financial statements

Earlier today, the FASB released a proposal on financial statement presentation. The proposal – in the form of an amendment to FASB’s Conceptual Framework – is likely to have a significant impact on financial reporting going forward for two reasons: (1) the proposal is very broad in scope, and (2) although Concepts Statements are not ‘authoritative,’ they form the basis upon which FASB is to develop accounting standards. Of note, FASB seeks comment on a proposed set of factors for determining when line items are necessary in the financial statements, and whether contracts should be aggregated or disaggregated within those line items.

Broad Scope Addressing Presentation

FASB described the proposal as being “designed to provide a foundation for future standards to enhance financial statement users’ abilities to assess prospects for future cash flows by addressing how to:

  • Group individual recognized items into line items and subtotals, and
  • Clarify the relationships among assets, liabilities, and equity and the effects of related changes of those assets and liabilities on comprehensive income and cash flows.”

Factors to Consider for Line Items

Of note, in addition to seeking comment on all aspects of the proposal, FASB specified it seeks comment on a set of proposed factors for determining when a line item should be presented, including whether those factors would be appropriate in considering when to present contracts individually, or in an aggregated fashion. These factors, which appear in paragraph 37 of the proposal, are:

  1. “The event that caused an item to be recognized, for example, a transaction, a change in circumstances or conditions, an accounting adjustment like systematic allocation, or an accounting change
  2. The activity with which an item is associated
  3. Similarities and differences in the frequency with which similar components of comprehensive income are expected to result in similar amounts to be recognized in the future
  4. The expected time until realization or settlement of an asset or liability
  5. The expected form (for example, cash or shares) of realization or settlement of an asset, liability, or in certain circumstances an equity instrument
  6. The types of changes in economic conditions that can affect the cash flows related either to an existing asset or liability or to similar revenues, expenses, and gains or losses in the future
  7. Similarities and differences in measurement methods”

The comment deadline on FASB’s proposal is November 9, 2016. For further information, see the proposal, entitled: Proposed Statement of Financial Accounting Concepts – Concepts Statement 8: Conceptual Framework for Financial Reporting — Chapter 7: Presentation , and the related FASB in Focus summary issued by FASB. The proposal on financial statement presentation issued today follows last week’s release by FASB of an Invitation to Comment: Agenda Consultation, seeking constituent (investors, creditors, preparers, auditors, analysts, and others) input into what items should be on, and prioritized within, the FASB’s standard-setting agenda.  In related news, see How CEOs, CFOs Can Communicate Financial Reporting More Effectively .

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