Extreme makeover for financial statements: in place for the past 60 years, financial statements are now being scrutinized, and changes suggested by a joint FASB-IASB project are drawing strong opinions--both pro and con--as many are asking "is this really necessary, especially now?".

• Author: DiFabio, Christine
• Position: FINANCIAL REPORTING

For years interested industry participants have debated whether the presentation of financial statements provides a view that clearly communicates an entity's integrated financial picture.

Then, in 2004, the Financial Accounting Standards Board and International Accounting Standards Board embarked upon a joint project to address the issue.

Financial Statement Presentation, one of the seven IASB-FASB Memo of Understanding (MOU) projects to be jointly completed by 2011, is based on three objectives. These objectives state that information should be presented in the financial statements in a manner that:

* Portrays a cohesive financial picture of an entity's activities;

* Disaggregates information so that it is useful in predicting an entity's future cash flows; and

* Helps users assess an entity's liquidity and financial flexibility.

The two boards believe that a common format for presentation based on these objectives will improve communication between users and preparers of financial statements.

With the assistance of a joint working group (JIG)--of preparers, users, auditors and other professionals--last October this project went from its "talking" stage to the issuance of a discussion paper, Preliminary Views on Financial Statement Presentation. (Comments on the paper are due April 14.)

The debate is now focused on whether the preliminary views are indeed an improvement to the current statements.

When it was published last fall, FASB Chairman, Robert Herz commented, "Providing investors with the most transparent, consistent financial reporting possible is more critical than ever to the efficiency and soundness of our capital markets.

By working together to create one common, high-quality global standard for financial statement presentation, the boards are aiming to increase the usefulness of financial reports while enhancing their comparability across international capital markets.

Usefulness, Comparability, Communication Transparency

The current format for balance-sheet presentation--assets, liabilities and equity--was developed by the U.S. Securities and Exchange Commission in the early 1940s. Now, more than 60 years later, the balance sheet as it's been known for years--and its partner statements--are undergoing major reconstruction.

The changes are significant. Is the boards' new direction the right way to go? Is this change really necessary--especially now?

Robert A. Howell, the David T. McLaughlin distinguished visiting professor of Business Administration at the Tuck School of Business at Dartmouth and FEI member, believes that change is necessary.

"Financial reporting is clearly at a critical point in its history," he says, adding that current practices have not kept up with changes in business conditions and practices. Financial statements do not adequately provide the information needed by creditors, investors and others to make rational...