Financial Statement Presentation
The staff addressed the following four topics regarding the discussion paper, Preliminary Views on Financial Statement Presentation:
- The statement of cash flows
- The reconciliation schedule
- Disaggregation by function and nature
- Classification: section and category definitions
Statement of Cash Flows
Presentation of Cash Flows Using the Direct Method
The staff began the discussion with a refresher of the feedback received from preparers and users of financial statements during an April 2009 meeting. The main theme of the feedback from preparers and the users was discussed with regards to the use of the direct method of cash flow presentation. Preparers believe that using the direct method is costly and may provide little benefit while users generally believe that this method is useful when prepared using disaggregated information. In hearing both groups, the staff believes that there may be support for a direct method of presentation supplemented with additional indirect information in the financial statements.
As such, the staff presented two alternatives to present cash flow information. In the first alternative, an entity would prepare its statement of cash flows using a less disaggregated (than as described in the discussion paper) direct method of presentation while presenting indirect information in the notes to its financial statements. Under the second alternative, the entity would prepare its statement of cash flows using an improved indirect method of presentation coupled with supplemental disclosures.
The Boards agreed with the staff's recommendation of using the first alternative when presenting information on the statement of cash flows. They believe that an entity should be required to present line items for cash receipts and payments in each section (and category) of the statement. In addition, they believe that an entity should reconcile operating income to cash flows from operations because it will provide the most meaningful information to users (e.g., changes in working capital assets and liabilities). The Boards also expressed the view that the upcoming exposure draft should only require a single method of cash flow presentation and not provide alternative methods.
Disclosing Non-Cash Information
Also discussed during the staff's research and user/preparer outreach discussed above was the notion that non-cash information does not necessarily represent cash flows and as a result, reduces a user's ability to assess the quality of reported earnings. While acknowledging this concern, the staff recommended to the Boards that the requirement in the discussion paper be retained. That is, an entity should be required to disclose non-cash information in notes to financial statements. The Boards agreed with this recommendation.
Other Cash Flow Related Disclosures
The staff recommended to the Boards that disclosure of repatriation limitations and other restrictions on cash should be disclosed in the footnotes to the financial statements. The Boards agreed with the staff's recommendation as they believe the information can be useful to a capital provider.
The Reconciliation Schedule
Because many users and preparers had questioned the proposed reconciliation schedule, through comment letters and user/preparer outreach, the staff discussed whether the Boards should reconsider this schedule to reconcile cash flows to comprehensive income. Concerns were focused mainly on the scale of the reconciliation, the particular accounts being reconciled, and the notion that the focus of the reconciliation should be on the distinction of changes in assets and liabilities that are attributable to remeasurement from those that are not.
The staff recommended a proposal that includes a revised reconciliation schedule that would analyse only the changes in 'significant' line items and that remeasurements be displayed separately on the statement of comprehensive income. While not specifically defining significant, the staff recommended to the Boards the following list of factors that an entity may use when determining which changes in line items to analyse:
- the significance of the ending balance with respect to total assets or total liabilities
- the significance of a change in the account balance with respect to revenues or expenses
- the significance of the activity flowing through the account with respect to revenues or expenses
- the use of assumptions or judgments in measuring the asset or liability and the degree of uncertainty or variability in the measurement due to risk exposure and the nature of that exposure (for example, credit, foreign exchange, interest rate)
- the nature and magnitude of transactions or events that are non-routine or non-repetitive
- any other transaction or event that could affect the future investment or credit decisions of a reasonable investor, creditor, or other user of financial statements
The Boards agreed with the staff's recommendation to revise the reconciliation schedule to only analyse changes in significant line items. However, the Boards did not reach agreement on the separate depiction of remeasurements. Some Board members questioned whether the depiction of remeasurements improved financial statement presentation while others questioned how entities would display this information (2 or 3 column reconciliations versus footnote disclosures). The staff was encouraged to consider further analysis on the merits of such information and the method for which to display it.
Disaggregation by Function and Nature
In light of feedback from various groups, the staff refined its thoughts on (a) the level of disaggregation an entity should present in its financial statements (Issue 1) and (b) where disaggregated information should be presented to be most decision useful in predicting future cash flows (Issue 2). The staff recommended to the Boards that in Issue 1, the discussion paper proposal that specifically requires disaggregation by function and nature on the statement of comprehensive income would be replaced by a disaggregation principle that requires an entity to consider disaggregation by function, nature, and measurement bases in the financial statements as a whole. This would mean the Boards would not specifically require an entity to disaggregate information in the statement of comprehensive income by function and nature. In Issue 2, the staff recommended that an entity that has only one reportable segment present its disaggregated information on the face of its primary statements and that an entity that has more than one reportable segment should present its disaggregated information in its segment note.
For both issues, the Boards conceptually agreed with the staff's recommendation. For Issue 1, the Boards encouraged the staff to further refine a principle for which an entity would base its disaggregation on. For Issue 2, while the Boards agreed with the staff's recommendation that an entity with multiple reportable segments present its information in its segment note, they questioned why the proposal would require an entity with only one reportable segment to present its information only on the face of the primary statements. They encouraged the staff to consider whether an entity with a single reportable segment should be allowed to present its information in its segment note as well.
Classification: section and category definitions
The staff discussed the following recommendations, all of which the Boards agreed with, relating to the section and category definitions to be used in the upcoming exposure draft:
- A treasury category should not be included in the financing section.
- Retain an operating and investing category in the business section of each of the financial statements. Those categories require a reporting entity to make a distinction between business activities that are active in nature (operating category) and business activities that are passive in nature (investing category).
- Equity should be a category in the financing section.
The staff clarified that any decisions made on the related to the section and category definitions were be used as a basis for future deliberations. As such, the staff indicated that the definitions will continue to evolve.
While not discussed at the meeting, information regarding the staff's next steps and the overall technical plan was provided in a handout at the meeting. The handout listed the following items to be discussed in November thru January leading up to the publication of an exposure draft in April 2010:
- Statement of financial position
- Financial services entity issues
- Non-controlling interests
- Basket transactions
- Foreign currency exchange transactions
- Segment disclosures
- Bringing it all together – the core presentation principles and the resulting financial statements.
- Nonpublic entity scope issue
- Overall costs and benefits of the presentation model
- Transition and effective date.