Accounting Horizons American Accounting Association Vol. 24, No. 2 DOI: 10.2308/acch.2010.24.2.279 2010 pp. 279–296 COMMENTARY The American Accounting Association’s Financial Reporting Policy Committee’s Response to the PreliminaryViews on Financial Statement Presentation The Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association Mark Bradshaw, Carolyn Callahan, Jack Ciesielski, Elizabeth Gordon, Mark Kohlbeck, Leslie Hodder, Patrick E. Hopkins, Robert Laux, Sarah McVay, Thomas Stober, Phillip Stocken, and Teri Lombardi Yohn SYNOPSIS: The Financial Accounting Standards Board and the International Account- ing Standards Board � hereafter, the Boards � issued the discussion paper Preliminary Views on Financial Statement Presentation in late 2008. The Boards propose to signifi- cantly reconfigure the presentation of financial statements to offer parallel statements with standardized partitions of each financial statement into five categories: business activities, financing activities, income taxes, discontinued operations, and equity. The allocation of transactions within these partitions will depend crucially on management’s assessment of each transaction � i.e., the management approach � . In this paper we comment on the proposal, with particular emphasis on empirical evidence and relevant theories from academic research. We highlight benefits of the proposed changes as well as some possible concerns. We conclude that the objective of providing a cohesive picture of activities through a uniform standardization of each financial statement by activity is desirable, but the proposed criteria for how activities are categorized results in potentially aberrant or confusing outcomes. Thus, any dissatisfaction with the current financial statement format may be replaced with other criticisms. Finally, the current proposal relies on the effectiveness of the management approach, which can only be successful if managers embrace the proposed structure. Keywords: financial statement presentation; financial reporting; Financial Accounting Standards Board; International Accounting Standards Board . This article is based on the comment letter written by the Financial Reporting Policy Committee of the Financial Account- ing and Reporting Section of the American Accounting Association, which is charged with responding to discussion papers and exposure drafts related to financial accounting and reporting issues. We appreciate the constructive comments received from two anonymous reviewers and Kathy Petroni � editor � . Submitted: April 2009 Accepted: October 2009 Published Online: June 2010 Corresponding author: Mark Bradshaw Email: mark.bradshaw@bc.edu 279
280 AAA FRPC INTRODUCTION T he Financial Reporting Policy Committee � hereafter, the Committee or AAA FRPC � of the Financial Accounting and Reporting Section of the American Accounting Association is charged with responding to discussion papers and exposure drafts related to financial ac- counting and reporting issues. The Committee is pleased to respond to an invitation to comment on Preliminary Views on Financial Statement Presentation � hereafter, the Preliminary Views � issued by the Financial Accounting Standards Board and the International Accounting Standards Board � hereafter, the Boards � on October 16, 2008. In the Preliminary Views , the Boards propose to reconfigure the presentation of financial statements to offer parallel statements with standardized partitions of each statement into five categories: business activities, financing activities, income taxes, discontinued operations, and equity. This change, for example, would permit a user to follow these assets and liabilities through each of the statements � e.g., cash flows to purchase an asset and revenue from the sale of the asset � . The Boards intend for the allocation of transactions within these partitions to be based on management’s assessment of each transaction, in contrast to the current financial reporting formats that provide limited alternative categorizations for most transactions. Additionally, the Boards intend for the statement of cash flows to be presented on a direct method, rather than the indirect method currently favored by the majority of preparers. Finally, a reconciliation disclosure would be required that links each line item from the statement of comprehensive income to the statement of cash flows. See Exhibits 1 , 2 , 3 , and 4 for a mock-up of the statement of financial position, statement of comprehensive income, statement of cash flows, and reconciliation schedule for ToolCo, a sample company provided in the Preliminary Views . 1 The Boards invited comments for a number of specific questions regarding their proposed changes, such as whether the management approach � where managers use their knowledge of each transaction to appropriately classify said transaction � would improve the usefulness of the financial statements. The purpose of this paper is to summarize the Committee’s comments on the Prelimi- nary Views , with particular emphasis on empirical evidence and relevant theories. The Boards’ goal is to improve the usefulness of the information provided in an entity’s financial statements to help users make decisions in their capacity as capital providers. 2 The Boards enumerate three objectives of the proposal: � 1 � Financial statements provide a cohesive financial picture of activities; � 2 � Information is disaggregated to assist in the prediction of future cash flows; and � 3 � Financial statements help users assess a firm’s liquidity and financial flexibility. The Boards describe “cohesive” financial statements as those that make relations in line items across financial statements clear, with the result being complementary information across each statement. We agree that the objective of providing a cohesive picture of activities through a standardization of activity/function/nature categories � i.e., business, financing, income taxes, dis- continued operations, and equity � is desirable, but the rigidity of this restriction results in poten- tially aberrant or confusing outcomes, discussed below � e.g., treatment of certain cash and tax items, segregation of equity itself � . The objective of disaggregating financial information also has the potential to improve investors’ and creditors’ judgments and decisions. However, disaggrega- tion can enhance the decision usefulness of financial information only if the managerial approach 1 Permission was granted by the Financial Accounting Foundation � FAF � to reproduce the proposed ToolCo financial statements from the FASB’s Discussion Paper, Preliminary Views on Financial Statement Presentation . 2 The Board acknowledges that other users might potentially benefit, but the emphasis is clearly on users that provide capital. Accounting Horizons June 2010 American Accounting Association
Preliminary Views on Financial Statement Presentation 281 EXHIBIT 1 Sample Proposed Format for Statement of Financial Position (A larger version of this exhibit is available online.) Accounting Horizons June 2010 American Accounting Association
282 AAA FRPC EXHIBIT 2 Sample Proposed Format for the Statement of Comprehensive Income (A larger version of this exhibit is available online.) Accounting Horizons June 2010 American Accounting Association
Preliminary Views on Financial Statement Presentation 283 EXHIBIT 3 Sample Proposed Format for the Statement of Cash Flows (A larger version of this exhibit is available online.) Accounting Horizons June 2010 American Accounting Association
284 AAA FRPC EXHIBIT 4 Sample Proposed Format for the Reconciliation Schedule Linking the Statement of Comprehensive Income to the Statement of Cash Flows (A larger version of this exhibit is available online.) Accounting Horizons June 2010 American Accounting Association
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