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Financial Statement Presentation

Date recorded:

Presentation of changes in assets and liabilities

The Board held a discussion that focused on what information should be presented in the financial statements. The issue of how that information should be presented was left to a subsequent meeting.

Clarification of working principles

The Cohesiveness Working Principle

The Board agreed that the Cohesiveness Working Principle should be applied at the line item level. However, several Board members noted that this Principle should not result in 'reconciling individual accounts', but to keep cohesiveness across statements. By agreeing this Principle, the Board was not advocating masses of information on the face of the financial statements; some of the information would be in the footnotes.

Disaggregation working principle

By a majority, the Board agreed that information related to changes in assets and liabilities should be disaggregated based on whether the information is assigned the same valuation multiple for the same reason. (I.e. Different types of income and expense will have a different multiple assigned to them by analysts related to persistence, estimation error, etc. This Working Principle implies that items of income and expense would be disaggregated on this basis.) The staff agreed that the explanation of this Working Principle needed a bit of work.

Reconciliation of statements of financial position [balance sheets]

Presenting a reconciliation of statements of financial position

The Board agreed that an entity should present a reconciliation of statements of financial position for each period for which financial statements are presented. This reconciliation would be in the footnotes. Board members noted that there are already many reconciliations required for balance sheet items. Some Board members wanted to ensure that any additional reconciliations were justified.

Cash transactions

The Board did not agree a staff recommendation that would have disaggregated cash transactions during the period into various components. Board members thought that the staff's approach would be burdensome on preparers and that there were surrogates, such as 'number of day's sales in accounts receivable', that were easier to prepare and just as useful.

The staff will return to this issue later.

Direct cash transactions and the classification of cash

The Board did not accept a staff recommendation that would require direct cash transactions (cash sales) to be accounted for as two transactions (an account receivable [an asset] followed by an immediate settlement for cash [a financing item]). The Board thought that the staff's approach was unnecessary. If the level of cash sales was important, the cash flow statement should show this.

Disaggregation of remeasurements

The Board agreed that only recurring fair value changes (as those arise as a result of applying FAS 157 Fair Value Measurements should be discerned from other remeasurements. This means that changes in fair values would not be aggregated with changes in carrying amount based on fair value-like measures.

Other comprehensive income items

The Board agreed that there was no need to display the remeasurement of items of other comprehensive income separately from remeasurements of other items. In other words, items displaying the same characteristics would be displayed in the same way, even if they were components of other comprehensive income.

Exemptions to remeasurements

The Board agreed that, for the purposes of the reconciliation, there should be no exceptions to what is presented in the remeasurement component.

Disaggregation of non-cash non-remeasurements that are recognised in income or expense for the current period.

The Board agreed that the initial recognition of an estimate (for example, the initial recognition of a non-financial liability) should be presented separately from other components within non-remeasurements that are recognised in income and expense for the year. The Board agreed that systematic allocation of costs (e.g. depreciation) and other timing differences between the period in which income is recognised and the period in which the cash flow occurs (for example, accrued expenses, deferred income), could be aggregated and need not be presented separately.

The staff will bring to a subsequent meeting examples to illustrate this issue. Some Board members were concerned that the staff were attempting to identify a distinction without a difference.

Non-cash changes in assets and liabilities that are not recognised in income or expense for the current period The Board agreed that changes in assets and liabilities that affect neither income nor expense nor accompany cash should be presented separately.

Statement of Comprehensive Income

A disaggregated statement of comprehensive income

The Board agreed that the reconciliation of statements of financial position [balance sheets] should include information that indicates how the changes in assets and liabilities relate to line items presented in the statement of comprehensive income and the statement of cash flows.

Although the Board agreed the staff recommendation, it was evident that not all Board members understood what the issue was attempting to communicate. The staff suggested that the suggested format of the statement would help to clarify what the staff is attempting to articulate.

Statement of Cash Flows

The Direct Method and the cohesiveness principle

A minority of the Board (six members) supported a mandatory requirement to present the cash flow statement using the direct method, that is, based on the actual cash receipts and payments, disaggregated in a manner that parallels the line items that are presented in the statement of comprehensive income as far as possible.

Reconciliation

As a result of the previous decision, it was evident that a majority of the Board thought that they should require a reconciliation between items in the statement of comprehensive income and the statement of cash flows.

The FASB staff present at the meeting notified the Board that the FASB had discussed the statement of cash flows on 21 March 2007 and had indicated a leaning of being unanimously in favour of mandating the direct method.

Other comprehensive income presentation

Presentation of other comprehensive income items in the statement of comprehensive income

The Board discussed various alternative presentations for the statement of comprehensive income (see Observer Note 9B). The staff was seeking guidance on which presentations it should include in the forthcoming Discussion Paper. The discussion centred on a presentation, designated as 'E-prime' (E1) and other formats in the Observer Note. It was not immediately obvious whether E1 was that reproduced in the Observer Note. E1 was distinguished from other possible presentations in that it presented items of comprehensive income within the business, investing and financing categories on the basis of whether the underlying assets and liabilities were short-term or long-term in nature. Thus, pension expense would be included within Business-operating, long-term; realised gains on available for sale financial instruments in Business-investing, short-term; and interest on long-term debt within Financing Expenses, long-term. The other innovation in this format was that income tax expense was also split between short- and long-term, something that violates a previously-agreed position that income tax expense should not be allocated.

After a lengthy debate, it was agreed that the Discussion Paper would include alternative statement presentations that included a category of 'other comprehensive income' and did not include the category; and examples that provided for the recycling of items of other comprehensive income and not.

Classification of other comprehensive income items in the working format

Classification of foreign currency translation adjustments

The Board agreed that foreign currency translation adjustments should be included in the statement of comprehensive income based on the nature of the underlying assets and liabilities (for example, in investing if the subsidiary is a 'treasury' activity; in business if it is a trading activity, etc). There was little enthusiasm for requiring a more detailed allocation of foreign currency amounts.

Classification of other comprehensive income items other than foreign currency adjustments

The Board agreed that there should be no additional classification guidance for items of other comprehensive income other than foreign currency adjustments.

Plan for achieving the Board's long-term goal

The Board had a brief discussion of this topic but did not make any decisions, thinking such decisions to be premature.

Initial Discussion Document [Discussion Paper]

The Board had a brief discussion about whether the discussion paper should include the Board's Preliminary Views. Although no definitive decision was taken, at least one Board member was fundamentally opposed to including Preliminary Views and would prefer the document to be silent in this respect.

Cash Equivalents

Whether the notion of 'cash equivalents' should be retained in the financial statements After a short debate, the Board voted (by majority) to eliminate the concept of cash equivalents. The statement of cash flows would present flows related to cash alone; items currently classified as cash equivalents would be classified in the same manner as other short-term investments.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.