FASB and IASB Propose Joint Enhancements to Presentation of Financial Statements

Culminating four years of joint effort, the IASB and FASB have proposed enhancing the presentation of financial statements based on the twin principles of cohesiveness and disaggregation. Currently, IFRS and U.S. GAAP provide little specific guidance on the presentation of line items in financial statements, such as the level of detail or number of line items that should be presented. The proposal is designed to create the most transparent, consistent financial reporting possible by creating one common, high-quality global standard for financial statement presentation. Public comment is invited until April 14, 2009.

Cohesiveness would ensure that a reader of financial statements can follow the flow of information through the different statements of an entity; while disaggregation would ensure that items that respond differently to economic events are shown separately. To present a cohesive set of financial statements, a company should align the line items, their descriptions, and the order of presentation of information in the statements of financial position, comprehensive income, and cash flows. To the extent that it is practical, a company should disaggregate, label, and total individual items similarly in each statement. In the view of the Boards, doing so should present a cohesive relationship at the line item level among individual assets, liabilities, income, expense, and cash flow items.

Under the new presentation scheme, the statement of financial position would be grouped by major activities (operating, investing, and financing), not by assets, liabilities, and equity as it is today. The presentation of assets and liabilities in the business and financing sections will clearly communicate the net assets that management uses in its business and financing activities. That change in presentation, coupled with the separation of business and financing activities in the statements of comprehensive income and cash flows, should make it easier for users to calculate some key financial ratios for a firm’s business activities or its financing activities.

Thus, generally, the proposed presentation model would require a company to present information about its business activities separately from information about the way it funds or finances those business activities. Further, a company should further separate information about its business activities by presenting information about its operating activities separately from information about its investing activities. More granularly, a company should present information about the financing of its business activities separately depending on the source of that financing. For example, information about non-owner sources of finance should be presented separately from owner sources of finance.

In the same spirit, a company should present information about its discontinued operations separately from its continuing business and financing activities. It should also present information about its income taxes separately from all other information in the statements of financial position and cash flows. Assets and liabilities would be disaggregated into short-term and long-term subcategories within each category unless an entity believes presenting assets and liabilities in order of liquidity provides more relevant information.

The proposed presentation model eliminates the choice a company currently has of presenting components of income and expense in an income statement and a statement of comprehensive income (two-statement approach) or, alternatively, of presenting information about other comprehensive income in its statement of changes in equity (U.S. GAAP only). Under the new regime, all companies would present a single statement of comprehensive income, with items of other comprehensive income presented in a separate section.