $1 billion

30%
May not equal 100%
due to rounding

7%
10%

Less than $75 million

Public (n = 127)

Private (n = 88)

37%
1%
97%

Total (n = 202)

Public (n = 126)

Private (n = 75)

18 | Disclosure Overload and Complexity: Hidden in Plain Sight

A. Significant survey results

At a very high level, the most significant findings based on the survey are identified below.

1. Complexity of accounting standards and volume of

mandated disclosure are the most significant contributors
to the issue of disclosure complexity.
Footnotes are the most significant source or cause of
disclosure complexity.
Fair value, derivatives and hedging are the most
significant sources or causes of disclosure complexity
under specific GAAP requirements.

2. Potential objection by the SEC and other regulators,

including state regulators, or by external auditors,
maycause companies to provide disclosure that is
otherwise immaterial.

3. Counsel is most likely to be involved when Risk Factors is

the topic associated with disclosures included in a filing
with the SEC or footnote to financial statements.
Many say their inside or outside legal counsel does not
direct disclosure in some or all parts of public filings or
footnotes to financial statements.

On July 22, 2011 in the U. S. Court of Appeals for the District of Columbia case, Business Roundtable
v. Securities & Exchange Commission, the court vacated a recently adopted SEC rule involving
investor access to proxy solicitation materials for purposes of including shareholder nominees. In
its opinion, the court found that the SEC had failed once again to conduct an adequate analysis of
the costs and benefits of the rule under the Commissions statutory obligation to balance efficiency,
competition, and capital formation.The opinion also cited other instances in which SEC rulemaking
was vacated due to faulty cost-benefit analysis. It is possible that the SEC may undertake changes to
its cost-benefit analysis processes in response to this and other court decisions.

19

4. Financial reporting preparation and review time are most

impacted by expanded disclosure requirements.

5. Overall, SEC initiatives (e.g., the plain English initiative) to

reduce disclosure complexity have not had much impact.

6. FASB and SEC should undertake incremental procedures

and processes as part of improving the cost-benefit analysis
while developing proposals for new accounting standards.19

7. Most companies have not taken steps to reduce disclosure

complexity in their financial statements.

Disclosure Overload and Complexity: Hidden in Plain Sight | 19

20 | Disclosure Overload and Complexity: Hidden in Plain Sight

B. Survey results applicable to

sources of disclosure overload
and complexity
Many respondents (77 percent) say the disclosure complexity
issue is not more serious in their industries than in others.
Inanalyzing this question and responses, we note that among
the 25 companies included in our Form 10-K review there
are significant observable differences in the impact over the
five- and six-year periods of comparative data on one industry.
The most noticeable difference is between the banks and all
other companies. Using page volume as a proxy for disclosure
overload and complexity, overall Form10-K volume on average
increased 16 percent over the six-year period reviewed while
the two banks included in the survey experienced increases of
53 percent and 110percent over the same period. Excluding the
financial institutions, our review of annual reports, which included
pairs of companies in similar lines of business, did not identify
any other category of company in which there seemed to be a
disproportionately greater increase in disclosure than in other
industries.

Many say the disclosure complexity issue is not

more serious in their industries than in others.
Q5. With respect to the assertion that there is a disclosure
complexity problem, do you believe the disclosure
complexity issue is more serious in your industries than
in others?
100%

80%
Total: 77%
Public: 74%
Private: 80%

60%

38% 42%
35%

40%

20%

22%

39%

39%

38%

24%
19%

1% 1% 1%

0%
Yes

No, but certain

industries
contribute to
complexity
because of
industry
specific issues

No

I don't believe
there is a
disclosure
complexity
problem

May not equal 100%

due to rounding

 Total (n = 216)

 Public (n = 127)

 Private (n = 88)

Disclosure Overload and Complexity: Hidden in Plain Sight | 21

Significant majority say potential objection by

SEC/other regulators may cause them to provide
disclosure that is otherwise immaterial.
Q6. What factors might cause you to provide a disclosure
that you believe is otherwise immaterial?

61%

Potential objection by
SEC or other regulator
including state regulators

83%
11%
56%

Possible objection by
external auditor

74%
15%

Potential financial
statement user objection:
e.g. analysts, bankers,
investors

21%
28%
6%
4%

Other

6%
0%
27%

Not applicable

3%
81%

The reviews of the Form 10-Ks revealed significant occurrences

of apparently immaterial disclosure. One notable example as
illustrated at the left is that many of the recent Form 10-Ks included
disclosures about adoption of recently issued new accounting
standards that recited a detailed description of the new standard
and concluded with the assertion that the newly adopted standard
did not have a material effect on the financial statements. Although
both SEC rules and FASB standards make it clear that rules and
standards need not be applied to immaterial items, we observed
many companies providing these and other apparently immaterial
disclosures. Based on the survey results as well as anecdotal
conversations, companies are reluctant to omit disclosures other
than those that are clearly immaterial, out of concern that an SEC
comment or auditor comment will require the issuer to revise its
reporting to include the immaterial item. We find this observation
is consistent with responses received in the survey discussed in a
later section.

May not equal 100% due to rounding

Total (n = 181)

Public (n = 127)

Private (n = 53)

A significant majority (61 percent) of respondents indicated that

potential objection by the SEC and other regulators, including state
regulators, may cause them to provide disclosure that is otherwise
immaterial (Public: 83 percent, Private: 11 percent).
A majority (56 percent) of respondents indicated that possible
objections by external auditors cause them to provide disclosure
that is otherwise immaterial.

Most (81 percent) private companies say the concern about SEC
comments is not applicable to them. In considering why SEC or
auditor objection might be a concern to a private company, we are
aware that some private companies hold themselves to a public
reporting standard either because they feel that is a form of best
practice or because members of their audit committees are also
executives with public companies. Other companies anticipate
becoming a publiccompany in the future.

22 | Disclosure Overload and Complexity: Hidden in Plain Sight

Many say once disclosure is included in apublic

filing in response to an SEC staff comment, it is
rarely or never omitted from future filings.

Many say their companys disclosures

are influenced by concerns over potential
future litigation.

Q7. If your company has expanded non-mandatory

disclosures as a result of an SEC staff comment,
whatstatement best captures the consideration of
including that same disclosure in future filings?

Q8. To what extent are your companys disclosures

influenced by concerns over potential
future litigation?

100%

100%

80%

80%

71%

74%
61%

60%

Total: 73%
Public: 83%
Private: 57%
59%
53%

60%

39%

40%
29%

44%

26%

20%

20%

20%

27%

24%

17%

13%
0%

44%

40%

0%
Once disclosure is included
in a public filing in response
to an SEC staff comment,
it is rarely or never omitted
from future filings

 Total (n = 154)

Once a disclosure is provided

in response to an SEC staff
comment, management would
continue to consider materiality
and would omit if it was later
determined to be immaterial

 Public (n = 122)

 Private (n = 31)

71 percent say once disclosure is included in a public filing in

response to an SEC staff comment, it is rarely or never omitted
from future filings (Public: 74 percent, Private: 61 percent).

Significantly influenced

Somewhat influenced

Not a consideration

May not equal100% due to rounding

 Total (n = 215)

 Public (n = 127)

 Private (n = 87)

 3 percent say their companys disclosures are influenced by

7
concerns over potential future litigation.
Significantly influenced: 20 percent (Public: 24 percent, Private:
13 percent).
Somewhat influenced: 53 percent (Public: 59 percent, Private:
44 percent).

Disclosure Overload and Complexity: Hidden in Plain Sight | 23

Many say their inside/outside legal counsel

does not significantly direct disclosure in
some/all parts of public filings/footnotes.
Q9. To what extent does your inside or outside legal counsel
significantly direct disclosure in some or all parts of
public filings or footnotes to the financial statements?

100%

Total: 79%
Public: 71%
Private: 94%

Many say the topic of risk factors is

influenced or directed by legal counsel.
Q10. If counsel is significantly involved in determining
disclosures included in a filing with the SEC
or the footnotes to the financial statements,
please identify what topics are influenced or
directed by legal counsel?

100%

80%

80%

60%

75%

71%

67%
60%

56%

47%

29%
20%

40%

39%

40%

40%
28%

21%

33%

24%
20%
16%

20%

9% 9% 11%

6%
0%
Signficantly

 Total (n = 209)

Moderately

 Public (n = 127)

Very limited

 Private (n = 81)

 9 percent say their inside or outside legal counsel does not

7
significantly direct disclosure in some or all parts of public filings or
footnotes to financial statements.
40 percent: Very limited (Public: 24 percent, Private: 67 percent).
39 percent: Moderately (Public: 47 percent, Private: 27 percent).

0%
Risk factors

 Total (n = 139)

Fear of litigation
by third parties
(such as class
action suits)

Other

 Public (n = 102)  Private (n = 36)

 1 percent say if counsel is significantly involved with disclosures

7
included in a filing with the SEC or a footnote to financial
statements, the topic is likely Risk Factors (Public:75 percent,
Private: 56 percent).

24 | Disclosure Overload and Complexity: Hidden in Plain Sight

Complexity of accounting standards

and volume of mandated disclosures are
significant contributors to disclosure complexity.
Q11. In your opinion please evaluate how much each of
the following factors contributes to disclosure
complexity using a 1 to 5 scale with 1 meaning it is
a very significant contributor to disclosure complexity
and 5 meaning it is not at all a significant contributor
to disclosure complexity.

Public

Total
Complexity of company

52%

Complex business
environment

52%

Disclosures to limit
litigation exposure

Interim period
disclosures
Voluntary redundant
disclosure

26%

22%

29%

45%

19%

28%

37%

27%

27%

36%

Mean

2.5

212

2.6

25%

34%

2.7

214

3.1

213

3.3

41%

12

Complexity of company

50%

26%

Complex business
environment

55%

24%

Voluntary redundant
disclosure

26%

Complex business
environment

50%

33%

Disclosures to limit
litigation exposure

48%

41%

32%

27%

May not equal 100% due to rounding

29%

16%

2.6

86

2.6

86

2.9

87

3.5

85

3.3

84

30%

52%

30%

12

Mean

21%

43%

45

2.5

125

2.5

125

25%

2.7

126

26%

2.8

127

3.3

126

21%

17%

Interim period
disclosures

28%

40%

34%

24%

37%

May not equal 100% due to rounding

12

40%

211

45

24%

212

Private

Interim period
disclosures

53%

Voluntary redundant
disclosure

May not equal 100% due to rounding

Disclosures to limit
litigation exposure

Complexity
of company

Mean

45

Disclosure Overload and Complexity: Hidden in Plain Sight | 25

Total
Mean
Complexity of
accounting standards

92%

Volume of mandated
disclosure

89%

Mandatory redundant
disclosure

66%

Risk factor disclosures

23%

61%

26%

5% 1.4
3%

216

6%
1.6
5%

215

11%

215

14%

2.1

2.3

Public

Mean
Complexity of
accounting standards

62%

Complexity
of transactions

58%

27%

25%

12

12%

18%

2.4

2.4

Mandatory redundant
disclosure

68%

Volume of mandated
disclosure

84%

6% 2.0

127

26%

10% 2.2

126

28%

10% 2.4

127

4 5 2.3
17%

127

26%

216

216

63%

Critical accounting
policies and judgments
Complexity
of transactions

62%

12

61%

22%

45

Mean
90%

127

213

Private
Complexity of
accounting standards

5%
1.5
2%

93%

Risk factor disclosures

Critical accounting
policies and judgments

127

94%

Volume of mandated
disclosure

5%
6% 1.5

 lmost all say complexity of accounting standards and volume of

A
mandated disclosures are significant contributors to the issue of
disclosure complexity.

88

7% 9%

1.7

88

18%

18%

2.2

87

26%

19%

2.5

86

2.4

88

2.6

88

Mean: 1.4, 1.6 respectively (on a 1-5 scale;

1 = very significant contributor)
Results similar among public and private companies.

Mandatory redundant
disclosure

63%

56%

Risk factor disclosures

Critical accounting
policies and judgments

60%

26%

52%

Complexity
of transactions

12

28%

5%
1.3
2%

14%

19%

45

26 | Disclosure Overload and Complexity: Hidden in Plain Sight

Almost all say footnotes are a significant source of

disclosure complexity.
Q12. (Part 1) Please indicate the extent to which each of the
following is a source or a cause of disclosure complexity
with 1meaning that the factor is a very significant
source of disclosure complexity and 5 meaning it is not
at all a source of disclosure complexity.

Total

Public
Mean

Footnotes

Risk factors

61%

Executive
compensation

61%

MD&A

62%

23%

16%

17%

23%

18%

48%

Litigation

Interim period
disclosures

4%
1.5
5%

92%

20%

31%

38%

22%

33%

12

30%

194

Footnotes

2.4

214

Risk factors

2.4

211

Executive
compensation

2.5

211

MD&A

2.7

212

Litigation

3.0

210

Interim period
disclosures

45

Mean

52%

Risk factors

Executive
compensation

31%

MD&A

39%

Litigation

41%

Interim period
disclosures

25%

12

115

8%

2.2

127

81%

12% 7%

1.7

126

78%

15% 7%

2.0

126

15%

2.5

125

18%

2.7

125

66%

26%

52%

33%

46%

37%

45

 lmost all say footnotes are a significant source or cause

A
of disclosure complexity.

88%

20%

23%

78

2.7

86

3.4

84

3.2

84

2.9

86

3.5

84

28%

46%

20%

28%

27%

40%

31%

48%

4%
8% 1.7

45

3%
1.4
3%

94%

12

Private
Footnotes

Mean

Mean: 1.5 (on a 15 scale;

5=not all a source of disclosure complexity).
Results similar among all companies.

Disclosure Overload and Complexity: Hidden in Plain Sight | 27

Most say fair value and derivatives and hedging

under specific GAAP requirements is a source/
cause of disclosure complexity.
Q12. (Part 2) Please indicate the extent to which each of the
following is a source or a cause of disclosure complexity
with 1meaning that the factor is a very significant
source of disclosure complexity and 5 meaning it is not
at all a source of disclosure complexity.

Specific GAAP Disclosure Requirements Total

Fair value

Mean n
6%
215
5% 1.5

89%

Derivatives and
hedging

80%

New accounting
standards

75%

Financial instruments
other than debt

67%

Business combinations and

non-controlling interests

66%

Debt and complex

equity instruments

8% 2.0

209

10% 2.1

215

2.2

214

3.2

214

16%

2.3

209

17%

2.4

211

19%

68%

Pension and post

retirement benefits

211

17%

72%

Income taxes

1.9

4% 16%

16%

15%

14%

19%

18%

57%

26%

12

45

Mean
5% 1.4
3%

126

4%10% 1.7

125

Derivatives and
hedging

9% 2.0

123

New accounting
standards

6% 1.9

127

Income taxes

21% 10% 2.1

126

Financial instruments
other than debt

2.1

127

Pension and post

retirement benefits

10% 2.2

125

Business combinations and

non-controlling interests

14% 2.4

125

Debt and complex

equity instruments

86%

New accounting
standards

75%

Income taxes

75%

Financial instruments
other than debt

16%
20%

69%

Pension and post

retirement benefits

74%

Business combinations and

non-controlling interests

10%

70%

Debt and complex

equity instruments

20%

58%

12

29%

Specific GAAP Disclosure Requirements Private

n
Fair value

92%

Derivatives and
hedging

Mean: 1.5, 1.9 respectively (on a 15 scale;

1 = very significant contributor).
Results similar among public and private companies.

Specific GAAP Disclosure Requirements Public

Fair value

Most say fair value, derivatives and hedging are the most
significant sources or causes of disclosure complexity under
specific GAAP requirements.

16%

45

85%
71%

5%

75%
67%

8%7%

1.6

88

25%

2.2

85

19% 6%

1.9

85

2.3

87

2.4

87

23%

2.5

86

25%

2.5

83

2.5

85

17%

67%

10%

57%

20%

59%

16%

56%

12

Mean

16%
23%

22%

21%

45

28 | Disclosure Overload and Complexity: Hidden in Plain Sight

Specific GAAP Disclosure Requirements Total

Significant
accounting policies

56%

Stock options
Compensation

57%

35%

Leases

44%

33%

Other

214

Significant
accounting policies

20%

2.5

210

Stock options

22%

2.5

211

Compensation

20%

2.7

210

Loss contingencies
and litigation issues

2.7

212

Leases

3.0

209

Foreign currency

3.1

210

Segments

3.4

71

Other

21%

45%

Segments

2.4

15%

20%

Loss contingencies
and litigation issues

Foreign currency

Mean
29%

60%

38%

23%

33%

33%

29%

31%

30%

35%

25%

Specific GAAP Disclosure Requirements Public

45%

May not equal100%

due to rounding

45

65%

13%

25%

74%

10%

17% 10%

50%

36%

35%

39%

39%

38%

42%

34%

36%

12

Specific GAAP Disclosure Requirements Private

Significant
accounting policies

57%

Stock options

53%
33%

Loss contingencies
and litigation issues

24%
12%

37%

Foreign currency

37%

Segments

20%

Other

18%

12

40%

32%

57%

18%

35%

26%

Leases

May not equal100%

due to rounding

31%

31%

14%
26%
23%
24%
33%

May not equal100%

due to rounding

12

Compensation

56%

31%
24%

25%

19%
38%

27%

53%

18%

64%

45

Mean

2.5

87

2.9

83

3.2

84

2.9

84

2.5

86

3.2

84

3.7

83

3.9

28

45

Mean

2.4

126

2.2

126

2.0

126

2.6

125

29

125

2.8

124

2.8

126

3.1

42

Disclosure Overload and Complexity: Hidden in Plain Sight | 29

These results are consistent with the observations of

data in the Form 10-Ks that footnote disclosure has
grown at a faster rate than disclosure overall. Because
the respondents noted that fair value, derivatives and
hedging are significant sources or causes of disclosure
complexity, we extracted data from the 25 companies
to assess the impact of disclosure expansion in these
areas. For purposes of our data extraction, we did
not include any disclosure about these topics that
was included in the accounting policy footnote or in
the footnote disclosures applicable to pensions and
other post-retirement benefits because data about
those footnotes was assessed separately. As noted in
Appendix C footnote disclosures applicable to the fair
value, derivatives and hedging topics have almost
tripled over the six-year period with a mean average
increase of 184 percent and a median increase of
150percent.

With respect to complexity, not only has the volume of

footnotes grown at a more rapid pace than disclosure
overall, but the topics of disclosure have been more
complex, including new standards and disclosures
about variable interest entities, derivative instruments,
pensions and other post-retirement benefits and fair
value. In fact variable interest entities and the financial
reporting concepts that they embody only came into
being within the last decade. The multiple attempts by
the FASB to promulgate the accounting for this new
phenomenon have illustrated that, even for these
sophisticated and knowledgeable standards setters,
this accounting and disclosure has been abnormally
challenging.

30 | Disclosure Overload and Complexity: Hidden in Plain Sight

Almost all say financial reporting preparation

time and information review time are impacted
by expanded disclosure requirements.
Q13. Please indicate the extent to which each of the following
is impacted by expanded disclosure requirements with
1 meaning that item is significantly impacted and 5
meaning it is not significantly impacted.

Total

Public
Mean

Financial reporting
preparation time
Time required to
review information

74%

25%

May not equal 100%

due to rounding

16% 9%
19% 7%

49%

Analysts' response to
expanded disclosures

Time required to
review information

1.9

211

Outside expert
preparation
and review cost

2.0

209

Audit fees

2.8

201

SEC comment letterbased disclosure

3.4

209

Investors' response to
expanded disclosures

3.5

206

Analysts' response to
expanded disclosures

7%
2%

Audit fees

23%

197

92%

74%

Investors' response to
expanded disclosures

1.5

1.4

Outside expert
preparation
and review cost

SEC comment letterbased disclosure

196

92%

23%
27%

27%
50%

24%

50%

12

Financial reporting
preparation time

45

89%

Outside expert
preparation
and review cost

80%
75%

Audit fees

Analysts' response to
expanded disclosures

94%

1.4

116

95%

4%
1%

1.5

115

10%

2.0

125

19%

9%

2.1

123

29%

11%

2.3

126

3.4

126

3.4

124

70%

19%

72%
60%
24%
26%

25%

52%

25%

49%

12

30%
22%
25%

12

45

 lmost all say financial reporting preparation and review time

A
required are most impacted by expanded disclosure requirements.

90%

Time required to
review information

Investors' response to
expanded disclosures

May not equal 100%

due to rounding

Private

SEC comment letterbased disclosure

Mean
3%
3%

n
Financial reporting
preparation time

6%
2%

15%

Mean

9%
1%

1.5

79

9%
2%

1.5

81

12% 8%

1.9

85

20% 5%

1.9

85

3.6

74

3.5

82

3.6

81

55%

30%

48%

22%

53%

45

Mean: 1.4, 1.5 respectively (on a 15 scale;

1 = significantly impacted).
Results similar among public and private companies.

Disclosure Overload and Complexity: Hidden in Plain Sight | 31

Significant majority say info. presented on the

face of fin. statements has a greater impact on
users understanding than if provided in a footnote.
Q14. Does information that is presented on the face of the
financial statements have a greater impact on users
understanding of financial statements than the same
disclosure when provided in a footnote?
 ignificant majority (62 percent) say information presented on
S
the face of financial statements has a greater impact on users
understanding than if provided in a footnote (Public: 57 percent,
Private: 69 percent).

100%

80%

It does not seem to need explanation that the more data that must
be included in a public filing, the more effort that is required to
gather, compile, format, present and review the data.

69%
60%

62%

57%
43%

40%

38%
31%

20%

0%
No

Yes

 Total (n = 213)

 Public (n = 126)

 Private (n = 86)

32 | Disclosure Overload and Complexity: Hidden in Plain Sight

Nearly half say greater tabular presentation

format for quantitative information disclosures
will have a positive impact on preparers burden.

C. Survey results applicable to

possible solutions to disclosure
overload and complexity
The survey also questioned respondents on some possible
solutions to the challenges of disclosure overload and complexity.

Q16. M any disclosures, containing qualitative and

quantitative information, are presented in descriptive
(essay) form. To what extent would more tabular
presentation format reduce preparer burden?

Impact assessment of SEC initiatives

Q15. The SEC has been active with initiatives aimed
at reducing the disclosure complexity issue.
To what extent have these SEC initiatives mitigated
the disclosure complexity issue where 1 means it
has had a very positive impact on reducing complexity
and 5 means it has had no impact on reducing complexity.

The plain English

initiative (Total)

19%

19%

The plain English

initiative (Public)

16%

20%

The plain English

initiative (Private)

32%

24%

Discussions and Report

by Advisory Committee on
5%
Improvements to
Financial Reporting (Public)

26%

May not equal 100%

due to rounding

8%

64%

11% 5%

53%

3.7

129

3.8

110

2.3

19*

4.0

148

4.0

125

3.5

22

46%

Quantitative information
disclosures (Public)
Quantitative information
disclosures (Private)

9% 14%

60%

10%

66%

23%

55%

12

45

Not applicable

2%

Overall, respondents believed that the impact of SEC

initiatives to reduce the disclosure complexity issue has not
had much impact.
Few (19 percent) say the plain English initiative has had a
positive impact on reducing complexity.
Mean: 3.7 (on a 15 scale; 1 = very positive impact).
Very few (5 percent) say discussions and report by CIFR on
improvements to financial reporting has had a positive
impact on reducing complexity.
Mean: 4.0 (on a 15 scale; 1 = very positive impact).

40%

52%

Qualitative information
disclosures (Total)

23%

Qualitative information
disclosures (Public)

17%

Qualitative information
disclosures (Private)

38%

42%

34%

53%

55%

Mean

2.6

210

2.7

126

2.5

83

3.0

197

3.1

121

2.9

75

16%

17%

14%

24%

28%

32%

49%

19%

May not equal100%

due to rounding

12

Discussions and Report

by Advisory Committee on
Improvements to 5%
Financial Reporting (Total)

Discussions and Report

by Advisory Committee on
Improvements to
Financial Reporting (Private)

55%

Mean

Quantitative information
disclosures (Total)

45

Respondents say a tabular presentation format would have a

positive impact in reducing preparers burden.
Nearly half say quantitative information disclosures have had a
positive impact.
Mean: 2.6 (on a 15 scale; 1 = very positive impact).
Public: 2.7, Private: 2.5 percent.
Less than one quarter says qualitative information disclosures
have had a positive impact.
Mean: 3.0 (on a 15 scale; 1 = very positive impact).
Public: 3.1, Private: 2.9.
Respondents were also asked for their views on the need for more
vigilance by the FASB and SEC in considering future requirements.

Disclosure Overload and Complexity: Hidden in Plain Sight | 33

FASB and SEC should take various incremental

procedures for cost-benefit analysis as a part
of developing proposals for new accounting
standards.

Many say preparers have little or no

discretion on ability to reduce disclosures.
Q18. D
 o you think preparers are making an effort
to reduce disclosure complexity?

Q17. What incremental procedures should the FASB and SEC

take in the consideration of cost-benefit analysis as part of
the process of developing proposals for new accounting
standards (including disclosure requirements)?

More field testing with

analysts and investors to
test use of information
More field testing with
actual companies to assess
cost of compliance 0%
Consideration of incremental
disclosure in context of all
other disclosures and not on a
standard by standard basis

10%
11%

100%

5%
80%

9%
11%

70% 72% 68%

60%

9%
10%
5%

40%

More open public

5%
discussion and consider6%
ation of field testing
and cost-benefit analysis 0%

23%
20%
7% 8% 5%

58%
62%

All of the above

27%
20%

0%

29%

Yes
9%
Not applicable 0%

Preparers have little or no

discretion on ability to
reduce disclosures

No

62%
May not equal100%
due to rounding

 Total (n = 213)
Private (n = 21)

Public (n = 127)

 Public (n = 127)

 Private (n = 85)

Total (n = 149)

 espondents generally believed that the FASB and SEC should

R
take various incremental procedures in consideration of costbenefit analysis as a part of developing proposals for new
accounting standards.

 0 percent say preparers have little or no discretion or ability to

7
reduce disclosures with results being similar among public and
private companies.

34 | Disclosure Overload and Complexity: Hidden in Plain Sight

Majority say provision of guidance on permissible

cross-referencing of redundant data by SEC tops
list to help reduce disclosure complexity.
Q19.Please assess the impact you think each of the following
suggestions would have on reducing the disclosure
complexity issue using a scale of 1 to 5 where 1 is
significant impact and 5 is no impact.

Suggestions for reducing disclosure complexity.

Q19. P
 lease assess the impact you think each of the following
suggestions would have on reducing the disclosure
complexity issue using a scale of 1 to 5 where 1 is
significant impact and 5 is no impact.

Total
Mean
SEC provides guidance
concerning permissible crossreferencing of redundant data

57%

FASB project on Disclosure

Framework accelerates
consideration of what
disclosure is "essential"
for users of financial
statements and allow
retroactive application to
existing standards

55%

SEC issues a policy statement

to make clear that immaterial
information may be omitted
SEC permit more crossreferencing of
information in financial
statements/footnotes
to other SEC filings

18%

44%

43%

25%

20%

31%

20% 5% 2.5

15% 5% 2.5

31%

5% 2.7

22% 4% 2.7

12

45

Not applicable

Public

n
144

SEC provides guidance

concerning permissible
cross-referencing of
redundant data

144

FASB project on Disclosure

Framework accelerates
consideration of what
disclosure is "essential"
for users of financial
statements and allow
retroactive application to
existing standards

48%

143

SEC issues a
policy statement to make
clear that immaterial
information may be omitted
SEC permit more crossreferencing of information
in financial statements/
footnotes to other
SEC filings

45%

145

May not equal100%

due to rounding

A majority of respondents say SEC guidance concerning

permissible cross-referencing of redundant data could help reduce
disclosure complexity.
Mean: 2.5 (on a 15 scale; 1 = significant impact).
Results similar among public and private companies.

60%

19%

59%

26%

21%

33%

Mean

2.5

126

15% 2.5

127

2.7

126

2.7

126

21%

31%

21%

12

45

Not applicable

Disclosure Overload and Complexity: Hidden in Plain Sight | 35

Many say their company has not taken specific

steps to reduce disclosure complexity in their
financial statements.
Q20. Has your company taken any specific steps or actions to
reduce disclosure complexity in your financial statements?

Private
SEC provides guidance
concerning permissible
cross-referencing of
redundant data

35%

12% 12%

41%

Mean

2.6

17

100%
85%
80%

FASB project on Disclosure

Framework accelerates
consideration of what
disclosure is "essential"
for users of financial
statements and allow
retroactive application to
existing standards
SEC issues a
policy statement to make
clear that immaterial
information may be omitted
SEC permit more crossreferencing of information
in financial statements/
footnotes to other
SEC filings
May not equal100%
due to rounding

70%
29%

18%

12%

41%

2.6

17

61%

60%

39%

40%
30%
18%

12%

29%

41%

3.1

17

3.3

16

20%

15%

0%
19%

19%

25%

38%

12

45

Not applicable

No

Yes

 Total (n = 213)

 Public (n = 127)

 Private (n = 85)

Some respondents also saw value in the FASB project on

Disclosure Framework, which could accelerate consideration of
what disclosure is essential for financial statement users and allow
retroactive application to existing standards).

Although most companies were concerned about disclosure

overload and complexity, 70 percent say their company has not
taken specific steps to reduce disclosure complexity in their
financial statements.

Mean: 2.5 (on a 15 scale; 1 = significant impact).

Public: 61 percent, Private: 85 percent.

Results similar among public and private companies.

This response is consistent with our observations that we identified

only one company in 25 that had made a deliberate effort to
rationalize its disclosures, although there may have been others
we did not identify. Further, we are aware of several companies
not included in our disclosure survey that have undertaken such
disclosure rationalization projects, but these seem to be exceptions
rather than illustrative of any trend.

36 | Disclosure Overload and Complexity: Hidden in Plain Sight

D. Results from the Audit

Committee Institute Conference

During the winter 2011 Audit Committee Institute Issues Conference

sponsored jointly by the National Association of Corporate Directors
(NACD) and KPMG LLP, attendees were asked the following question
to which respondents provided electronic response.
Do you believe that your companys disclosuresincluding
the MD&Aare overly complex and voluminous, and could be
streamlined and made clearer? Positive responses were given by
64percent and negative responses were given by 36 percent.
The attendees at the conference were predominantly audit
committee members and the results suggest that they are less
concerned about disclosure overload and complexity than the
preparers of financial and other disclosures. This is an interesting
perspective because it is reasonable to assume that audit committee
members are reading all of the disclosures in the documents filed
by their respective companies. While a majority of audit committee
respondents (who may be viewed as users of financial reporting)
found their companies disclosures overly complex and voluminous,
the majority is not an overwhelming majority. The response does
indicate that even among this subset of users of financial reporting
there is a predominant view that there is room for more streamlined
and less complex disclosure.
Our research did not attempt to survey financial statement users at
this point, but we expect to expand this project into a second phase
in which investors and other users of financial statements will be
surveyed to obtain their views on disclosure overload, complexity,
streamlining, and other relevant perspectives.

Disclosure Overload and Complexity: Hidden in Plain Sight | 37

38 | Disclosure Overload and Complexity: Hidden in Plain Sight

 ecommendations for reduction of

R
disclosure overload and complexity
Considering the findings of the research discussed previously,
we have developed the following recommendations that we
believe could streamline disclosure without sacrificing important
information.

to SEC staff comments and potential amendments to filings.

One possible approach would be a single footnote that briefly
identifies disclosures omitted due to immateriality.

2. Summaries of significant accounting policies and discussions

1. The SEC should issue an interpretive release to address:

of newly implemented or soon to be implemented accounting

policies should not include a detailed description of patently
immaterial matters but should conform to the guidance in FASB
ASC Section 235-10-50.

The permissibility of cross-referencing to avoid duplicate

disclosures including business description, risk factors,
accounting policies, litigation and other contingencies.
The manner of addressing immaterial items. Note that
both FASB and SEC have issued guidance that indicates
that requirements need not be applied to immaterial items.
Many registrants are concerned that any omission will lead

Q 3/31/20111 Q 3/31/2010

3. Disclosures in the financial statements and elsewhere should

make maximum use of tables and graphics and avoid the use
of long textual discussions. For example, MD&A could include
comparative statements in a tabular format with a column
devoted to explanations such as:

Change

Additional Information

Sales

2,000,000

1,800,000

+200,000

New product introductions, new stores, increased

volume, increase price, foreign currency changes

COGS

1,100,000

1,000,000

+100,000

Increase due to sales volume increase partially offset

due to volume discount increase

Gross margin

900,000

800,000

+100,000

See above

Other costs

700,000

650,000

+ 50,000

Payroll increase due to personnel added for new stores

Significant judgments and estimates could also be summarized in tabular format such as:

Balance Sheet
12/31/2010

Income Statement
Impact
Current Period

Significant Judgments and Estimates

Allowance for sales

returns

3,500,000

900,000

Requires management to anticipate future trends

in customer dissatisfaction with products

Reserve for inventory

obsolescence

1,700,000

400,000

Requires management to anticipate trends in

sales of products with declining demand due to
style/technology changes

Fair value of investment

securities (Level 2 and 3)

12,575,000

1,225,000

Goodwill carrying value

4,000,000

-0-

Requires evaluation of quality of inputs and

models used to determine fair value
Requires appropriate assessment of segment,
reporting units, enterprise value, allocation
among reporting units and estimates of future
cash flows as well as applicability of valuation
models

Disclosure Overload and Complexity: Hidden in Plain Sight | 39

4. The SEC should move forward with its 21st Century Disclosure
Project and should consider rule making to permit companies
to omit or incorporate by reference information included in
other filings that continue to be available on the companys or
SEC Web site. Periodic reports could be revised to require the
financial results comparison for the current comparative period
only and to refer to prior year comparisons that have appeared
in past filings.
This recommendation is similar to the concept of company
disclosure as envisioned in the SECs original paper on the
21stCentury Disclosure Initiative.

5. The FASB should accelerate work on its Disclosure Framework

project. Currently the FASB has significant resource
commitments as a result of the many projects related to
convergence with IFRS. As a result of the constraints on
available resources and the priority of the IFRS convergence
commitments, the FASB has delayed work on the Disclosure
Framework project. Noting that disclosure is sometimes the
alternative to, but is always the companion to, other recognition
and measurement standards setting, and given the evidence
of the importance of establishing comprehensive and useful
disclosures, aneffective framework for disclosure development
should be a companion consideration and not an afterthought in
the standards-setting process.
In August 2011 FASB held two public meetings at which the
Disclosure Framework project was discussed. The current FASB
technical plan indicates in the discussion of next steps that an
initial due process discussion document is planned to be issued
in early 2012. Since a significant period may elapse between
the issuance of a discussion document and the issuance of a
final framework, and in consideration of the significant standard
setting projects that are scheduled for finalization in the next
year, FASB should consider any early guidance developed during
the deliberation of the Disclosure Framework project in its
deliberation of disclosure requirements in connection with final
standards adopted in the interim.

6. Disclosure of risk factors should be limited to company-specific

unique risks and should not recite the obvious risks of the
general environment of Regulation S-K consistent with the Item
503(c). For example, a companys disclosure that a recession
in which customers reduce purchases could negatively
affect revenues is not uniquely informative. Adisclosure
that the companys facilities are concentrated in areas that
are negatively impacted by weather patterns or geophysical
risks that are unique to a particular geography orare subject
to specific political risks such as dependency on government
spending is useful.

Item 503 (c) of Regulation S-K which specifies risk factor

disclosure requires as follows:

(c) Risk factors. Where appropriate, provide under the caption

Risk Factors a discussion of the most significant factors that
make the offering speculative or risky. This discussion must
be concise and organized logically. Do not present risks that
could apply to any issuer or any offering. Explain how the risk
affects the issuer or the securities being offered. Set forth each
risk factor under a subcaption that adequately describes the
risk. The risk factor discussion must immediately follow the
summary section. If you do not include a summary section,
the risk factor section must immediately follow the cover
page of the prospectus or the pricing information section that
immediately follows the cover page. Pricing information means
price and price-related information that you may omit from the
prospectus in an effective registration statement based on
230.430A(a) of this chapter. The risk factors may include, among
other things, the following:
(1) Your lack of an operating history;
(2) Your lack of profitable operations in recent periods;
(3) Your financial position;
(4) Your business or proposed business; or
(5) The lack of a market for your common equity securities
or securities convertible into or exercisable for common
equitysecurities.

40 | Disclosure Overload and Complexity: Hidden in Plain Sight

Risk factor disclosure in most periodic filings was observed to go

much further than the rule, which made it difficult to determine
factors that were truly matters for concern from those that were
routine general risks. As a result of the volume of routine risk
disclosures, readers are tempted to skim these factors and thus
there is a greater chance that they will fail to read the uniquely
risky factors.

7. Regulation S-X Article 10 Interim Financial Statements

provides that interim financial statements may be presented in
a condensed format and, Registrants may presume that users
of the interim financial information have read or have access to
the audited financial statements for the preceding fiscal year
and that the adequacy of additional disclosure needed for a fair
presentation, except in regard to material contingencies, may
be determined in that context. Accordingly, footnote disclosure,
which would substantially duplicate the disclosure contained
in the most recent annual report to security holders or latest
audit financial statements, such as a statement of significant
accounting policies and practices, details of accounts which
have not changed significantly in amount or composition since
the end of the most recently completed fiscal year, and detailed
disclosures prescribed by Rule 4-08 of this Regulation,
may be omitted.

Both public and private companies should be permitted to omit

interim period disclosures concerning financial statement items
that have not substantially changed since the end of the prior
fiscal year.

8. Consistent with the observations from respondents in the

survey, the FASB and SEC should take various incremental
procedures in consideration of cost-benefit analysis as a
part of developing proposals for new accounting standards.
In particular the FASB should consider any new disclosure
requirements from the context of the overall current disclosure
environment rather than considering disclosure from the
perspective of each individual topic as it is addressed in
standards setting. This macro disclosure consideration,
together with more rigorous cost-benefit analysis and field
testing of disclosures should be considered prospectively
and retrospectively.

Disclosure Overload and Complexity: Hidden in Plain Sight | 41

Appendix A

Disclosure Overload and Complexity: Hidden in Plain Sight | 43

Comparative volume analysis for 25 selected companies

Comparison of 10-K page volume and footnote volume for fiscal years
ended 2004, 2009, and 2010
Form 10-K Pages

Footnote Pages

Form 10-K Pages

Footnote Pages
Percentage Change
Percentage Change
2004 2010 to 2004 2010 to 2009 2010 to 2004 2010 to 2009

2010

2009

2004

2010

2009

Johnson & Johnson

56

69

67

27

25

19

-17%

Bristol Myers

134

132

122

52

54

44

Time Warner

141

164

225

51

64

73

Viacom

111

118

116

37

38

Dow Chemical

203

165

118

64

-19%

+42%

+8%

+10%

+2%

+18%

-4%

-37%

-14%

-30%

-20%

45

-4%

-6%

-18%

-3%

64

55

+72%

+23%

+16%

Dupont

107

108

99

46

47

43

+8%

-2%

+7%

-2%

Reynolds American

156

151

167

91

84

73

-7%

+3%

+25%

+8%

Altria

153

143

93

58

56

30

+65%

+7%

+93%

+4%

Procter & Gamble

64

67

57

20

22

17

+12%

-4%

+18%

-10%

Avon

91

92

90

38

36

32

+1%

-1%

+19%

+6%

Verizon

86

103

97

35

36

36

-11%

-17%

-3%

-3%

AT&T

93

89

78

40

36

25

+19%

+4%

+60%

+11%

Bank of America

245

205

160

98

85

68

+53%

+20%

+44%

+15%

Wells Fargo

212

176

101

109

87

45

+110%

+20%

+142%

+25%

Archer Daniels
Midland

91

84

72

42

22

20

+26%

+8%

+110%

+91%

ConAgra

87

91

80

44

42

29

+9%

-4%

+52%

+5%

Lockheed Martin

85

92

85

28

30

27

0%

-8%

+4%

-7%

General Dynamics

70

70

60

26

24

21

+17%

0%

+24%

+8%

Cardinal Health

85

85

118

36

36

44

-28%

0%

-18%

0%

Ameri-source Bergen

80

81

84

34

35

33

-5%

-1%

+3%

-3%

IBM

134

128

98

63

57

43

+37%

+7%

+47%

+11%

Microsoft

87

84

73

36

34

35

+19%

+3%

+3%

+6%

Wal-Mart

82

80

73

23

25

12

+9%

+2%

+92%

-8%

Target

67

56

28

28

24

10

+139%

+20%

+180%

+17%

98

64

33

33

23

+53%

0%

+43%

0%

902

+16%

+3%

28.5%

+6%

Berkshire Hathaway
Total

98
2,818

2,731 2,427 1,159 1,096

Note to table: Companies presented above consist of matched pairs by industry as follows:
Pharmaceuticals Johnson & Johnson and Bristol-Myers

Food Products Archer Daniels Midland and ConAgra

Cable and Entertainment Time Warner and Viacom

Chemicals Dow and DuPont

Federal government contracts Lockheed Martin and General

Dynamics

Tobacco Products Reynolds American and Altria

Health care supplies Cardinal Health and Amerisource Bergen

Toiletries, cosmetics, soaps, detergents Procter & Gamble and

Avon Products

Computers and software IBM and Microsoft

Telecommunications Verizon and AT&T

Unmatched Berkshire Hathaway

Financial Institutions Bank of America and Wells Fargo

Retail stores Wal-Mart and Target

44 | Disclosure Overload and Complexity: Hidden in Plain Sight

Appendix B

Disclosure Overload and Complexity: Hidden in Plain Sight | 45

Pension and other post-retirement benefit

plan footnote disclosure
Comparison of 2004 to 2010
2010

2004

% change

Johnson & Johnson

4.5

+50

Bristol Myers

5.5

3.5

+57

Time Warner

+20

4.5

4.5

+100

Dupont

7.5

+88

Reynolds American

7.5

5.5

+36

3.5

+71

Viacom
Dow Chemical

Altria
Procter & Gamble

4.5

-10

Avon Products

7.5

+25

Verizon

6.5

4.5

+44

AT&T

11

+38

Bank of America

6.5

+30

Wells Fargo

+100

5.5

+38

ConAgra

4.5

+33

Lockheed Martin

4.5

+56

Archer Daniels Midland

General Dynamics

+100

Cardinal Health

Amerisource Bergen

+20

14

+75

Microsoft

Wal-Mart

0.5

+100

Target

+200

2.5

1.5

+60

146.5

97.5

+50

IBM

Berkshire Hathaway
Total

46 | Disclosure Overload and Complexity: Hidden in Plain Sight

Appendix C

Disclosure Overload and Complexity: Hidden in Plain Sight | 47

Fair value, derivatives and hedging footnote disclosure

(excluding disclosure in accounting policy and pension and other
post-retirement benefit footnotes)
Comparison 2004 to 2010
2010

2004

% change

Johnson & Johnson

+100%

Bristol Myers

+400%

Time Warner

Viacom

<0.5

+100%

Dow Chemical

8.5

3.5

+143%

Dupont

4.5

<0.5

+800%

Reynolds American

4.5

0.5

+800%

Altria

Procter & Gamble

1.5

+100%

Avon Products

5.5

+83%

Verizon

AT&T

+300%

Bank of America

11

+57%

Wells Fargo

28

+300%

Archer Daniels Midland

+800%

ConAgra

1.5

+167%

1.5

+150%

+100%

Lockheed Martin
General Dynamics
Cardinal Health

5.5

2.5

+120%

<0.1

<0.1

10

2.5

+300%

Microsoft

+300%

Wal-Mart

2.5

+150%

Amerisource Bergen
IBM

Target

0.5

+700%

Berkshire Hathaway

2.5

+100%

136.5

48

+184%

Total

48 | Disclosure Overload and Complexity: Hidden in Plain Sight

Appendix D

Disclosure Overload and Complexity: Hidden in Plain Sight | 49

Survey for financial executives

Screener and demographic questions

Issue overview

1.

5. With respect to the assertion that there is a disclosure complexity

problem, do you believe the disclosure complexity issue is more
serious in your industry than in others?

Is your company publicly traded on a stock exchange or privately held?

a. Public
b. Private

a. Yes

2. Annual revenues are:

b. No

a. $100 million or less

b. Greater than$100 million but less than $500 million

c. No, but certain industries contribute to complexity because of

industry specific issues

c. Greater than $500 million but less than $1 billion

d. I dont believe there is a disclosure complexity problem

d. Greater than $1 billion but less than $5 billion

e. Greater than $5 billion
3. Which of the following best characterizes the industry your company is in?

6. (This question applies to publicly-held companies. Respondents

from privately-held companies may skip this question). What factors
might cause you to provide a disclosure that you believe is otherwise
immaterial? (Check all that apply)

a. Banking & Finance

a. Possible objection by external auditor

b. Investment Management

b. Potential financial statement user objection; e.g. analysts,

bankers, investors

c. Insurance

c. Potential objection by SEC or other regulator including state

regulators

d. Building, Construction & Real Estate

e. Energy, Natural Resources & Chemicals

d. Other. Please specify

f. Diversified Industrials
g. Electronics, Technology, Software & Services
h. Communications & Media
i. Retail
j. Food, Drink & Consumer Goods
k. Healthcare & Pharmaceuticals
l. Other (Please specify)
4. If company is publicly traded, market capitalization at 9/30/2010 was:
a. Less than $75 million
b. Greater than $75 million but less than $200 million

e. Not applicable
7.

If your company has expanded non-mandatory disclosures as a result

of an SEC staff comment, what statement best captures consideration
of including that same disclosure in future filings?
a. Once disclosure is included in a public filing in response to an SEC
staff comment, it is rarely or never omitted from future filings.
b. Once a disclosure is provided in response to an SEC staff
comment, management would continue to consider materiality
and would omit if it was later determined to be immaterial.

8. To what extent are your companys disclosures influenced by concerns

over potential future litigation?

c. Greater than $200 million but less than $500 million

a. Significantly influenced

d. Greater than $500 million but less than $1 billion

b. Somewhat influenced

e. Greater than $1 billion

c. Not a consideration

f. Company not publicly traded

9. To what extent does your inside or outside legal counsel direct

disclosure in some or all parts of public filings or footnotes to the
financial statements?
a. Significantly
b. Moderately
c. Very limited

50 | Disclosure Overload and Complexity: Hidden in Plain Sight

10. If counsel is significantly involved in determining disclosures included

in a filing with the SEC or the footnotes to the financial statements,
please identify what topics are influence or directed by legal counsel?
a. Fear of litigation by third parties (such as class action suits)

12. Please indicate the extent to which each of the following is a

source or a cause of disclosure complexity with 1 meaning that
the factor is a very significant source of disclosure complexity and
5 meaning it is not at all a source of disclosure complexity:

b. Risk factors

Very
Significant
Source

c. Other? (Please specify)

Not at all
Significant
Source

Footnotes

1 2 3 4 5

11. In your opinion please evaluate how much each of the following
factors contributes to disclosure complexity using a 1 to 5 scale with
1 meaning it is a very significant contributor to disclosure complexity
and 5 meaning it is not at all a significant contributor to disclosure
complexity:

MD&A

1 2 3 4 5

Executive Compensation

Risk factors

Litigation

1 2 3 4 5

Interim period disclosures

Sources/causes of the issue

a.

Very
Significant

Complexity of company

Not at all
Significant

b. Complexity of accounting standards 1

Specific GAAP disclosure

requirements

c.

a. Significant accounting policies

d. Mandatory redundant disclosure

b. Fair value

e. Voluntary redundant disclosure

c. Compensation

f.

Complexity of transactions

d. Pensions and post retirement

benefits

g. Complex business environment

e. Income taxes

h. Risk factor disclosures

f. Leases

i.

Disclosures to limit litigation exposure 1

Interim period disclosures

g. Financial instruments
other than debt

j.
k.

Critical accounting policies

and judgments

h. Derivatives and hedging

i. Foreign currency

j. Debt and complex equity

instruments

k. Stock options

l. Segments

m. Loss contingencies and

litigation issues

n. New accounting standards

o. Business combinations and

non-controlling interestsp.

p. Other (Please specify)

Volume of mandated disclosure

Disclosure Overload and Complexity: Hidden in Plain Sight | 51

17. (This question applies to publicly-held companies. Respondents from

privately-held companies may skip this question) What incremental
procedures should the FASB and SEC take in the consideration of costbenefit analysis as part of the process of developing proposals for new
accounting standards (including disclosure requirements)?

Impacts of the issue

13. Please indicate the extent to which each of the following is impacted
by expanded disclosure requirements with 1 meaning that item is
significantly impacted and 5 meaning it is not significantly impacted:
Financial reporting preparation time

a. More field testing with actual companies to assess

cost of compliance

Time required to review information

b. More field testing with analysts and investors to test use

of information

Outside expert preparation and review cost 1

c. Consideration of incremental disclosure in context of all other

disclosures and not on a standard by standard basis.

Investors response to expanded disclosures 1

Analysts response to expanded disclosures 1

SEC comment letter-based disclosure

Audit fees

14. Does information that is presented on the face of the financial

statements have a greater impact on users understanding of financial
statements than the same disclosure when provided in a footnote?
a. Yes

d. More open public discussion and consideration of field testing

and cost benefit analysis
e. All of the above
f. Not applicable
18. Do think preparers are making an effort to reduce
disclosure complexity?
a. Yes
b. No
c. Preparers have little or no discretion on ability to
reduce disclosures

b. No

19. (This question applies to publicly-held companies. Respondents from

privately-held companies may skip this question) Please assess the
impact you think each of the following suggestions would have on
reducing the disclosure complexity issue using a scale of 1 to 5 where
1 is significant impact and 5 is no impact.

Solutions to the issue

15. (This question applies to publicly-held companies. Respondents from
privately-held companies may skip this question) The SEC has been
active with initiatives aimed at reducing the disclosure complexity
issue. To what extent have these SEC initiatives mitigated the
disclosure complexity issue where 1 means it has had a very positive
impact on reducing complexity and 5 means it has had no impact on
reducing complexity
Impact on reducing complexity
Very Positive
No Impact

The plain English initiative

N/A

Discussions and Report by Advisory 1

Committee on Improvements
to Financial Reporting

N/A

16. Many disclosures, containing qualitative and quantitative information,

are presented in descriptive (essay) form. To what extent would more
tabular presentation format reduce preparer burden?
Impact on preparer burden
Very Positive
Very Negative
Qualitative information disclosure

Quantitative information disclosures

SEC issues a policy statement to

make clear that immaterial
information may be omitted.

5 N/A

SEC provides guidance concerning

permissible cross referencing of
redundant data

5 N/A

FASB project on Disclosure

1
Framework accelerates consideration of what disclosure is essential
for users of financial statements and
allow retroactive application to
existing standards

5 N/A

SEC permit more cross-referencing

1
2
3
4
5 N/A
of information in financial statements/
footnotes to other SEC filings
20. Has your company taken any specific steps or actions to reduce
disclosure complexity in your financial statements?
a. Yes (What steps or action have you taken?)
b. No
21. Please provide any other comments or suggestions that you believe
would be helpful to this study.

52 | Disclosure Overload and Complexity: Hidden in Plain Sight

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Disclosure Overload and Complexity: Hidden in Plain Sight | 53

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Teresa E. Iannaconi
Partner in Charge, Knowledge Sharing
Department of Professional Practice
KPMG LLP
T: 212-909-5426
E:[email protected]
William M. Sinnett
Director of Research
Financial Executives Research Foundation, Inc. (FERF)
T: 973-765-1004
E: [email protected]

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