Accounting
S&P question financial statement changes |
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| Accounting | |
| Written by Sue Harding, Managing Director and Senior Accounting Specialist, Standard & Poor’s Ratings Services | |
| Monday, 09 November 2009 | |
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Standard & Poor’s ask questions of the proposed new revolutionary changes to the format of financial statements.
The joint discussion paper (DP) entitled, ‘Preliminary Views on Financial Statement Presentation’, published by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), proposes a revolutionary change to the format of financial statements without changing their underlying accounting requirements. The two Boards propose a complete redesign of the balance sheet so that all assets and liabilities are categorised as relating to one of operating, investing, financing, income tax, or discontinued operations. Furthermore, under the proposals, the income statement and the statement of cash flows would show earnings and cash items classified using these same categories corresponding to the assets or liabilities they relate to, thereby cohesively linking classification of items across the three statements. The DP also proposes to replace the cash flow statement presentation that currently uses an “indirect method” derivation of cash flows from operations - showing adjustments to an earnings measure (such as net income or operating income) needed to derive operating cash flows - with one that shows all cash flow amounts directly, listing amounts paid and received on a line-by-line basis that coincides with lines on the income statement. While S&P welcomes the wide debate that the DP has instigated, we believe it is critical for the Boards to revisit the manner in which financial information is delivered to users, to both explain historical performance and how the company responded to existing conditions, and provide information that is useful to analysts in better estimating how it may perform in the future. While the DP proposes many major changes, we are not convinced that it does as much as it could to address the issues that are relevant to our credit analysis. Indeed, the question S&P asks is whether a complete replacement of the format of company financial statements is necessary, when enhancements could be made to the existing format that might better resolve current concerns. Analytical difficultiesThe DP intends, at least in part, to respond to requests for greater transparency of financial information by the investment and analytical community. Indeed, there are many ways that companies can communicate financial statement information to investors and analysts. In our view, the financial statements and footnotes need to be considered as a package, rather than individually, and therefore the boards should focus on identifying an optimal package of financial statement information that improves the quality of information and enables better analytical assessment. We have significant concerns over current disclosure that can for some companies be ambiguous and disconnected. These are concerns that we feel could be addressed by a basic disclosure framework that requires clear explanation of what the company's underlying transactions are, and links this to how they have been accounted for; what the related amounts in the various financial statements are and information on estimation and sensitivities to future changes. Next stepsWe understand that the Boards are considering a range of approaches, including steps we have advocated to retain and improve the indirect derivation of operating cash flows and to add certain supplemental reconciliations of asset and liability balances. The current project plan calls for an Exposure Draft to be issued in April 2010, and a final standard published in June 2011. In the meantime, we continue to monitor the progress of this important project and participate in the ongoing discussion with the boards, issuers, investors, and other interested parties.
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