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Financial Statement Presentation

Date recorded:

Results of the FASRI Experimental Study

The IASB received a presentation from Professor Robert Bloomfied (Cornell University), Director of the Financial Accounting Standards Research Initiative (FASRI), of the results of a study that tested the decision-usefulness of two proposals contained in the October 2008 discussion paper Preliminary Views on Financial Statement Presentation. The study had focused on two particular proposals in the discussion paper:

  • classifying the statement of financial position, statement of comprehensive income, and statement of cash flows into operating, investing and other categories, and
  • the proposal to disaggregate expense items in the statements of comprehensive income and cash flows by function and nature.

In particular, the study tested whether the way in which the classification and disaggregation were presented influenced the behaviour of a sample of credit analysts.

The key finding of the study was that appropriate decisions were most likely to occur when the classification and disaggregation were effected in the same place - that is, if the classification and disaggregation were performed on the face of the financial statements; or were made in the footnotes. Sub-optimal decisions were more likely when classification was made on the face of the statements with disaggregation in the footnotes, or if disaggregation was presented on the face of the financial statements with classification information in the footnotes.

Professor Bloomfield suggested that one of the most important findings was that the disaggregation of cost of sales was crucial to many credit analysts.


Analysts Field Test Results

Regenia Cafini (FASB staff) reported on the analyst portion of the field tests performed by the FASB and IASB. The field testing was conducted to test the proposals in the 2008 Discussion Paper. Of particular relevance to the proposals in the DP were the following findings:

  • Analysts ranked 'increased disaggregation' as the most useful aspect of the proposed presentation model and the management approach to classification as the least useful aspect.
  • Most analysts agreed with the proposed definitions of operating and financing. They were split evenly regarding the definition of investing. Most of the respondents thought that financial statements prepared according to the DP were better at presenting the operating and investing results of the companies they reviewed; however views were not as favourable with respect to the results of the entity's financing activities.
  • Cohesiveness enhanced the usefulness of the income statement and the cash flow statement the most.
  • The direct method presentation of cash flows was ranked as the third most useful aspect of the proposed presentation model. For the sub-group that reviewed a financial institution's financial statements, this was ranked second in usefulness.
  • About 70% of the respondents indicate that the reconciliation schedule enhanced the decision-usefulness of the financial statements they reviewed. The 'cash' and the 'accruals and allocations' columns were cited as the most useful on the proposed reconciliation schedule.
  • The majority of respondents do not think that the recast statements present the entity's liquidity and financial flexibility any better than the non-recast statements.

Another key finding was that many analysts who participated in the field test considered 'nature' (at least in the statement of comprehensive income) to represent 'fixed' versus 'variable', rather than any other possible attribute.

The Board thanked both presenters for their presentations, and their research teams, for their time and efforts, which would be most useful as the Board considered its next steps on this project.

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