In October 2008, International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) had came out with a discussion paper on a new presentation of financial statements to replace the older ones that we have been using all along these years. This presentation was introduced in a joint discussion paper between the two boards which is known as “Preliminary Views on Financial Statement Presentation”.
Both bodies are asking for opinions and comments from other accounting bodies on the new presentation of the financial statement. In the boards' paper, they had stated that the implementation of the current presentation could affect the communication between the users of financial statements and the management of the entity.
The changes that were proposed in the discussion paper by IASB and FASB was Statement of Financial Position (SoFP) which will replace the current Balance Sheet (BS) that we are using whereas Statement of Comprehensive Income (SoCI) is proposed to replace the current Income Statement (IS). SoFP and SoCI was aimed to provide a clearer picture as the existing presentation was presented inconsistently and might have some uncertainties.
IASB and FASB in the paper had said that, with the new presentations of the financial statements, it could help not only the accounts or auditors to understand well about the financial statements, but also a company's potential and current investors. In this paper, they highlighted that in changing of the presentation of the financial statements, it could show a very clear relationship between the items in the financial statements. Both boards also highlighted that information that are disaggregated could be easier for users to predict future cash flows. This new presentation could also reflect the firm's financial flexibility and liquidity.
This discussion paper could be counted as a good one as it provides a good summary which tells us the highlights and gives users a quick brief on the changes that is written in the discussion paper. Apart from that, this discussion paper provides a very detailed explanation on each changes of the presentation. It highlights the main problems that are faced by the current financial statements and provides a better solution to overcome the problems that were faced.
a) Changes of Balance Sheet to Statement of Financial Position.
The first major that will be changed in SoFP would be that the headings of each activities are changed and was divided into three main parts which are financing, operating and investing activities.
Other than that, SoFP requires entity to allocate their assets and liabilities into different time span which would be the long-term and short-term categories according to each item's timeline. But for instance, some entities are excluded from the above. For those excluded from the time span, it can be measured by liquidity. For an example, the financial institutions which are dealing with daily stocks and bonds where only liquidity approach could be applied here.
b) Income Statement to Statement of Comprehensive Income
The changes found in SoCI would almost be similar to SoCP. Accounts in the comprehensive income should be harmonised in order to ease users to do comparison. Each item must be allocated into the correct section according to its nature. This could help out users to make more valuable decisions.
With everything divided accordingly, analysis could be done easily either by the management or investors as they do not need to find each of the things one by one from the notes of each financial statements.
2. Critical Reviews on this discussion paper.
Since the proposal of this new presentation of the financial statements, different bodies had come out with arguements for each of the questions that have been posted up for them. Some even gave their honourable opinion on where things should be improved before this new presentation could be implemented to replace the current one.
a) The decision usefulness
This would be the main portion of the whole report. To have a presentation of report to work, we need to make sure it is useful and it's easy to help out in decision making. Without these two, a financial statement presentation is deemed not useful.
From the decision usefulness aspects, KPMG (2009) had supported that the amendments done could improve the decision usefulness. They also said that by adopting the liquidity, disaggregation and cohesiveness would be very useful towards the firms and users of the financial statements. KPMG also supports that disaggregation would be more decision useful compared to the current one as it is allocated accordingly.
In the other hand, KPMG (2009) criticises that the Boards should be clear of the way in maintaining cohesiveness between financial statements and maximising the decision-usefulness of each financial statements. Relatively, they also highlighted that the guidance and examples given in the discussion paper might be contradictory and hope the Boards to give a clarification.
Other than KPMG, CEBS (2009) also fully supports on the new changes which cover the disaggregation, cohesiveness and liquidity and financial flexibility as these will proves how transparent the financial statement is.
As for HSBC (2009), they have said that the newer version of presentation would not be more favourable compared to the current one for the banking industries. They even highlighted that if it is disaggregated, it would be no difference as ‘financing activities' has no difference with ‘operating activities' as giving out loans is one of the fundamental nature of banking industries.
In ASB's (2009) opinion, they said that disaggregation would not be a decision useful model as it is lengthy and brings little information value. ASB also says that not every single item in the comprehensive income is useful.
CIMA (2009), in giving feedback for this paper, had said that the primary statement's cohesiveness is not strong enough to show the relationship between each items on the financial statements. In their opinion, it is good to adopt the objectives, liquidities and cohesiveness into the financial statements as it will help out the users of it. Other than that, CIMA also commented on disaggregation which they said it would be decision-useful but not everyone could be asked to adopt this into their syllabus.
It is useful for disaggregation to exist in a financial statement as it could help in assessing past performance of the company and also the future cash flows of a company. Thus, this would be a very useful decision to add it into the financial statements. (Deloitte, 2009)
b) Improvement of comparability
Comparability against two companies are important in order for a new business to go into a market. Other than that, it is another key source for investors to make smart decisions to decide on which company they would want to invest in. Below are few positive and negative feedbacks from different bodies :
KPMG (2009) also highlighted that if there is a differential presentation is used between companies, company-to-company comparability would decrease. They also said that the starting point of each classification should not be determined by the rules but only be determined by the management.
HSBC (2009) is going more to the management approach as it is more relevant to the business model that they are doing compared to the comparability ones that have been proposed by the Boards.
CEBS (2009) has argued that comparability might loss causing by the disaggregation of activities between operating and financing categories as not all institutions might allocate accordingly.
Apart from that, they also pointed out the point that bank financial statements' users might not get benefited as the cohesiveness is not so accurate enough to show the difference of the comparability as the industry relies more on management approach.
On the other hand, ICAEW (2009) had commented that the management approach will not only give users the information they needed but could also help achieve comparability. Though the whole thing of comparability could not be achieved, still there are still being satisfied than none at all.
Though using different ways and entities, but the same items, comparability will still be achieved where it will just show that the items are used or managed in another way. (ICAEW, 2009)
c) Subjectivity and cost
Implementing the whole new structure into a company takes time and money. Without a desirable and accurate presentation, it should not be introduced to the accounting world yet as this might bring problems not only to the users but also the Boards that have produced the presentation.
Perspective of each comment from the different bodies should be taken into account to amend the whole structure as they could help out in detecting some loopholes that the Boards had missed.
KPMG (2009) has supported that the introduction of the new presentation would be in favour of new companies as this could minimize the cost of them entering as the presentation of the financial statements of companies are the same.
ASB (2009) also had opposed in preparing the some details on the new presentation of the financial statements as it is not useful for majority of the users and they need to incur more costs to get it ready.
In CIMA (2009) feedback, they argued that the disaggregation in too detailed. They also highlighted that more costs might be incurred as the implementation of this new presentation would cause almost everyone to incur the cost to implement the standards. If not, it would still not be standardized as not everyone is willing to spend more cost on implementing new financial statements.
Meanwhile, BAA FARSIG (2009) had said that they think that by implementing this new presentation there will be more costs compared to benefits when it is applied to the non-public companies and also limited companies.
As for the financial institution, it might cause a heavy blow to them if the maturity date of each loan is classified into two terms only. This will affect the concurrence loans that are going on and would also affect the users who were on loan. (HSBC, 2009)
In BAA FARSIG (2009)'s report, they had clarified that the implementation of this new presentation should not take place as there are still some amendments that should be done before starting to circulate and implemented to replace the current one. They urged the Boards to take the right action before implementing.
As for KPMG (2009)'s comment, they are still unclear for some uncertainties where the Boards have reach conclusion and hoped that the Boards should explain clearly the relationship between the objectives and qualitative characteristic of the proposed financial statement.
Other than that, ICAEW and ASC (2009) found out that the new presentation format is over-detailed even thought it could saves up part of the auditing cost.
As for ACCA (2009), they had commented that it is not easy to deal with the new format as it is too detailed and not all the companies could adapt them while it could not reflect the overall position of a company.
Eventhough much effort had been put in researching and preparing the whole new presentation of financial statements, there are still some places that could be changed in order to get to a better solution for everyone. If this is implemented straightaway without comments or feedbacks, problems might be faced by users and might need to be taken back by the Boards to amend, while implementing another new one to the world which will incur another sum of cost.
The reliability of the new presentation is still questionable. There might still be loopholes for management to manipulate accounts and the decision usefulness and comparability of the whole presentation is still questionable.
Association of Charted Certified Accountants (2009) Preliminary Views on Financial Statement Presentation. Letter of comment no 70 [online]. Available from: http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818485445&blobheader=application%2Fpdf [Accessed 19 January 2010]
Communication of European Banking Supervisors (2009) Preliminary Views on Financial Statement Presentation. Letter of comment [online]. Available from: http://www.c-ebs.org/getdoc/182bd11d-a095-40c6-89ae-38088a177aa4/2009-04-09--%28CL-DP-Financial-Statement-Presentatio.aspx [Accessed 17 January 2010]
Deloitte & Touche LLP (2009) Discussion Paper, Preliminary Views on Financial Statement Presentation. Letter of comment no 63[online]. Available from: http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818485194&blobheader=application%2Fpdf [Accessed 13 January 2010]