Accounting Issues

According to the authors of "The Matter of Financial Statement Presentation," Brian W. Carpenter and Daniel P. Mahoney, US financial reporting will undergo significant changes on its transitioning from US GAAP to International Financial Reporting Standards. Therefore, the article discusses the proposed changes by the IASB and FASB's posted "Staff Draft of an Exposure Draft on Financial Statement Presentation." The reason why the boards address the financial statement presentation is that financial statements are in "the heart" of financial reporting and the main communication method between the companies and the users outside the company. Since there are too many permitted alternatives of financial statement presentation, which have created difficulties in comparing information between two sets of financial statements, the standard-setting organizations decided to create a common global format for financial statements not only to improve the understandability between companies and their analysts, but also to promote comparability with the financial statements of other entities. First, The FASB sets a "complete set of financial statements" that must be presented by an entity as shown in Exhibit 1(Carpenter and Mahoney 15). In the process, financial statement presentation will be standardized at a global level, driven by two "core principles": cohesiveness and disaggregation - to help the user to understand the information presented in financial statements (Carpenter and Mahoney 15). As the article points out, cohesiveness means that "the relationship between items in the financial statements is clear and that an entity's financial statements complement each other as much as possible" (Carpenter and Mahoney 15). Disaggregation means the separation of resources "by the activity in which they are used and by their economic characteristics" (Carpenter and Mahoney 15). For example, as a result of applying these two principles, the statement of financial position, comprehensive income statement, and statement of cash flows would have a common structure, and including applicable sections (business, financing, and income tax), categories (operating, investing, debt, equity), and an "operating finance subcategory" as shown in Exhibit 2 (Carpenter and Mahoney 16). Besides, IFRS calls for the mandatory use of the direct method of the statement of cash flows to promote comparability of financial information, which makes sense, since the permission to use either the indirect or the direct method has created difficulty in comparing financial information cross entities and raised concerns about its usefulness. However, a reconciliation of net income to net cash still would be required. Moreover, requiring an entity to present comparative information for the current and preceding reporting periods will enhance consistency of financial reporting.

It is critical for the IASB and FASB to know whether the proposed changes are helpful to the analysts to better utilize the financial statements. Moreover,

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