Extreme makeover: consistency is goal in general purpose financial statements.

• Author: Davis, A. Christine
• Position: Regulationupdate

the structure and presentation of general purpose financial statements that's been familial" to us for decades is undergoing drastic surgery thanks to a far-reaching, convergence-related joint project between FASB and the, IASB that started in 2008.

Motivated by the need to make financial statements more useful in an ever-growing global economy the boards' objective appears reasonable: "To ensure consistency within an entity's financial statements for previous periods and to promote comparability with the financial statements of other entities."

In the process, financial statement presentation will become virtually standardized on a global basis, driven by two new financial statement presentation principles: cohesiveness and disaggregation.

Cohesiveness means that the relationship between items in the financial statements is clear and that an entity's financial statements complement each other as much as possible. Disaggregation means separating resources by the activity in which they are used and by their economic characteristics.

Together, it is expected that these principles would improve the ability of the user to understand the information presented in an entity's financial statements.

The "Staff Draft of an Exposure Draft. on Financial Statement Presentation," also known as a proposed ASU, was issued in July, which was followed shortly by an outreach and field testing phase. While the FASB has not. indicated when the FD would be issued, this project remains in the FASB's Current Technical Plan as of Nov. 1st.

What Prompted the Proposed Changes?

Financial reporting is of paramount importance to many as it is the primary means of communicating an entity's financial information to those outside the company. Those parties (such as current and potential equity investors, lenders and analysts) use an entity's financial statements to make decisions based on the information presented. It's been commonly observed, however, that the usefulness of the information could be enhanced greatly by addressing and eliminating a number of shortcomings arising from permitted alternatives in current financial reporting principles and practices.

Inconsistency is one of them. For example, while the statement of cash flows provides a section for operating activities, the income statement and balance sheet do not provide a section exclusively for operating activities. As such, it has been difficult for users to compare operating income with operating cash flows, a common type of analysis that users attempt to make in understanding certain trends.

In other words, a clearer linkage or association of information among the statements, which gels us to the point about cohesiveness, has been missing.

In addition, permitted presentation alternatives have created difficulties in comparing information between two sets of financial statements. Take, for instance, the statement of cash flows. Financial statement preparers may use the direct...