The Lowdown on New IASB/FASB Proposals

The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) are putting a lot of effort into creating a single approach for organizing and presenting financial information. The project should improve the comparability of financial reports across companies and geographies and, at a more micro level, should make it easier to compare and contrast information in financial statements prepared in different parts of the world.

Below we provide an overview of where the IASB and FASB are in their deliberations and what’s coming next.

Current State of Deliberations

Normally the IASB and FASB would publish an exposure draft (ED) based on the comments received from a discussion paper (DP). However, considering that these proposals would mean bring big changes to the world of financial reporting, the two standard-setting bodies decided to issue a draft ED first, which they will then use to collect feedback over the next few months.

As both the IASB and the FASB have been so consistent in following their standard procedures of soliciting public feedback by way of DPs and EDs for all their projects, it’s interesting that they’ve taken this more unconventional approach. It is also interesting that both bodies do not differ much in their opinions on the proposed changes (obviously with some exceptions to specific disclosure requirements); a rarity in most convergence projects.

Staff Draft of ED: Modification to the Two Key Principles

There are a few major modifications in the staff draft that will make the changes less cumbersome for firms to adopt. These are:

• Cohesiveness: The IASB and FASB continue to recommend that financial statements should be cohesive but have eliminated comparability requirements across financial statements on a line item basis.
• Disaggregation: Firms will be required to disaggregate income and expense by ‘function’ on the face of the statement of comprehensive income and by ‘nature’ in the footnotes. In addition, the IASB and FASB have decided to reduce disaggregation in the statement of cash flows and recommended that cash flows be derived using the direct approach. Though FASB has always recommended the direct cash flow method over the indirect method, U.S. firms rarely ever use it. If the boards ultimately decide to mandate use of the direct cash flow method, it will mean big changes for U.S. firms as their accounting systems are not geared to capture that kind of information.

Classification and Format

The one big change here is redesign of the ‘business’ section of the financial statements to include two main categories: ‘operating’ and ‘investing’.  An ‘operating finance’ subcategory will exist for the operating section for items that have both an operating and finance aspect to their nature.

Another major change is the inclusion of treasury assets in the ‘business’ section instead of the ‘financing’ section. The IASB and FASB have also eliminated the reconciliation requirement between the statement of comprehensive income and cash flows and instead required reconciliation between balance sheet elements form one period to another, only for significant asset and liability items.

What it Means for Companies

Needless to say, the proposed changes will have a considerable effect on companies’ financial reporting processes. Here are a few ways we see this playing out:

• Systems: The level of detailed information and its categorization is likely to impact reporting systems.
• Policies and processes: A change in reporting processes could in turn affect internal controls policies and procedures.
• Resourcing: Companies may also have to rethink resourcing decisions to cope with the additional disclosure requirements.
• Key metrics: A change in data recorded may affect key metrics that companies track and report.
• XBRL tagging: Another area specifically for U.S. filers could be XBRL tagging – a change in the line items reported would result in a change in tagging of those items.

In general, standardization of categories may make it difficult for companies to send clear messages to their investors. For instance, if companies that segregate their selling from general & administrative (G&A) expenses are asked to report them as SG&A, they may no longer be able to clearly demonstrate their efforts in reducing G&A while say increasing their selling expenses.

What It Means for Users of Financial Statements

From the users’ perspective, the proposed changes will allow greater comparability and usability of financial information. Addition of new data may provide an opportunity to generate new metrics to track a company’s performance. However, the changes could also make the historical comparison of financials difficult, as companies’ reported line items would change considerably after the implementation of the proposals.