Financial Statement Presentation
Basket Transactions and Foreign Currency Translation
At their respective July 2006 Board meetings, the Boards agreed that the cohesiveness principle should be the governing principle in the financial statement presentation project. Under the cohesiveness principle, assets and liabilities are classified into a functional category (operating, investing, financing, and the like). The income and expense (including gains and losses) associated with those assets and liabilities are presented in the corresponding category in the statement of comprehensive income, and the cash flows associated with those assets and liabilities are presented in the corresponding category in the statement of cash flows.
However, it is not uncommon that a single transaction involves multiple assets (or a combination of assets and liabilities) that would be classified in more than one category under the proposed presentation format. These are referred to as 'basket transactions'.
The staff presented a memorandum discussing how basket transactions should be classified in the Statement of Cash Flows and in the Statement of Comprehensive Income.
Classification in the Statement of Cash Flows
Require an entity to allocate cash flows related to all basket transactions to existing categories. This option was further split into:
- A-1 Allocate cash flows based on the relative carrying values of the assets and liabilities
- A-2 Allocate the cash flow to one category based on the function that is likely to be the predominant source of that cash flow
- A-3 Do not prescribe how to allocate cash flows to categories
Require an entity to present cash flows related to all basket transactions in a new 'Acquisitions and Disposals' section.
Require an entity to allocate cash flows related to certain basket transactions to existing categories and to present cash flows related to other basket transactions in a new 'Acquisitions and Disposals' section. Classification in the Statement of Comprehensive Income The memorandum discussed whether the income and expenses (including gains and losses) related to a basket transaction should be allocated to each category the assets or combination of assets and liabilities are classified in.
These issues were discussed at a FASB education session recently and a number of concerns were raised. The Board agreed with these concerns, which included:
- The grossing up of cash flows under Alternative A-1;
- An allocation based on relative fair values was not considered; and
- The allocation of cash flows was considered prior to the allocation of gains and losses rather than vice versa.
No decision was reached by the Board and it was agreed that the staff would rework the paper for future discussion based on the concerns raised at this meeting.
Presenting Information about the Cause of Change in Reported Amounts of Assets and Liabilities
The Board continued the discussion on applying the working principle that states: 'Financial statements should present information in a manner that helps a user understand what caused a change in reported amounts of individual assets and liabilities.'
Basis on which to disaggregate amounts recognised as income or expense
The disaggregation working principle states that line items should be disaggregated 'if that disaggregation enhances the usefulness of that information in predicting future cash flows'. The Boards' preliminary view in March was that amounts recognised as income or expense should be disaggregated based on the characteristics of persistence and measurement subjectivity. Persistence was defined as 'recurring and having predictive value'.
In their memo the staff concluded that it would be difficult to define and operate a disaggregation scheme that relies on the notion of 'measurement subjectivity'. Furthermore, it is nearly impossible to develop an operational definition of 'recurring'. The staff therefore recommended that disaggregation based on the predictive value of an amount recognised in income or expense would disaggregate information in a manner that enhances the usefulness of that information in predicting future cash flows.
The staff also proposed that both predictive and not predictive amounts recognised as income or expense be further disaggregated into (a) fair value adjustments and (b) all other changes, on the basis that disaggregation of amounts recognised as income or expense in this manner will help a user understand the cause of a change in reported amounts of assets and liabilities.
The Board discussed the issues and reached the following conclusions with regard to producing an initial discussion paper:
- The Board did not agree with disaggregating changes in assets and liabilities recognised as income and expense based on predictive value, as the concept of predictive value was not clear. In particular, the Board was unsure whether predictive value related to future cash flows or the future line item amount recognised (or both).
- The definition of 'fair value adjustments' needed to be clarified, such that it referred to all valuation adjustments.
- The staff should consider whether disaggregation based on (a) valuation adjustments and (b) other than valuation adjustments, would provide incremental information to the users given that, under the proposed presentation format, distinction between line items according to measurement basis is already required.
- If such a disaggregation scheme does provide incremental information, the Board believed that a 'through the eyes of management' accounting policy exclusion should be available. This would allow management the option of not disaggregating certain valuation adjustments that they considered integral to ordinary business activities (for example, inventory obsolescence, doubtful debt allowances), which could be retained in (b) other.
Methods of presenting information about changes in assets and liabilities
The board discussed the following three alternatives for presenting information about what caused a change in the reported amounts of assets and liabilities:
- Alternative A: Statement of Financial Position Reconciliation
- Alternative B: Statement of Comprehensive Income Matrix
- Alternative C: Reconciliation of the Statement of Cash Flows and Comprehensive Income
These formats were discussed in terms of three of the project's working principles related to this issue - that financial statements should present information in a manner that:
- Portrays a cohesive financial picture of an entity
- Helps a user understand what causes a change in reported amounts of individual assets and liabilities
- Helps a user assess the differences between cash transactions and accrual accounting.
Incorporating FCTA and Acquisitions and Disposals in a Statement of Financial Position Reconciliation
The board did not discuss this issue since the Statement of Financial Position Reconciliation (Alternative A above) was not the preferred method.