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Financial Statement Presentation - Phase B

Date recorded:

The Board continued its deliberations on various issues to be addressed in the initial discussion document of this project.

 

Statement of cash flows

The Board discussed which presentation formats for the statement of cash flows should be presented in the initial discussion document.

The discussion mainly focussed on the question whether the direct or indirect method of presentation provides more useful information to users of financial statements. Two Board members pointed out that, in their view, the indirect method is superior to the direct method in relation to the projection of future cash flows and that it has broad acceptance in practice. Board members in favour of the direct method stressed that this method achieves a high degree of cohesiveness with the statement of comprehensive income. Other Board members noted that both methods have their merits.

Finally, the majority of Board members were of the view that the direct method should be the preferred method. To generate discussion with constituents on this issue it was decided to illustrate both the direct and indirect method in the initial discussion document and to also describe advantages and disadvantages of both methods. When using the direct method an entity should use the same line items within the operating category on both the statement of comprehensive income and the statement of cash flows. The Board decided to describe two approaches of the direct method in the initial discussion document:

  • 'Direct-direct" or 'bottom-up' approach: Under this approach, cash receipts and payments are determined by aggregating the cash flows amount from the cash ledger.
  • 'Indirect-direct' or 'top-down' approach: Under this approach, cash receipts and payments are determined by adjusting items in the statement of comprehensive income (that is, revenue, expense, gains and losses) for the change in the related items in the statement of financial position over the period.

The Board acknowledged that the direct-direct approach may be very costly to implement and, therefore, an entity should be permitted to use the indirect-direct method. In addition, the Board agreed to seek input regarding the following issues:

  • Costs and benefits associated with preparing a direct method statement of cash flows.
  • For entities for which a statement of cash flows may not be relevant (such as financial institutions) ask how the statement could be modified to increase its relevance, or what information might be more relevant to be provided in place of the statement of cash flows.
  • Whether the indirect schedule should continue to be required when the statement of cash flows is presented under the direct method and a reconciliation of statement of cash flows to statement of comprehensive income is presented.

 

Reconciliation schedule

The Board reaffirmed its preference for the disclosure of a reconciliation of the statement of cash flows to the statement of comprehensive income (the 'reconciliation schedule'). Such a schedule would begin with the line items and amounts in the statement of cash flows (based on the direct method) and reconcile to the amounts in the statement of comprehensive income.

The Board discussed which reconciling items (columns) should be required in the reconciliation schedule. The staff proposed that at a minimum the reconciling items should be disaggregated into the following four columns:

  • Cash flows not affecting income
  • Accruals and systematic allocations This column includes contractual accruals (such as changes in payables and receivables), systematic allocations (such as depreciation expense), other accruals and other non-remeasurements.
  • Recurring valuation changes This includes changes to fair value from fair value only.
  • Remeasurements other than recurring valuation changes In the staff's view these remeasurements are considered to be more persistent and separating these from recurring fair value changes would improve information.

The proposed format combines attributes of the preliminary IASB and FASB views and was labelled 'the converged view'. It is illustrated on page 4 of the appendix of agenda paper 7A available on the IASB website.

A number of Board members pointed out that it may be difficult to allocate reconciling items to the four columns and that divergence in practice may arise; for example, should impairment of inventories be included in 'accruals and systematic allocations' or 'remeasurements other than recurring valuation changes'? One Board member raised the concern that a fixed schedule could result in 'number crunching' to ensure that the schedule works out rather than providing useful information.

The Board decided to describe and illustrate the converged view in the initial discussion document and to seek feedback on the reconciling items (columns) including the definitions of the columns. In deviation from the format illustrated in agenda paper 7A the Board decided not to require a separate presentation of unusual or infrequent items.

 

Totals and subtotals in the financial statements

The Board discussed various alternatives for presenting totals and subtotals in the statement of financial position, statement of comprehensive income, and the statement of cash flows.

Common totals and subtotals

The staff presented the revised working format below including additional mandatory subtotals.

Statement of Financial Position

Statement of Cash Flows

Statement of Comprehensive Income

BUSINESS

BUSINESS

BUSINESS

Operating assetsOperating liabilities

Cash flows from operating activities

Operating income and expenses

Subtotal (A1)

Subtotal (A1)

Subtotal (A1)

Investing assetsInvesting liabilities

Cash flows from investing activities

Investing income and expenses

Subtotal (A2)

Subtotal (A2)

Subtotal (A2)

TOTAL (A) = Subtotals (A1) + (A2)

TOTAL (A) = Subtotals (A1) + (A2)

TOTAL (A) = Subtotals (A1) + (A2)

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

TOTAL (B) Sum of Net assets of Discontinued operations

TOTAL (B) Sum of Cash flows from Discontinued operations

TOTAL (B) Sum of Income/expense from Discontinued operations

FINANCING

FINANCING

FINANCING

Financing assets

Cash flows from financing assets

Financing income

Subtotal (C1)

Subtotal (C1)

Subtotal (C1)

Financing liabilities

Cash flows from financing liabilities

Financing expenses

Subtotal (C2)

Subtotal (C2)

Subtotal (C2)

TOTAL (C) = Subtotals (C1) + (C2)

TOTAL (C) = Subtotals (C1) + (C2)

TOTAL (C) = Subtotals (C1) + (C2)

INCOME TAXES

INCOME TAXES

INCOME TAXES

Income tax assets

Income tax liabilities

TOTAL (D) Sum of Net income tax asset/liability

TOTAL (D) Sum of Cash flows from income taxes

TOTAL (D) Sum of Income tax expense/benefit

EQUITY

EQUITY

--

TOTAL (E) Sum of Equity

TOTAL (E) Sum of Equity

--

In general the Board agreed with the revised format. However, there seemed to be a consensus that no additional subtotals should be required for investing and financing items (subtotals A2, C1 and C2 above) because investing and financing items normally include only a few line items.

The Board noted that an entity should not be precluded from presenting additional subtotals in any of the statements.

The Board decided that an order of the sections in the statement of financial position (business, discontinued operations, income taxes, financing and equity) should not be prescribed. However, the same order of sections should be used in all statements.

Totals and subtotals unique to the statement of financial position

The Board made the following decisions:

  • An entity that presents a classified statement of financial position should be required to present a subtotal for each short-term and long-term subcategory in each of the categories (unless there is only one line item in that subcategory). No further subtotals should be required.
  • Operating assets should be separated from operating liabilities and an entity should be permitted but not required to include a subtotal for operating assets and for operating liabilities.
  • The notes to financial statements should include totals for short-term assets, short-term liabilities, long-term assets, long-term liabilities, total assets, and total liabilities.

Totals and subtotals unique to the statement of comprehensive income

The Board decided to require the subtotal 'comprehensive income' in addition to the common subtotals required in the revised working format above.

Totals and subtotals unique to the statement of cash flows.

The Board decided that no additional subtotals should be required on the statement of cash flows other than the common subtotals required in the revised working format above.

 

Overall aggregation principle

The Board decided to add the following guidelines to the aggregation principle:

  • An entity would be permitted to include additional line items on the financial statements and modify the descriptions used as necessary to explain the components of its financial results.
  • Subtotals must flow from the order of the sections; that is, an entity cannot randomly choose subtotals or line items to add together.
  • Additional subtotals an entity chooses to include should be presented with no more prominence than any required subtotals.

The staff was asked to prepare a draft of the initial discussion document reflecting the decisions made at this meeting.

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.