The proposed new format calls for companies to reconfigure the balance sheet and the income statement to follow the lines of the current cash-flow statement. Each one would separate data into at least the following four categories: business (or operating) items, financing items, income taxes, and discontinued operations. The proposal provides broad guidelines for classifying business and finance terms that permit some flexibility in communicating the unique aspects of each business. The flexibility does not extend to income taxes, discontinued operations, and equity, however. Companies would also be required to provide a new statement that reconciles income to cash flows as part of their notes section.
Still, “it’s very important to understand this is a much-longer-term thing,” says Kueppers. “We might see some discussion of it in 2009, but I don’t think any decisions will be made before 2010,” at the earliest.
Like so many issues, the future of the Financial Statement Presentation project “will depend on how enthusiastic [investor] response is,” says Hepp. Assuming it happens, though, the door would be open for the implementation of those original radical ideas. A joint statement from the two boards affirmed that they would retain the notion of net income for now, but that “a future standard on financial-statement presentation would replace existing guidance in both U.S. GAAP and IFRS.”
FAS 5: Accounting for Contingent Liabilities
Last summer, FASB ignited the ire of the business community with its proposal to require companies to disclose “specific quantitative and qualitative information” about loss contingencies such as securities litigation. The changes would “add uncertainty, complexity, new liability, and a great deal of cost while compelling companies to provide potentially unreliable, and often immaterial, information about pending litigation,” said a comment letter from the U.S. Chamber of Commerce. Up against dozens of similarly scornful letters, FASB beat a hasty retreat and directed its staff to develop an alternative model, which was to be field-tested (along with the original controversial version) last fall. FASB could not confirm any specific dates.
This quarter, public roundtable discussions about FAS 5 are on the docket, with a final decision expected to take place sometime this spring. The revision, should it occur, would not be effective until after December 15, 2008, according to the board.
Alix Stuart is a senior writer at CFO. Additional reporting was provided by Sarah Johnson, David Katz, Marie Leone, and David McCann.
Will IFRS provide the “little GAAP” that companies want, or pose too large a burden?
While the largest U.S. companies are getting invitations from the Securities and Exchange Commission to be first-movers on international financial reporting standards, private companies could, in fact, steal some of their thunder. That’s because the American Institute of Certified Public Accountants, which governs private-company auditing, has recognized the International Accounting Standards Board as a valid standards-setter. Once the IASB finalizes its “IFRS for Private Entities,” due to happen this quarter, U.S. private firms could, in theory, immediately embrace the “little GAAP” they have been seeking for so long.
Mark Ellis, CFO of privately held Michael C. Fina, believes that would be a good move. Right now, nearly every accounting change requires a team of auditors to implement, he notes, whereas the new set of principles-based standards would be easier to apply internally. “I see this as a way for CFOs to do more, and for accounting firms…to not charge as much,” says Ellis.
However, others caution private-company CFOs to beware. “Many are assuming that [IFRS for Private Entities] will simplify things for private companies. I totally disagree,” says Andy Thrower, a partner at NaviscentGroup, which provides part-time CFO services to private companies.
Thrower outlines 12 points of contention in a recent paper, including stock-option accounting. The proposed standard may be only 3 pages long, compared to GAAP’s 286 pages, but Thrower argues that the IFRS approach is no simpler, because it incorporates by reference IFRS 2 — virtually the same as FAS 123R, the current standard that requires companies to calculate the cost of shares based on market valuations, not an easy prospect for non–publicly traded firms.
Continuing to have private companies hew to fair-value standards, which the IASB is likely to do, is also overkill, says Thrower. “The primary users of private-company financial statements are bank lenders, and they are trying to predict cash-flow coverage,” which doesn’t necessarily hinge on asset valuations, he says. “If the bank wants to know the fair value of your assets, it will just ask you to get an appraisal.”
For better or worse, how quickly private companies adopt IFRS will likely depend on how readily bankers, auditors, and others accept such a move, says John Hepp, partner at Grant Thornton, and that remains a “wild card.” — Alix Stuart and Tim Reason