The Council of Institutional Investors (CII), a leading voice for corporate governance, told the FASB that disclosure rules around environment, social and corporate governance (ESG) matters and the presentation of the statement of cash flows are two topics the board should prioritize on its technical agenda, as both areas lack key information investors seek.
The FASB can effectively enhance ESG-related note disclosures with respect to the risks relating to human capital management, climate change and income taxes, CII’s General Council Jeffrey Mahoney said in a Sept. 16, 2021, letter to the board.
Investors are also seeking to project future operating results and cash flows, and therefore “we would support as a top priority for the board to improve the statement of cash flows to require presentation of cash flows from operating activities under the direct method,” he wrote in response to the FASB’s agenda consultation document.
The FASB issued the document in June as Invitation to comment (ITC) No. 2021-004, Agenda Consultation, to solicit public feedback about its five-year agenda. Comments are due by Sept. 22.
CII said there is a pervasive need for more information about human capital management in the financial statements, more granularity and disaggregation about breakdown of cost of sales (COS) and selling, general, and administrative (SG&A) expense to understand a company’s cost structure by nature (such as labor), as this would allow investors to better understand a company’s operating results, and future cash flows.
Moreover, climate change is a systemic risk, so it is critical that investors can access clear disclosures of the risks it poses to long-term value creation by the companies in which they invest, according to the letter. But there is inadequate information being disclosed on climate risk when it would have a material effect on an impairment analysis, fair value calculation, or expected credit losses.
“We believe “the current inadequacies of existing disclosures about climate change by companies can lead to mispricing of assets and a misallocation of investment capital,” Mahoney wrote.
To improve disclosures on climate risk, the FASB would need to amend six rules: Subtopic 205-40, Presentation of Financial Statements—Going Concern; Topic 275, Risks and Uncertainties; Subtopic 350-20, Intangibles— Goodwill and Other—Goodwill; Subtopic 350-30, Intangibles—Goodwill and Other— General Intangibles Other than Goodwill; Subtopic 410-20, Asset Retirement and Environmental Obligations—Asset Retirement Obligations; and Subtopic 410-30, Asset Retirement and Environmental Obligations—Environmental Obligations.
Related to income taxes, investors want more granularity and disaggregation including a breakdown of income tax information to better assess global tax risk, CII said. For example, many investors agree that jurisdictional or country-by-country information, such as income taxes paid, could assist investors in better understanding a company’s exposure to potential changes in tax legislation and the global tax risk companies may face.
“Such information could assist investors in analyzing a company and making capital allocation decisions,” the letter states.
On the cash flows statement, CII would support requiring presentation of cash flows from operating activities under the direct method, a step it said would be an improvement as the indirect method is not intuitive.
For example, some investors noted that “the most decision-useful cash flow information, such as cash collected from customers, is only available in a statement of cash flows prepared using the direct method, which companies rarely utilize,” Mahoney said. “Detailed operating cash flows provide much needed data and context, which many investors have been demanding for far too many years.”
CII is a nonprofit, nonpartisan association of United States public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion.
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