Changing Requirements for Financial Statements Governments around the globe have

Question

Changing Requirements for Financial Statements

Governments around the globe have adopted localized regulations and laws pertaining to the reporting of financial statements. However, as a global economy evolves, standardization of these reports is becoming increasingly important. Investors and suppliers looking toward foreign companies as investment opportunities or business partners need to be able to rely on the fact that the information is not only accurate, but also prepared following a common set of procedures. In a response to the need for a comprehensive reporting model, the FASB and IASB proposed making changes to financial statements.

Using the FASB, the IASB website locate examples of the current and proposed formats of financial statements. Analyze how the two statements are derived from the conceptual framework. Be sure to compare (similarities and differences) both the formats and effectiveness of FASB's and IASB's (financial position) financial statements, statement of cash flows, and income statement. What insights or what conclusions can you draw based upon your comparison? Provide examples of the current and proposed formats to support your conclusions.

Explanation / Answer

Answer

Proposed Working Format for Presenting Information in the Financial Statements as follows

Statement of Financial Position

Business

- Operating Assets & Liabilities

- Investing Assets & Liabilities

Financing

- Financing Assets

- Financing Liabilities

Income Taxes

Discontinued Operations

Equity

Statement of Comprehensive Income

Business

- Operating Income & Expense

- Investing Income & Expense

Financing

Financing Asset Income

Financial Liability Expense

Income Taxes (related to business and financing)

Discontinued Operations, Net of Tax

Other Comprehensive Income, Net of Tax

Statement of Cash Flows

Business

Operating Cash Flows

Investing Cash Flows

Financing

Financing Asset Cash Flows

Financing Liability Cash Flows

Income Taxes

Discontinued Operations

Equity

Similarities and differences in the current and proposed formats and effectiveness of FASB's and IASB's (financial position) financial statements, statement of cash flows, and income statement are as follows

The Statement of Financial Position

The financial statement most impacted is the Statement of Financial Position. Current reporting for the Statement of Financial Position (Balance Sheet) calls for classifying/grouping items as assets, liabilities. However, the proposed format for the Statement of Financial Position calls for grouping items by major business activities; operating, investing and financing. Firms would disclose assets and liabilities in the business and financing sections. Management would classify assets and liabilities into the sections (business and financing) and categories in the Statement of Financial Position based on how management thinks the asset or liability is used. Management would also determine the classification in the Statement of Comprehensive Income and the Statement of Cash Flows. Operating assets and liabilities are those that management sees as related to the main purpose of the entity and the investing assets and liabilities are those that management considers to be unrelated to the main purpose of the entity.

In addition, It proposes:

The Boards (FASB and IASB) also propose the elimination of cash equivalents. These securities would not be included as part of cash. Instead, they would be disclosed a part of short-term investments. Management would disaggregate assets and liabilities according to their measurement bases and they would present them on separate line items in the Statement of Financial Position. One example would be separating securities measured at cost from securities measured at fair value.

The Statement of Comprehensive Income

The most significant change for reporting income is the proposed Statement of Comprehensive Income. This single statement separates business from financing activities and within business activities separates operating activities from investing activities. Discontinued operations are disclosed, but extraordinary transactions would no longer be disclosed. Neither comprehensive income nor other comprehensive income would be disclosed in a statement of changes in stockholder’s equity.

The Statement of Cash Flows

The proposed Statement of Cash Flows calls for separate disclosure of business activities, financing activities, income taxes, discontinued operations and equity. Of the two proposed major changes in the Statement of Cash Flows, mandated use of the direct method for computing is the most significant. Current cash flow reporting allows either the direct or indirect method; however, when the direct method is used, a firm must reconcile net income to cash flow from operating activities. In other words, by default, the indirect method is required. The proposed format would require a schedule in the notes that reconciles cash flows to comprehensive income – in other words, the indirect method. Thus, under the proposed format, both direct and indirect would be required. Another change is the elimination of cash equivalents.

The Reconciliation Schedule

The proposed Reconciliation of the Statement of Cash Flows to the Statement of Comprehensive Income is similar to the current indirect method of computing and presenting cash flows from operating activities. However, whereas the current format does a vertical reconciliation of net income, the proposed reconciliation is for a horizontal reconciliation of cash flows (under the direct method) to comprehensive income and other comprehensive income.

Application

All entities except not-for-profit and nonpublic entities would be required to comply with the proposed new financial statement presentations.

Apparently, the implementation project yielded some major concerns about the proposed reconciliation schedule. After obtaining feedback from the implementation study, both boards (FASB and IASB) have tentatively decided to replace the proposed reconciliation schedule with a requirement to analyze the changes in balances of significant asset and liability line items.

Following insights or conclusions can be drawn based upon above comparison.

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