A financial statement plays an important role in understanding the financial position of any business entity for profit and not for profit business types. It is the major source of delivering financial information of the company to those who are linked with it directly or indirectly. Reasons to Undertake this Project:
Because of too many different alternatives of presenting financial statements, the information in the financial statements is extremely comprehensive and erratically presented thus making it difficult to understand the relationship between financial statement and financial results of the company, IASB and FASB start a joint project on financial statement presentation to rectify the user apprehension. There are three objective of this joint project for presenting financial statement.
Those objectives shows that the information presented in the financial statement are in a manner that provides a clear financial picture of an organization’s activity in an organized way, which means that every item of financial statement is related with each other and there is no confusion in understanding their relationship. Another objective is to present the financial statement’s components in a disaggregate form to make it easier for the users to calculate future cash flows easily.
The third objective is to provide the organization’s liquidity and flexibility information in the financial statement to help users to analyze its ability of investment in opportunities and response to threats. Changes considered by FASB: The FASB had proposed a format of financial statement. This format requires and organization to present its business activity information and financial activity information separately from each other. That means for business activities, information of operating and investing activities should present separately.
However, financing activities should also be presented separately as debt financing and equity financing. Information about discontinued operations and continued operations should also present separately. Also it is important to note that FASB wants to separate the information about income taxes from all other information. Changes in Statement of Financial Position: Today statement of financial position is divided into assets, liabilities and equity.
Board suggested that it would be divided into operating, investing and financing activities. Assets and liabilities would present in business and financing activities with the separation of business and financing activities in comprehensive income and cash flow make it easier for user to calculate some key financial ratios to determine the entity’s financial position. Changes in Statement of Comprehensive Income: The board’s model removes the presentation of income and expenses in an income statement.
The board’s proposed model needs to present a single statement of comprehensive income with other income items in a separate section. This includes a total of profit or loss or net income and a total of other income for the period. These additional subtotals will allow users to analyze the changes of operating assets and liabilities. Another important change to be considered is that board’s proposed model disaggregates all line items to enhance their usefulness. Statement of Cash Flows:
The FASB’s proposed model demanded to present separately the main components of cash receipts and payments for operating activities such as cash collected from sales and paid to purchase inventories. FASB believes that the presentation of reconciled profit or loss or net income to net operating cash flows is not consistent. Board also believes that disaggregation of line items help users to relate operating assets and liabilities and operating income and expenses to operating cash receipts and payments.
New Reconciliation Schedule: The new reconciliation schedule reconciles cash flows to comprehensive income. This reconciliation disaggregates income into cash, accrual other than remeasurement and remeasurement components. FASB believes that this new schedule help users analyzing those components separately and help them in predicting future cash flows easily. References FASB, “Preliminary view on Financial Statement Presentation: Financial Accounting Series”, File reference No. 1630-100 (October 16, 2008)