Financial statements unlike any you’ve seen (part 1) |

Financial Reporting

Financial Statements Unlike Any You’ve Seen (Part 1) |
BY BRUCE POUNDER, CMA, CFM

If you haven’t yet read the financial statements of ToolCo and Bank Corp, you should—your company’s financial statements may soon look like theirs.
Financial statements of the fictitious ToolCo and Bank Corp appear as illustrative examples in a discussion paper issued last month by theFinancial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). Titled “Preliminary Views on Financial Statement Presentation,” it describes significant changes that the Boards believe should be made to the contents and formats of principal financial statements. The discussion paper is a “must read” if you prepare financial statements in accordance with U.S.Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). It takes only a quick glance at the ToolCo and Bank Corp examples to realize that the FASB and the IASB are proposing a complete overhaul of the balance sheet, income statement, and cash flow statement as we know them today under both U.S. GAAP and IFRS. This month’s column is the first of two thatwill introduce you to the dramatic changes described and illustrated in the discussion paper. Next month’s column will continue to examine the changes and will explain how you can help influence the Boards’ ongoing standardssetting efforts in the area of financial statement presentation.

Background
The recently issued discussion paper represents the first major milestone attained after manyyears of collaboration between the FASB and the IASB on the topic of financial statement presentation. The Boards’ financial statement presentation project is just one of many ongoing joint projects that the two have undertaken with the objective of converging U.S. GAAP and IFRS. In particular, the financial statement presentation project is an example of multilateral, standard-level Convergence,which is one of several ways in which the global Convergence of financial reporting standards can

occur and is occurring. As I explain in The Convergence Guidebook (Wiley, forthcoming 2009), multilateral, standard-level Convergence happens when two standards setters work to replace their existing, dissimilar standards on a specific topic with a common standard that is unlike either existingstandard. Publication of a discussion paper on a standards-setting issue is an optional but common step in the due process that the FASB and the IASB follow as they develop and revise financial reporting standards. Discussion papers are generally published early in the standards-setting process to share the Boards’ preliminary views on issues that they have researched before attempting to draft a newstandard or draft revisions to an existing standard. As such, discussion papers represent opportunities for interested parties to help shape the standards that affect the individuals and organizations that make up the financial reporting supply chain.

What’s So Different?
The proposed balance sheet, or as it is formally called in the discussion paper, the “Statement of Financial
November 2008|

S T R AT E G I C F I N A N C E

19

Position,” exhibits a number of striking features. First, the Statement of Financial Position isn’t organized into the traditional sections of assets, liabilities, and equity. Rather, it is organized into five sections: Business, Financing, Income Taxes, Discontinued Operations, and Equity. The Business section of the Statement of Financial Positionpresents both assets and liabilities that are related to the reporting entity’s “business activities,” i.e., the operating and investing activities through which the entity creates value. The Financing section lists assets and liabilities that relate to how the reporting entity funds or finances its business activities from nonowner sources of capital. Financing from owner sources is detailed in...