Financial performance reporting: striking a balance between transparency and simplicity.

• Author: Sayther, Colleen
• Position: President's Page

As corporate finance moves towards ever-greater transparency, the Financial Accounting Standards Board (FASB) is engaged in a significant project to redesign he income statement. Financial Performance Reporting by Business Enterprises has two main objectives:

* To improve the quality of information displayed in financial statements so that investors, creditors and others can better evaluate an enterprise's financial performance.

* To ascertain that the financial statements provide sufficient information to permit calculation of key financial measures used by investors and creditors.

Users of financial statements have expressed strong interest in developing reporting standards with enhanced predictive value. This is consistent with the objectives of a parallel project being undertaken by the International Accounting Standards Board (IASB) and the Accounting Standards Board (ASB)of the U.K. However, IASB's tentative conclusions so far are headed in a different direction from FASB's.

At the same time, the importance of not adding to the current complexity and volume of disclosures was recognized. Forcing compliance to performance metrics irrelevant to a specific industry, with the stated aim of consistency, would accomplish nothing.

FASB continues to deliberate on this complex project. Here are specific, tentative decisions made to date:

* There should be a single statement of comprehensive income, reporting all items of revenue, expense, gains and losses.

* The statement of comprehensive income should comprise three major categories: 1) Business Activities--a management-defined category; 2) Financing--a defined category; and 3) Other--a residual category.

* Income tax expense is to be presented as a separate classification after the categories.

* Income from continuing operations would be a required subtotal.

* Discontinued operations are presented as a separate classification, net of tax effects and after income tax expense.

* Other comprehensive income is retained, as required by FASB Statement 130.

* The cumulative effect of change in accounting principle is included in other comprehensive income.

* Extraordinary transactions and events are to be reported in the applicable category, before tax, not labeled as "extraordinary."

While categorization, if done properly, could add clarity to the report, it could also add confusion. Statement users must be given a way to bridge from the old income statement categories to the new ones, with...