The IASB and the US FASB are working together to simplify the presentation of Financial Statements and have jointly published for comment a discussion paper entitled, “ Preliminary Views on Financial Statement Presentation”. The goal of the project is to create a global standard that requires entities to organise financial statements in a manner that clearly communicates an integrated financial picture of the entity. Gary Simon, FSN’s managing editor reports.
The Boards’ acknowledge that International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) provide only limited presentation guidance. In addition, presentation guidelines in US GAAP are dispersed across standards. According to the Boards, users of financial statements have often expressed dissatisfaction that information is not linked across the different statements and that dissimilar items are in some cases aggregated in one number. The Discussion Paper contains an analysis of the current issues in financial statement presentation and presents the Boards’ initial thinking on how those issues could be addressed in a possible future format.
Introducing the Discussion Paper, Sir David Tweedie, chairman of the IASB, said, “The credit crisis has highlighted the need for clear presentation of financial information that is often complex. Early staff drafts of the paper that included an option to eliminate the ‘net income’ line were widely reported. However, the boards have chosen to proceed with proposals that build on established practice.”
Robert Herz, chairman of the US FASB, commenting on the publication of the Discussion Paper said, “Providing investors with the most transparent, consistent financial reporting possible are more critical than ever to the efficiency and soundness of our capital markets. By working together to create one common, high-quality global standard for financial statement presentation, the Boards are aiming to increase the usefulness of financial reports while enhancing their comparability across international capital markets.
How an entity presents information in its financial statements is vitally important
because financial statements are a central feature of financial reporting—a principal
means of communicating financial information to those outside an entity. The
International Accounting Standards Board (IASB) and the U. S. Financial Accounting
Standards Board (FASB) initiated the joint project on financial statement presentation to
address users’ concerns that existing requirements permit too many alternative types of
presentation and that information in financial statements is highly aggregated and
inconsistently presented, making it difficult to fully understand the relationship betweenthe financial statements and the financial results of an entity.
The Discussion Paper sets out the Boards’ preliminary views on a proposed model for presenting information in the financial statements. The model is designed to make an entity’s financial statements more useful by requiring entities to provide detailed information organised in a manner that clearly communicates an integrated (cohesive) financial picture of an entity.
The Boards has developed three objectives for financial statement presentation, namely; That they (i) “Portray a cohesive financial picture of an entity’s activities” - a cohesive financial picture means that the relationship between items across financial statements is clear and that an entity’s financial statements complement each other as much as possible. (ii) “Disaggregates information so that it is useful in predicting an entity’s - future cash flows”. According to the Boards, Financial statement analysis aimed at objectives such as assessing the amount, timing, and uncertainty of future cash flows requires financial information that is disaggregated into reasonably homogeneous groups of items. If items differ economically, users may wish to take that into account differently in predicting future cash flows.
The final objective is to (iii) “Help users assess an entity’s liquidity and financial flexibility”. Information about an entity’s liquidity helps users to assess an entity’s ability to meet its financial commitments as they become due. Information about financial flexibility helps users to assess an entity’s ability to invest in business opportunities and respond to unexpected needs says the Discussion Paper.
The proposed presentation model requires an entity to present information about the
way it creates value (its business activities) separately from information about the way it funds or finances those business activities (its financing activities). Furthermore it is suggested that an entity should present information about its discontinued operations separately from its continuing business and financing activities. Finally the discussion draft says that an entity should present information about its income taxes separately from all other information in the statements of financial position and cash flows.
The Discussion Paper is open for comment until 14 April 2009.
