Other comprehensive income

The staff identified alternative formats for presenting other comprehensive income (OCI) that could serve until the IASB and FASB can achieve their long-term goal of eliminating the separate presentation of some OCI items.

The staff developed the following alternatives for presenting OCI items on the statement of comprehensive income (the alternatives are illustrated in the observer notes):

• Alternative A Present OCI items within the functional section or category to which the events or transactions relate and recycle (if necessary) within the section or category.
• Alternative B Presentation is the same as Alternative A, except that each category or section that has an associated OCI item would have a subcategory to distinguish OCI items from non-OCI items.
• Alternative C Present OCI items in a separate section (that would be presented with equal prominence as the business, financing, income tax, and discontinued operations sections). OCI items that are recycled would be recycled among sections and categories. The OCI section would include operating, investing, and financing categories. The OCI section would have a subtotal like the other sections.
• Alternative D. Presentation is the same as Alternative C, except that OCI items would be presented on a net of tax basis. This presentation is the most consistent with the current presentation of OCI items and the sum of the business, financing, discontinued operations, and income taxes sections would equal net income, as currently presented.

The Board discussed the alternatives and was nearly equally divided between the positions 'A or B' on the one hand and 'C or D' on the other side. Those who supported 'A or B' noted that this presentation would be closer to the long-term goal of eliminating the separate presentation of OCI items.

A Board member presented an additional alternative with no label OCI but with income and expense items classified as long-term and short-term similarly to the current/non-current classification in the balance sheet (statement of financial position). This concept could be presented using the formats of Alternatives B or C.

The staff noted that a majority of the FASB agreed with Alternative B with minority votes for A and C.

No decisions were made.

The statement of cash flows

Proposed working principles

The staff recommended that the objectives of the statement of cash flows in FAS 95 Statement of Cash Flows be adopted in this project as working principles, modified in part, as follows. Information should be presented in the financial statements in a manner that will help investors, creditors, and others to assess:

• (a) an entity's ability to generate future cash inflows;
• (b) an entity's ability to meet its obligations, its ability to pay dividends, and its needs for external financing;
• (c) the differences between cash transactions and accrual accounting; and
• (d) the effects of non-cash activities during the period on an entity's financial position.

The Board agreed to these principles but said that it should be made clear that the objectives can only be achieved by financial statements as a whole not by cash flow statements alone.

Direct method versus indirect method

At the April 2004 joint Board meeting, IASB and FASB decided that the financial statement presentation project should address whether the statement of cash flows should be required or permitted to be prepared under the direct method or the indirect method.

The current guidance in FAS 95 formed the basis of the discussion. FAS 95 describes the direct method as a method which reports 'major classes of gross cash receipts and gross cash payments and their arithmetic sum' (paragraph 27) and the indirect method as a method which determines and reports 'net cash flow from operating activities indirectly by adjusting net income to reconcile it to net cash flow from operating activities' (paragraph 28).

Many Board members felt that the direct method provides more useful information. However, some raised the concern that the direct method might be too complex and that the cost might outweigh the benefits.

The Board decided that the direct method as outlined in an Agenda Paper (not provided to observers) should be applied.

Reconciliation from operating income to cash flows from operating income

Currently, FAS 95 requires a reconciliation of net income to cash flows from operating activities if the direct method is used. That reconciliation is not required by IAS 7 Cash Flow Statements.

The Board agreed that the information needed to reconcile (comprehensive) operating income to cash flows from operating activities should be required to be presented in the financial statements.

The staff was asked to explore whether similar information should be provided for the investing, financing and other categories.

Non-cash activities

The Board agreed that all relevant information about significant non-cash activities should be provided. The issue was not discussed in detail.

Application of the working format of cash flow statements to financial institutions

At the outset of the convergence project on financial statement presentation, the IASB and FASB agreed that issues related to financial statement presentation should be addressed first for non-financial institutions and second for financial institutions. While that is the approach that has been taken, the staff's underlying goal was to develop, if possible, principles for presentation that would apply to all entities.

The staff presented a paper based on meetings with the Financial Institutions Advisory Group (FIAG).

The Board agreed to the staff's recommendations on the following issues (without discussing them in detail):

• An eyes-of-management approach should be used to classify information in the financial statements. The Board noted that this is the same approach as for non-financial institutions.
• The criteria for classifying items in the financing, investing and operating section should similarly apply to financial institutions
• Cash and cash equivalents are required to be classified in a single category.