At last week’s meeting, FASB announced that this fall it will issue an exposure draft of new guidance on the format for annual financial statements. Guidance on interim statements will be issued separately.
FASB introduced the Project on Reporting Financial Performance in August 2001 to address concerns that investors could be confused or misled by alternative and inconsistent financial performance measures. The increased use of these measures may reflect a rise in the number of business combinations as well as gains and losses associated with restructuring transactions, the board has acknowledged, and not merely companies’ desire “to put performance in the best light.”
According to the board, the project addresses the classification and display of items in the financial statements. It will not address matters of recognition and measurement of items, nor will it address nonfinancial measures.
Certain aspects of the proposal could be a tough sell, however, particularly the statement of comprehensive income. This can cover foreign currency adjustments, adjustments to the fair value of equity and debt securities classified as available for sale, and certain unrealized gains and losses of derivatives classified as hedges. In 1997, when FASB issued Statement No. 130 on reporting comprehensive income, the board offered several presentation alternatives to companies and their auditors. Today, however, FASB is in the midst of its convergence initiative with the International Accounting Standards Board, and a more unified approach seems in the cards.
The bottom line on the income statement is currently “net income,” but the FASB exposure draft is expected to propose that “other comprehensive income,” currently listed in a separate statement, be listed below that bottom line as part of a single statement. Board member Michael Crooch observes that in meetings with some groups on this point, “there’s been some pushback.”
The board has noted that its efforts to prescribe classification methods and summary measures is likely to reduce the flexibility in financial statement display, especially for nonpublic companies not bound by prescribed regulatory formats. “That sacrifice of freedom may be a cause for some constituent resistance,” stated FASB, which argued that in exchange, there would be greater comparability, consistency, and credibility.
There doesn’t appear to be “a great crying need” for the change, says Mark Scoles, a partner in the accounting principles group of Grant
Thornton, because even under the existing standard, comprehensive income must appear on the face of the financial statements. “Most people choose to present [other comprehensive income] on a separate statement or as a component with the statement of changes in shareholder’s equity,” not in the way that FASB and IASB are proposing, notes Scoles.
Comprehensive income is often more volatile than net income, he also observes, and the board’s proposal might shift the prominence away from what many practitioners contend is a better measure of performance. Given FASB’s position on comparability and transparency, however, Scoles believes that more-fruitful responses to the proposal might focus on selecting a method other than the one-statement combination for comprehensive income, rather than trying to convince the board to abandon its standardization initiative outright.
Looking ahead this week:
• FASB is scheduled to discuss whether to issue a draft of a proposed staff position on FASB Interpretation No. 46, Consolidation of Variable Interest Entities, on determining the variability to be considered when applying the interpretation.
• The board also plans to discuss whether to provide transition for the accounting for debt securities subsequent to an other-than-temporary impairment and whether to proceed with drafting the final staff position.