Are you able to get what you need from reviewing financial statements? Do you think there are ways to enhance the usefulness of the presentation of the information?

If you have ever experienced frustration in your attempts to glean information from financial statements, take note. The Financial Accounting Standards Board and the International Accounting Standards Board have joined together in a proposal to improve the look and feel of the financial statements.

Furthermore, readers are encouraged to help in this effort by providing feedback. Input is being sought and welcomed from around the world as the boards completely rethink how financial statements are presented.

Is there a problem?
Investors and others rely on financial statements for important information about a business’s financial situation. Yet many have expressed concern that the current financial statements do not give them enough information to make good decisions. Inconsistency in format, lack of continuity of information from one statement to another, and the fact that dissimilar items are often grouped into one number are some of the major contributing factors to this problem.

Add to that the increasingly global economy, and it becomes clear that current financial statements need to communicate more information in a way that can be understood and compared consistently across international borders.

What is being done about it?
The IASB and FASB have issued a discussion paper that offers views on how financial statement presentation can be improved. They propose a format that provides a consistent structure for all companies but allows a company to tailor its financial statements to communicate the unique aspects of its business in a way that doesn’t exist under today’s model. In addition, the proposed model seeks to achieve more cohesiveness – allowing the reader to follow the flow of information through various statements – and disaggregation – separating information that responds differently to different economic events, so that it is not “lumped” into one number.

The proposal requires companies to present their cash flows from operations directly by activity as opposed to the current predominant method of presenting it indirectly via adjustments to net income. Lastly, the model provides a detailed schedule in the footnotes that separates many of the financial statement line items into their cash and non-cash changes.

Tying the financial statements together – cohesiveness objective
In order to present information in a way that better allows financial statement readers to put the whole puzzle together, the boards have proposed that business activities should be separated into those that relate to their core operations and those that do not.

Financing activities should also be shown separately as these are not specifically related to business activities. While this idea exists today in the format for the statement of cash flows, the proposal takes this concept through the other financial statements as well, so that the cash flow statement, balance sheet and income statement would be presented in the same manner.

This methodology of applying a “cohesiveness objective” would help tie all the statements together. The goal of applying the proposed model to all of the financial statements is to help readers better understand how operating cash flows relate to operating assets, the key drivers of operating cash flows, and the extent to which cash received from customers tracks total reported revenues.

More importantly, it should make it easier for the reader to go from one financial statement to the next while analyzing the different types of activities of the company or while attempting to determine its current position.

Adding more relevant detail – disaggregation
The proposal addresses the common complaint among financial statement users that too many items are being captured in one line item in the financial statements. The current practice of “lumping” together data that is essentially different in the same line item means important information is being lost in translation. For example, some general and administrative costs (such as rent, utilities and corporate salaries) are often combined on one line in the income statement.

Analysts and investors may want to analyze these costs separately if they believe that the costs could react differently to economic events. As a result, the discussion paper proposes including additional line items in financial statements to enhance an analyst’s ability to understand the details of the business. This disaggregation of information would, simply put, provide much more detail and improve the utility of the data being conveyed.

Presenting operating cash flows directly
Despite the FASB’s encouragement to present operating cash flows directly, the vast majority of companies arrive at operating cash flows indirectly, by presenting first their net income, then adding or subtracting non-cash transactions. The proposal would eliminate this practice by requiring a direct method cash flow statement, thus providing a clearer understanding of the relationships between income, assets and their ultimate conversion into cash.

For example, a direct method presentation would allow an analyst to see how reported sales compare to the cash received from customers which impacts accounts receivable. While there has long been debate about the cost of providing this information versus the benefit to financial statement users, the boards believe that requiring use of the direct method is consistent with both the cohesiveness and disaggregation objectives.

The final piece – the reconciliation of cash flows to comprehensive income
The proposed financial statement presentation model set forth in the discussion paper would also call for a significant new disclosure in the notes to the financial statements. Specifically, it would require presenting a schedule that reconciles all cash flows to comprehensive income.

The reconciliation schedule would separate out income in each line item into four categories: their cash components, their accrual components, fair value changes and all other re-measurements. This would vastly improve the amount of detail provided to investors and analysts, better allowing them to make informed judgments about how—or if—those components will be realized in cash in the future and thus how they ultimately will impact the value of their investment.

Make your voice heard
This discussion paper represents the initial ideas of the boards—now it is your turn to have a say in how financial statements are presented. All who use financial statements are encouraged to review the discussion paper, and provide comments to the FASB by the April 14, 2009 deadline.

Once the comment period has ended, the boards will review the feedback received to determine their next steps in improving financial statement presentation. The discussion paper is available for review at

Don’t miss this opportunity to help improve the financial statements of the future!

Marc A. Siegel is a member of the Financial Accounting Standards Board.

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