Is More Too Much?

The Financial Accounting Standards Board and the International Standards Board issued a discussion paper titled Preliminary Views on Financial Statement Presentation. The joint project between the boards was initiated to address concerns that existing presentation requirements permit too many alternative types of presentation and that information in financial statements is highly aggregated and inconsistently presented.

The discussion paper introduces the concepts of disaggregation and cohesiveness. A detailed explanation of these concepts and all of the changes under the Discussion Paper is beyond this narrative; however, you should be aware that the discussion paper introduces significant changes to the presentation of information in financial statements.

Under the concept of disaggregation, the income statement will provide more detail. Revenue, costs and expenses will be disaggregated by nature and function. Instead of having one line item for selling, general and administrative expenses, for example, these expenses will be expanded to multiple lines by nature (selling, general and administrative) and then by function (salaries and wages, advertising, depreciation, etc.). In the balance sheet, you will see more line items. Many accounts that used to be lumped in other current assets or other current liabilities will require separate lines.

The goal of cohesiveness is to make the relationship between items across financial statements clear. In attempt to make the financial statements flow together, the balance sheet will include separate sections for operating, investing and financing assets and liabilities.

While the concept of net income is retained, the basic income statement is not. It will be replaced by a required single statement of comprehensive income. For the cash flow statement, the proposal prohibits the use of the indirect method and requires the direct method. The financial statements are then pulled together by footnote disclosures that require a detailed reconciliation of cash flows to comprehensive income.

Changes introduced in the discussion paper may be welcome by many. However, others may be concerned that the proposals go beyond what is needed and introduce changes that will make financial statements too detailed and less useful.

Have you had a chance to read the discussion paper? What do you think about the proposals? The comment period is open until April 14, 2009. Instructions for submitting comments are included in the Discussion Paper.

- Paul Parks

Comments

[Dennis Adair]

The footnotes already provide supplementary income statement detail If they want to add a little more detail to the income statement, okay. Otherwise what is proposed will add little value (who, other than accountant, will understand such detailed reconciliations) at a high cost. In addition, requiring the direct method adds no value at great cost - all accounting systems are based on accrual accounting, not cash and do not provide the information for direct cash flow.

[Michalina Pietas]

Though more detail would provide better comparative information, expanding the lines on the balance sheet and income statement by embedding the detail in that presentation, could defeat the purpose. By expanding the notes to the financial statements and requiring a breakdown between the items of G&A and COGS, more information would be provided in a meaninful, summarized format while keeping the integrity of the basic 3 financial statements clean and concise. Many people quickly view the BS and P&L for specific numbers: Cash, Fixed Assets, Total Revenue, or EDITDA.

[John L Daly]

I have studied the proposed new financial statement presentation formats that FASB and the IASB are currently considering and would like to offer my insights on these proposed changes.

A major goal of financial statement presentation is to provide readers with an understanding of the financial situation of an entity. This should include not just financial, professionals but the entities management, board of directors, bankers and ordinary shareholders.

I believe that our current financial statements, particularly the Statement of Cash Flows have become too difficult for lay readers to understand. With the existing format, one of the first questions lay readers ask us is "What is the difference between "investing" and "financing" cash flows? Making a distinction between these types of cash flows provides little value for a financial statement reader, yet using this financial statement presentation hides other very valuable piece of information: What are the TOTAL inflows and outflows of the entity.

Making the Income Statement and Statement of Financial Position comparable to the Statement of Cash Flows would effectively take two financial statements that most users understand and makes them inaccessible to lay readers. Our current Statement of Financial Position is well understood by lay people. From that statement, it is easy to identify total assets, total liabilities, total equity and the relationships between these quantities. The proposed new format obscures this valuable information for the sake of providing information that is of little value.

We should be attempting to make financial statements easier to understand, not more difficult to understand. The recent proposal to change the Income Statement and Statement of Financial Positionindicates that the accounting techies at FASB and the IASB have completely lost touch with real world financial statement users.

If we really believe that it provides value to a financial statements reader to know business, financing, income tax, and discontinued operations assets and liabilities. The Statement of Financial Position should be presented in this format:

ASSETS

Business

Financing

Income Tax

Discontinued Operations

TOTAL ASSETS

LIABILITIES

Business

Financing

Income Tax

Discontinued Operations

TOTAL LIABILITIES

EQUITY

The Statement of Cash Flows should have the same format. This presentation would make financial statements much more readable to lay users.

John L. Daly

MBA, CPA, CMA, CPIM