Print


Joint FASB/IASB Project Kicks Into High Gear
By Melissa Hoffmann Lajara
Posted on 2/19/09

NEW YORK -- Now that it has upheld fair value accounting, the Securities and Exchange Commission (SEC) is pushing the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to complete a two-year-old Financial Statement Presentation Project.

This is according to CPA Dina Maher, the head of U.S. accounting research for FitchRatings’ Credit Policy Group, who detailed the project and its next steps at a recent meeting of the NYSSCPA’s Banking Committee.

“The SEC has shown they’re willing to pressure the standard setters … if they think it’s in the public’s best interest,” Maher said. “The FASB and IASB have to move quickly now with the SEC saying ‘go get this done.’”

To that end, she said, testing is already underway at a few companies and an exposure draft is pending its completion. In addition, a joint discussion paper was released in October on the project, with a comment period open until April 14.

“The SEC in its fair value study said that both the FASB and IASB should speed up the process of moving forward with this project … because disclosures would help users understand fair value better,” Maher said.

She said the project “also becomes an ad for XBRL” in its focus on providing more useful information.

Undertaken by the boards in 2006, the project would substantially restructure the way information is presented in financial statements, with a new focus on making information more interactive and user-friendly. “The objective is to create a standard that requires entities to organize financial statements in a manner that clearly communicates an integrated financial picture of the entity,” the IASB said in a statement.

The project includes a management approach model that Maher said shows “this is really written in [International Financial Reporting Standards] mode.” It relies on the judgment of management in the classification of assets and liabilities “and related changes as used within reportable segments.”

What does that mean? Maher said classification of an asset or liability would be at the segment level, not the entity level. If a consolidated entity has a manufacturing segment as well as a financing segment—General Motors would be a good example of that—results from each segment would be classified as “operating.” The consolidated financial statements would reflect that.

The Problem

Analysts and investors have long raised concerns about some issues in the way entities present information in financial statements, the IASB notes in a plain-language explanatory document.

In creating a new standard, the IASB states the aim of the joint project is to address a variety of such concerns, including:

  • The lack of a common approach for financial statement presentation. U.S. generally accepted accounting principles and International Financial Reporting Standards (IFRS) provide only limited presentation guidance, and guidelines in GAAP are dispersed across standards. As a result, financial statements prepared under US GAAP or IFRS can be presented in many alternative ways. This makes it difficult for analysts, investors and other users to compare the financial statements of different entities.
  • Information is not linked between the statements. A set of financial statements includes several individual statements, such as statements of financial position, of comprehensive income and of cash flows. However, the formats of those individual statements do not make it easy for users to see how the information in them is linked. This makes it difficult to compare operating income with operating cash flows – a step often taken in assessing the quality of an entity’s earnings.
  • Dissimilar items are sometimes aggregated into one number. In many cases, entities do not show separately items that respond differently to the same economic events.

A Call for Comment

Maher urged members of the committee, chaired by Victor Valdivia, to speak up with concerns or questions about the project.

“They’re really looking for insight from a variety of sources,” Maher said. “There’s a push to have more user needs taken into consideration, rather than preparer or auditor needs.”

Previously, “user needs have not necessarily been paramount,” she said. But the recent upheavals in both the economy and financial sector have shifted the focus to the users’ needs: interactive, more transparent financial reporting.

Throughout her presentation, Maher highlighted other discussion questions in which the FASB and IASB are particularly interested. They include:

  • Should this proposed format also be applied to nonpublic entities?
  • Will the project’s stated objectives make financial information more useful for capital providers?
  • Does it make sense to separate income taxes and discontinued operations?
  • Should equity be included as a part of financing, or be included elsewhere in a financial statement?
  • Is netting assets together by category going to make financial statements easier or harder to understand?
  • Will the costs of making system changes be prohibitive?

The two discussion papers can be found online, on both the FASB and IASB Web sites.

One question was posed to Maher: Would this change in reporting financial information have clued regulators or investors in to the root troubles at Lehman Brothers or any of the other financial institutions that failed during the summer of 2008?

“Some of the issues that arose in the past year weren’t on the balance sheets … and wouldn’t be identified here,” Maher replied.

Project Details

The current phase of the project only applies to the primary financial statements, not to notes and related disclosures, and would apply to all entities except for nonprofits, nonpublic (private) entities and benefit plans, Maher said.

The project has three primary objectives: cohesiveness, disaggregation of information, and liquidity and financial flexibility.

To provide cohesiveness, Maher said, the relationship between items across financial statements must be clear, and an entity’s financial statements should “complement each other as much as possible.”

“This principle will ease analysts’ ability to tie the various financial statements together,” Maher said in her presentation. She showed committee members a schedule that delineated which assets and liabilities would be detailed in a statement of financial position (balance sheet), a statement of comprehensive income or a statement of cash flows. Maher broke it down even further to show how assets and liabilities would be categorized as either operating, investing or financing.

Maher said that tying the balance sheet, cash flow and comprehensive income together can help “a user of financial statements read and understand liquidity.”

The second objective, disaggregation, is “one of the key principles of the proposal,” Maher said. It would break up financial information into “reasonably homogenous groups of items so that analysts can assess the amount, timing and uncertainty of future cash flows,” she noted in her presentation. “For example, the paper suggests disaggregating assets and liabilities based on their measurement basis. Assets and liabilities measured at fair value will be separated from those measured at historical cost.”

But disaggregation, she said, can also be based on nature and function and “will assist in comparing margins and efficiencies between issues in the same industry and have some predictive value.”

Maher said that while some may find it difficult at first to tabulate assets that will be “all over the place” in various categories of a financial statement, she noted that disaggregation “should be nirvana for credit analysts.”

The project’s liquidity and financial flexibility objective is intended to help “assess the ability to meet financial commitments as they come due and invest in business opportunities,” according to Maher’s presentation. A contractual maturity schedule included with a company’s financial statements would help meet this objective, she said.

More project details and materials can be found here.

Close