At the 22 April 2004 joint Board meeting, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) agreed to jointly conduct their respective projects on Performance Reporting and that the work should be performed in two segments.
A. Segment A addresses narrow differences between US GAAP and International Financial Reporting Standards (IFRSs) related to required financial statements and requirements to present comparative information.
B. Segment B is to develop standards for presentation of information on the face of the required financial statements.
Specific issues include recycling, disaggregation and the use of totals/subtotals on the required financial statements.
The staff gave an update on the progress on the Joint International Group and noted that there had been some delays to date in setting out the necessary policies and procedures that they were expected to follow. There was some discussion amongst the Board as to the role of the JIG. It was concluded that they are not a decision maker but should be used in the consultation process by both the FASB and the IASB in forming decisions on performance reporting.
Required Financial Statements
The staff asked the Boards the following questions:
Question 1: What information should comprise a Full Set of Financial Statements?
- A statement that shows (at a point in time) balances of assets, liabilities, and equity as of the beginning of the period-referred to as a Beginning of the Period Statement of Financial Position.
- A statement that shows (at a point in time) balances of assets, liabilities, and equity as of the end of a period-referred to as the End of the Period Statement of Financial Position.
- A statement or two statements that show (for a period of time) the changes in assets and liabilities other than from transactions with owners in their capacity as owners-referred to collectively as a Statement(s) of Earnings and Comprehensive Income.
- A statement that shows (for a period of time) the changes in assets and liabilities from transactions with owners in their capacity as owners-referred to as a Statement of Changes in Equity.
- A statement that shows inflows and outflows of cash-referred to as a Statement of Cash Flows.
Question 2: Should individual Financial Statements within the Full Set of Financial Statements be shown with equal prominence to each other?
The IASB noted that there is currently a difference between IFRS and US GAAP in that under IFRS and US GAAP, certain information can be shown in the notes to the financial statements rather than in a financial statement format. However, it was agreed by the Boards unanimously that all individual statements should be shown with equal prominence.
Question 3: With regard to the Statement of Earnings and Comprehensive Income, should that information be presented as:
- (1) A single statement with a total representing all non-owner changes in financial position and no subtotal for net income or profit or loss. (The Pure Single Statement Approach);
- (2) A single statement with a total for non-owners' changes in financial position and a required subtotal called net income or profit or loss. (The Modified Single Statement Approach); or
- (3) Two separate statements broken down into a traditional Income Statement and a Statement of Other Comprehensive Income similar to that described in FASB Statement No. 130, Reporting Comprehensive Income, paragraph 22. (The Two-Statement Approach)?
There was extensive debate on this question and the following points were made:
- The staff recommended alternative (2) modified single statement approach as it provides the best layout of information for users.
- Certain Board members preferred alternative (1) pure single statement approach but recognised that such an option would require a greater degree of modifications in existing standards and create issues for items such as recycling which are to be dealt with in Segment B of the project.
- Some FASB members were strongly in favour of the pure single statement and felt that the issues to be debated in Segment B should be addressed earlier.
- There was concern that certain items that were currently presented outside of the statement of income (e.g. the Statement of Total Recognised Gains and Losses for UK companies) were given less prominence in considerations of analysts. Therefore, a single comprehensive statement of income was seen as a positive step to improved financial reporting.
- The IASB members noted that alternative (1), which would eliminate the concept of net income, would be a major issue for IFRS reporters, and that the alternative (2) modified single statement approach offered the best solution.
Question 4: Based on the Boards' decisions on Questions 1 through 3, at this time, do the Boards prefer to make the proposed revision by amending their existing guidance rather than create a new replacement standard?
The Boards debated the merits of issuing a consultation document prior to an exposure draft on the above changes. It was stated that some of the proposals are a major change and therefore discussions would be required in order to persuade interested parties as to the merits of the Boards' recommendations. IASB members specifically noted that European and other IFRS adopters would be resistant to these changes if they felt the IASB are merely falling in line with the FASB.
A vote was taken and the Boards opted (by majority) for issue of an Exposure Draft (without discussion paper) with the proviso that round table discussions would be held.
Comparative Financial Statements
The staff introduced this topic and the need to eliminate existing differences between IFRS and US GAAP relating to the requirements for presenting comparative financial statements.
The staff asked the Boards the following questions:
Question 1: Do the Boards agree with the staff recommendation to require comparative financial information for all entities, and to limit the required information to two annual periods (the current and prior annual period)?
There was some debate regarding the SEC's rule for 3 years of financial information. The Boards voted (by majority) with the staff recommendation to require comparative financial information for two annual periods. Clarification was made (with reference to the full set of financial statements) that this would include 3 balance sheets and 2 sets of period statements (earnings and comprehensive income, cash flows and changes in equity).
Question 2: Do the Boards agree with the staff recommendation that the presentation of financial information by those entities that elect to provide information for annual periods beyond the required minimum should be encouraged but not be required?
The Boards determined that provision of financial information beyond the required two annual periods should not be encouraged. The rationale was that most jurisdictions (including standard setters, securities regulators, and stock exchanges) currently require comparative financial information for the prior annual period and, thus, would most efficiently achieve convergence. While true convergence may not be achieved for public entities, convergence will be achieved at least at the standard setters' level.
The staff asked the Boards to consider specific questions noted below. The staff acknowledged that the Boards may have felt that certain questions had been debated before but the staff felt that clarity was required.
1. Is the Boards' objective to develop a single standard that would apply broadly to all entities?
The Boards agreed unanimously that this is their objective.
2. Do Board members agree that they should first develop a standard that would apply to entities other than financial institutions, and then consider the application of such a standard to financial institutions?
The Boards agreed unanimously that this is the best approach.
3. Do Board members agree with the staffs' approach regarding interim financial statements and notes to financial statements?
Because the staff believes the scope of this project never included fundamental reconsideration of interim reporting requirements or note disclosures, the staff plans to change existing reporting requirements only as needed through consequential amendments made necessary by Board decisions. The Boards agreed (by majority) with the staff.
4. Should the scope of this project include a comprehensive reconsideration of FASB Statement 95, Statement of Cash Flows, and IAS 7, Cash Flow Statements, including whether to require a particular method and presentation of the cash flow statement?
The Boards agreed unanimously that this question should be addressed in Segment B of this project.
5. Do the Boards believe that there are any additional topics that should be added to either Segment A or Segment B? If so, what are these additional topics and should they be addressed in Segment A or Segment B?
An IASB Board member stated that a statement of returns to shareholders should be considered as an additional part of the full financial statements. The Boards also highlighted that additional input from the financial services sector (specifically buy side companies) would be welcomed on the JIG.
6. Timing and Staffing Issues
The Boards agreed (by majority) with the staff proposal to continue with one joint staff team that would complete Segment A of the project through Board deliberations and working toward issuing an Exposure Draft addressing Segment A only. After that the staff will work toward the issuance of a public discussion document on only Segment B issues.