FASB Plans Huge Changes for Financial Statements
Currently FASB is looking at ways in which the accounting process can be changed in order to address investor complaints, according to recent article at CFO.com by Tim Reason and Marie Leone. Thomas Linsmeier of the FASB has said “this particular project will change the face of financial statements in a very, significant way.”
The reason that the major three financial statements are being looked at is that investors have been complaining that items are not linked across the three statements. Those who use the financial statements look at value creation separately from how value creation is funded. “So we want to separate the creating activities from the financing activities,” explained FASB’s Kim Petrone.
A financial statement overhaul will change the three major financial statements dramatically. The Balance Sheet, Income Statement, and Cash Flow statement will be divided into two major sections: Business and Finance. The Business section includes two sub-categories, operating and investing. Operating will include the primary or core revenue and expense generating activities. While the investing category will include the activities that generate returns, and activities that fund the company’s business activity will be in the Finance section.
The management of each company will classify items as assets or liabilities based on their use, this may cause items to be classified differently by each company. With these changes the balance sheet will no longer balance the same way we have been accustomed to in the past.
Right now companies use either the direct or indirect methods in preparing their cash-flow statements. Most companies use the indirect method because it has been in use by their companies in previous years. Now the companies will need to use the direct method. Greg Jonas, Moody’s managing director, and Joe Joseph of Putnam Investments both believe that the direct method better predicts future cash flows.
One major detractor of these changes is Peter Bridgman of PepsiCo. He believes that the cost for companies to switch outweighs the value that will be created by using the direct method. Peter also believes that if there were any value in switching to the direct methods, companies would have already done so.
FASB is conducting field research to see if using the direct method will be too costly to implement, and they are also encouraging companies to weigh in with thoughts and opinions on these changes.
Discussion Questions for Comment Section:
- How do you believe changing accounting standards will affect smaller companies from a cost standpoint?
- Do you think that allowing the management of a company to decide whether or not an item is an asset or a liability will lead to fraudulent behavior?
Tags: Accounting, fasb, financial statements
