A report by Fitch Ratings calls into question the cost-effectiveness of the improvements in financial statement presentation proposed by FASB and its international counterpart.

In October 2008, FASB and the International Accounting Standards Board published a joint discussion paper that was open to public comments until April 14, 2009. The proposal, in its current form, would significantly change the current presentation of the balance sheet, income statement and cash-flow statement (see Commentary: Build a Better Financial Statement). The final standards are not expected until 2011.

The discussion paper came in response to criticism from investors and analysts that the current format of financial statements often seems overly summarized and inconsistently presented. However, the price of changing the format could be high for companies.

“The discussion paper is a good start, although it is unclear whether the benefits of the changes, if enacted in the current form, would outweigh the added costs for users as well as preparers,” said Fitch Ratings director Olu Sonola.

The ratings agency believes the proposed overhaul to financial statements contains several good points, although some of the suggestions will need further evaluation to determine their workability and usefulness. In Fitch Ratings’ view, the three overall objectives set forth in the discussion paper – cohesiveness of financial statements, “disaggregation” of line items, and more clarity on liquidity and financial flexibility  – should improve the usefulness of financial statements to users and enhance analysis.

However, Fitch believes that further clarity and revisions are needed on some specific points. For example, cohesiveness should serve to address some of the inconsistencies present in reconciling key balance sheet, income statement and cash-flow items and making flows from period to period more understandable. While Fitch supports cohesiveness as an objective, the rating agency said that applying this principle too rigidly in practice by hard-wiring cohesive application line by line through all financial statements would result in cumbersome, unhelpful reporting.

A full analysis of the proposed changes can be found in the report "Financial Statement Presentation: Is it Time for Change?" which is available on Fitch's Web site at www.fitchratings.com  by clicking the tab "Market Focus" and then "Accounting and Corporate Governance."


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