The New Financial Statements:
What the FASB and IASB are Considering
Presented November 16, 2010 at the
North Penn Chapter of the
Institute of Management Accountants
by
Joel Wagoner, MBA, CPA, CMA, CFM
Assistant Professor of Accounting
Arcadia University
The New Financial Statements
• Purpose: “The purpose of this joint project
is to establish a standard that will guide the
organization and presentation of information
in the financial statements.”
(continued on next slide)
The New Financial Statements
“The results of this project will directly affect
how the management of an entity
communicates financial statement information
to users of financial statements, such as
present and potential equity investors, lenders,
and other creditors.”
The New Financial Statements
“The boards’ goal is to improve the usefulness
of the information provided in an entity’s
financial statements to help users make
decisions in their capacity as capital
providers.”
The Staff Draft of an Exposure Draft
•On July 1, the FASB and IASB jointly
released a staff draft of an exposure draft on
the new financial statement presentation.
•(This is literally a draft of a draft.)
The Staff Draft of an Exposure Draft
•Originally, the two boards had intended to
release an exposure draft by the end of 2010.
•The date was later moved to the first quarter
of 2011.
The Staff Draft of an Exposure Draft
•On November 1, the boards announced that
“[A]t their October 2010 joint meeting, the
Boards acknowledged that they do not have
the capacity currently to devote the time
necessary to consider the information learned
during outreach activities and modify their
tentative decisions.”
The Staff Draft of an Exposure Draft
•“Consequently, the Boards decided to not
issue an Exposure Draft in the first quarter
2011 as originally planned.”
The Staff Draft of an Exposure Draft
"The Boards will return to this project when
they have the requisite capacity. This is
expected to be after June 2011.”
The New Financial Statements
•What follows are the major aspects and
features of the financial statements that are
proposed in the staff draft of July 1, 2010.
The New Financial Statements
•These are an indication of the future of
financial reporting, as currently envisioned by
the FASB and IASB.
The New Financial Statements
Two main themes of the staff draft on
financial statements are
•
Cohesiveness
•
Disaggregation
Cohesiveness
“The aim. . .is to clarify the relationship
between items across financial statements and
to have an entity’s financial statements
complement each other as much as possible.”
[74]
Cohesiveness
“Financial statements that are [cohesive] will
display data in a way that clearly associates
related information across the statements.”
[74]
The New Financial Statements
An entity’s financial statements shall include
the following sections, categories, and
subcategories, as appropriate:
a. A business section, containing:
1. An operating category
i. An operating finance
subcategory
2. An investing category. [62]
The New Financial Statements
An entity’s financial statements shall include:
b. A financing section, containing:
1. A debt category
2. An equity category.
[62]
The New Financial Statements
An entity’s financial statements shall include:
c. An income tax section.
d. A discontinued operation section.
e. A multicategory transaction section. [62]
The Operating Category of
the Business Section
•The operating category of the business
section will include:
–Assets used in the entity’s day-to-day
business and all changes in those assets;
– Liabilities that arise from the entity’s
day-to-day business and all changes in
those liabilities. [72]
The Operating Finance Category
The operating finance subcategory includes
liabilities that “are directly related to an
entity’s operating activities; however, they
also provide a source of long-term financing
for the entity.” [74]
The Operating Finance Category
• Liabilities are included in the operating
finance subcategory if they meet (all) three
conditions:
The Operating Finance Category
Condition 1: “The liability is incurred in
exchange for a service, a right of use, or a
good, or is incurred directly as a result of an
operating activity (rather than a capital-raising
activity that funds general business activities,
capital expenditures, or acquisition
activities); [75]
The Operating Finance Category
•Condition 2: “The liability is initially long
term”; [75]
The Operating Finance Category
Condition 3: “The liability has a time value of
money component that is evidenced by either
interest or an accretion of the liability
attributable to the passage of time (that is, the
accounting for the liability requires the
calculation of an interest component).” [75]
The Operating Finance Category
• The staff draft offers the following examples
of liabilities that would be presented in the
operating finance subcategory:
a. A net postemployment benefit
obligation;
b. A lease obligation;
c. Vendor financing; [76]
The Operating Finance Category
“If an entity enters into a borrowing
arrangement with its own suppliers primarily
to acquire a specific good used in production
or to procure a specific service, that
borrowing arrangement, if initially long term,
is classified in the operating finance
subcategory of the operating category. If such
a borrowing arrangement is not initially long
term it is classified in the operating category.”
[89]
The Operating Finance Category
•Assets restricted for the purpose of satisfying
liabilities reported in the operating finance
subcategory will also be presented in the
operating finance subcategory. [77]
The Investing Category of
the Business Section
The investing category of the business section
will include “an asset or a liability that an
entity uses to generate a return and any
change in that asset or liability”. [81]
The Investing Category of
the Business Section
“No significant synergies are created for the
entity by combining an asset or a liability
classified in the investing category with other
resources of the entity.” [81]
The Investing Category of
the Business Section
“An asset or a liability classified in the
investing category may yield a return for the
entity in the form of, for example, interest,
dividends, royalties, equity income, gains, or
losses.” [81]
The Investing Category of
the Business Section
“Examples of investing activities and related
items include:
a. The purchase and sale of investments,
unless the transaction is part of the
business in which the entity is engaged
(for example, financial services entities)”
b. Dividends received on equity investments”
[82]
The Investing Category of
the Business Section
“Examples of investing activities and related
items include:
c. Interest earned on debt investments
d. The purchase and sale of nonfinancial
assets, such as a real estate investment
e. Distributions of nonfinancial investments
such as rents, royalties, fees, and
commissions
f. Equity method investments and investments
in fixed-income securities and equity
securities.” [82]
The Financing Section
The financing section shall include items that
are part of an entity’s activities to obtain (or
repay) capital. [83]
Two categories in the financing section:
Debt
Equity
The Financing Section
Although the statement of comprehensive
income and statement of financial position
will present debt-related and equity-related
activities separately, “The statement of cash
flows shall not include separate categories for
debt or equity.” [85]
The Financing Section
“Assets and liabilities and the related income
effects that arise from transactions involving
an entity’s own equity shall be classified in
the debt category and presented separately
from borrowing arrangements within the debt
category.” [93]
The Financing Section
“Examples of assets and liabilities that arise
from transactions involving an entity’s own
equity include:
a. A dividend payable
b. A written put option on the entity’s own
shares
c. A prepaid forward purchase contract for the
entity’s own shares.” [94]
The Financing Section
“Examples of activities or items that may be
classified in the equity category in the
statement of financial position or the
financing section in the statement of cash
flows include:
a. Issuing shares or other equity instruments
b. Common, preferred, and treasury shares
c. Cash payments to owners to acquire or
redeem the entity’s shares
d. Distributions to owners.” [96]
Assets and Liabilities
Assets and liabilities will be presented in
seven separate categories of the statement
of financial position.
1. Business Operating
2. Business Operating Finance
3. Business Investing
4. Financing – Debt related
Assets and Liabilities
Assets and liabilities will be presented in
seven separate categories of the statement
of financial position.
5. Financing – Equity related
6. Income Tax-related
7. Discontinued Operations
The Income Tax Section
“The income tax section of the statement of
financial position shall include all current and
deferred income tax assets and liabilities. . .
and any other assets or liabilities related to
income taxes. An entity shall present cash
flows related to those assets and liabilities in
the income tax section of the statement of
cash flows.” [97]
Intraperiod Tax Allocations
“In the statement of comprehensive income,
an entity shall allocate income tax expense or
benefit in accordance with Topic 740”. [98]
Intraperiod Tax Allocations
“Consequently, an entity may be required to
present amounts of income tax expense or
benefit in the discontinued operation section
and in the other comprehensive income part of
the statement of comprehensive income rather
than in the income tax section of the statement
of comprehensive income.” [98]
Discontinued Operations
“All assets and liabilities related to a
discontinued operation shall be classified in
the discontinued operation section of the
statement of financial position.” [99]
Discontinued Operations
• “All changes in the assets and liabilities of a
discontinued operation shall be presented in
the discontinued operation section of the
statements of comprehensive income and cash
flows.” [99]
Multicategory Transactions
“The net effects on comprehensive income
and cash flows of an acquisition (or disposal)
that results in the recognition of assets and
liabilities in more than one section or category
in the statement of financial position shall be
classified in the multicategory transaction
section of the statements of comprehensive
income and cash flows.” [100]
The New Financial Statements
“An entity shall classify an asset or a liability
used for more than one function in the
section or category of predominant use.”
[106]
Interest Expense
“Interest expense and cash paid for interest
shall be presented in the same section,
category, or subcategory as the liability giving
rise to the interest.” [107]
Classification of Assets and Liabilities
“An entity shall present short-term assets,
long-term assets, short-term liabilities, and
long-term liabilities separately in each
category within its statement of financial
position unless a presentation based on
liquidity provides information that is more
relevant.” [115]
Classification of Assets and Liabilities
• Note: No more “current” and “non-current”
assets and liabilities. “Short-term” if within
one year, “long-term” if more than one year.
[124]
Classification of Assets and Liabilities
If a presentation based on liquidity is more
relevant, “an entity shall present all assets and
liabilities within each category in order of
liquidity.” [115]
Classification of Assets and Liabilities
“[A]n entity may present some of its assets
and liabilities using a short-term/long-term
classification and others in order of liquidity
if that presentation provides information that
is relevant. The need for a mixed basis of
presentation may arise when an entity has
diverse operations.” [116]
Disaggregation
Disaggregation: “[D]isaggregate assets and
liabilities and present them separately in the
statement of financial position when the
function, nature, or measurement basis of an
item or aggregation of similar items is such
that separate presentation is relevant to an
understanding of the entity’s financial
position.” [119]
Disaggregation
“Assets or liabilities that do not respond
similarly to similar economic events shall
be presented separately in the statement of
financial position.” [120]
Classification of Income and Expense
“An entity shall classify items of income and
expense that comprise net income into the
section, category, and subcategory that are
consistent with the classification of the related
asset or liability in the statement of financial
position and consistent with the related cash
flows in the statement of cash flows.” [137]
Classification of Income and Expense
“An item of income or expense that is not
related to an asset or a liability in the
statement of financial position shall be
classified consistent with the activity
generating the income, expense, or cash
flow.” [137]
Disaggregation
• The rationale for disaggregating:
“Disaggregation of income and expense items
by function is useful in understanding the
various activities required to convert an
entity’s resources into cash.” [149]
Disaggregation
“An entity shall disaggregate and present its
income and expense items by function within
each section and category in the statement of
comprehensive income so that the information
is useful in understanding the activities of the
entity and in assessing the amount, timing,
and uncertainty of future cash flows.” [140]
Disaggregation
“An entity shall disaggregate its income and
expense items by their nature within the
related functional grouping to the extent that
the information is useful in assessing the
amount, timing, and uncertainty of future cash
flows.” [142]
Disaggregation
“Disaggregation by nature within a functional
grouping may include, for example,
disaggregating total cost of sales into
materials, labor, transportation, and energy
costs. Disaggregation by nature within a
functional grouping may also include, for
example, disaggregating revenue from selling
goods into wholesale and retail components.”
[143]
Disaggregation
“An entity that does not provide a segment
disclosure. . . may disclose its income and
expense items disaggregated by nature in the
notes to financial statements rather than
present that information in the statement of
comprehensive income.” [146]
Disaggregation
“An entity may choose not to disaggregate. .
.by function if (doing so) is not useful to users
of financial statements in understanding the
entity’s activities and the amount, timing, and
uncertainty of future cash flows. (In that
case), an entity shall disaggregate its income
and expense items by nature and present that
information in the statement of
comprehensive income.” [148]
The New Financial Statements
“Understanding those activities is particularly
useful in assessing the amount, timing, and
uncertainty of future cash flows for an entity
that develops and produces tangible
products.” [149]
The New Financial Statements
“[F]or entities that provide services rather
than. . .products, the conversion of resources
into cash happens almost simultaneously.
Therefore, for those entities disaggregation of
income and expense items by function often
does not provide any incremental
information about the amount, timing, and
uncertainty of future cash flows.” [149]
Statement of Cash Flows
• The statement of cash flows will be prepared
on the direct basis.
• To the extent practical, the activities will
align with the sections in the Statement of
Financial Position and the Statement of
Comprehensive Income.
Statement of Cash Flows
“[D]isaggregate cash flows in the statement
of cash flows by classes of cash receipts and
payments so that the statement of cash flows
provides a meaningful depiction of how the
entity generates and uses cash.” [177]
Cash and Cash Equivalents
• “Cash Equivalents” will no longer be
presented on the same line of the balance
sheet as “Cash”.
Other Comprehensive Income
“In the statement of comprehensive income,
an entity shall indicate for each item of other
comprehensive income, except for a foreign
currency translation adjustment of a
consolidated subsidiary, whether the item
relates to an operating activity, investing
activity, financing activity, or a discontinued
operation.” [139]
So, how does this affect us?
What does this mean for Accountants
working in private industry?
So, how does this affect us?
Obviously, accountants who work in reporting
functions will have much to learn, and will
see their job requirements become more
complex.
So, how does this affect us?
What about accountants in other functions?
So, how does this affect us?
Accountants (and consultants) whose
responsibilities are related to the development
of accounting systems can expect to be very
busy as organizations retool their accounting
systems to comply with the new requirements.
So, how does this affect us?
Cost accountants will possibly see more
information available as a result of the
retooling of accounting systems.
So, how does this affect us?
Financial analysts will have much more
information on competitors available.
Might we see an increased for accountants in
competitive intelligence?
The New Financial Statements
• The staff draft of the exposure draft on
Financial Statement Presentation, and
additional information, are available on the
FASB’s website:
– www.fasb.org
(follow the links)
The New Financial Statements
• The staff draft of the exposure draft on
Financial Statement Presentation, and
additional information, are available on the
FASB’s website:
– www.fasb.org
(follow the links)