In the current financial turmoil, what might help is a more presentable presentation of financial statements.

As a result, the International Accounting Standards Board and the Financial Accounting Standards Board have teamed up to roll out a discussion paper on statement presentation.

The proposal is rather radical, calling for public and private companies to produce statements of financial position, comprehensive income and cash flows, each divided into sections on financial activities (i.e., how it obtains capital) and business activities (how it uses capital to produce value). The business activities sections would be divided into categories on operations and investments, and financial activities would show categories for assets and liabilities.

Rebecca McEnally, a member of FASB's Investors Technical Advisory Committee and retired director of advocacy for the CFA Institute, labeled the proposal "brilliant" and said that it may be the biggest thing FASB has ever done. "This is a framework that better reflects what investors actually do when they analyze companies," she said. "It provides the information that they work so hard to get out of the highly aggregated and confusing numbers that we now have. In that regard, this may be the most significant proposal that the FASB has ever put forward."

McEnally said that the new model would indirectly resolve certain accounting issues, such as fair value measurement.


The proposed global standard is based on two objectives: cohesion and disaggregation.

Improved cohesiveness, the boards believe, will ensure that users can follow information through an entity's statements of financial position, comprehensive income and cash flow. The segregation of information found in current statements makes it difficult, for example, to compare operating income with operating cash flows.

At the same time, disaggregation would ensure that items that respond to economic events differently are shown separately. For example, though direct production costs and administrative costs respond differently to economic events, some companies aggregate them. Most companies use an indirect method of presenting operating cash flows that adjusts net income to arrive at net operating cash flow. Users of financial information, however, would like to see separate operating cash inflows and outflows, the better to understand how well a company can generate cash.

Entities would be free to decide how to classify their assets and liabilities into the sections and categories on the basis of how the item is used. The classification in the balance sheet would determine classifications in other statements. Companies would need to disclose the reasons behind the classifications.

Dina M. Maher, senior director at the Credit Policy Group of Fitch Ratings, said that presentations under the proposed guidance would greatly facilitate credit analysis.

"We're very supportive of this project because we think that overall it will result in financial statements that are clearer and provide move comprehensive data that will make our jobs easier from a credit analysis perspective," Maher said. She added that the cohesiveness factor would make it easier to evaluate across the balance sheet and into the cash flow statement. The disaggregation of information will make it easier to evaluate the timing, amount and uncertainty of the cash flow.

Malcolm Cheetham, head of Novartis Group Financial Reporting & Accounting, generally supports the proposal but has reservations about one aspect. "The one area that concerns me is the mandated use of the direct cash flow method," he said. "Unless some short-cuts can be made, I see this as adding unnecessary complications and cost to the whole reporting process without having a clear benefit."

FASB senior project manager Kim Petrone said that the new presentation would give managers an opportunity to communicate the unique aspects of their business, while making it easier for the users of financial information to understand how a business is run.

"The idea is to have financial statements clearly communicate what's going on in the business," Petrone said. "Because everybody's business is different, the resulting financial statements may look different. They will be more consistent because everyone will be using the same principles to classify their items, but, for example, a bank is going to say financial instruments belong in operating, while a manufacturing entity is going to put them in financing."

McEnally said that the proposal is a major advance in reporting. "For the first time, we're getting a comprehensive look at financial reporting," she said. "It doesn't try to just move a little forward. It backs up and says, 'Let's look at modern business, at the information that capital providers really require to make their decisions.'"

The proposal does not address issues of recognition or measurement. As Petrone put it, "It's just a matter of grouping." All the required information, Petrone said, is readily available in corporate accounting systems.

FASB has requested comments on the discussion paper by April 14, 2009.

The paper is online at

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