At its September 20 board meeting, the Financial Accounting Standards Board voted to add three new projects to its standard-setting agenda. The three new projects relate to distinguishing between liabilities and equity, and specified matters relating to performance reporting and segment reporting.
Attempts by FASB to distinguish between liabilities and equity have had a storied history, including numerous Discussion Memorandums, Exposure Drafts and proposals dating back to 1990. As outlined in FASB’s 2016 Invitation to Comment (ITC), constituents continue to rely on disparate ‘legacy’ literature swept into FASB’s Accounting Standards Codification, to make the liability-equity distinction. FASB issued a limited scope standard on liability-equity, FAS 150, in 2003. However, it was met with significant constituent concern, especially among private companies. As a result, the accounting standard-setter issued FSP 150-3, deferring the effective date of FAS 150 with respect to certain mandatorily redeemable financial instruments of nonpublic entities and certain non-redeemable controlling interests.
The FASB and the IASB developed a joint Exposure Draft on liabilities-equity in 2010. However, “the Boards decided that the document had significant unresolved issues and, consequently, never issued the document.”
In 2016, “the Board decided to add a broader project on distinguishing liabilities and equity to its research agenda.” The operative word there, is ‘research,’ with the research phase being a precursor to FASB adding a project to establish new or amended accounting standards.
With the vote on September 20, the board is once again engaged in, as the staff described, a ‘holistic’ standard-setting project to distinguish between liabilities and equity.
The FASB’s project on performance reporting, an update to its earlier project on financial statement presentation, could significantly recast the form and content of the primary financial statements – the income statement and statement of cash flows in particular.
Preparer organizations have voiced concern with this project. Financial Executives International stated, “We do not believe a wholesale change to performance reporting is necessary … We are not persuaded … that significant modifications are needed for the cash flow statement, segment reporting or the balance sheet… It is not clear to us that investors would benefit from any of the suggested paths outlined in the ITC… [or] whether categorizing the income statement into operating versus non-operating or providing greater granularity of individual line items would provide any incremental decision-useful information to investors.“
Similarly, the Institute of Management Accountants stated that it “generally does not believe the Board should add a project on performance reporting and cash flows to its agenda.”
However, the CFA Institute, an association of financial analysts, in support of the performance reporting project, stated that, “Improving the presentation of financial statement line items has been a long-standing investor priority for the overall improvement of financial reporting information as it can help investors to better assess the performance, liquidity and financial condition of reporting entities.” The CFA Institute referenced its own earlier surveys and recommendations in support of improvements to performance reporting/financial statement presentation.
FASB states that the standard-setting issue relating to performance reporting which it has added to its agenda relates to elevating only one component of its broad-based research project on performance reporting: “disaggregation of performance reporting by function and nature.”
It is worth paying attention to this project as it develops, since there are so many moving parts.
The FASB states its new project on segment reporting will be limited in scope: improving the aggregation criteria and segment disclosures.
Further information about FASB’s agenda decision will be reported in its summary of tentative board decisions. See also our earlier post, New FASB projects to intersect with implementation of ‘Big 3’ standards.