New Ways to Present a Financial Statement
by Sue Harding, European Chief Accountant, Standard & Poor’s Rating Services
Following the recent proposals published by the International and U.S. Financial Accounting Standards Boards for the presentation of financial statements, Sue Harding, European Chief Accountant for Standard & Poor’s Ratings Services, discusses how helpful the proposed changes would be for credit analysis.
Having debated this issue for a number of years, the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have now published a joint discussion paper entitled ‘Preliminary Views on Financial Statement Presentation’. The discussion paper (DP) advocates a radical change to the decades-old presentation of basic financial statements – the balance sheet and the income and cash flow statements - without changing any of the underlying accounting requirements. However, in the opinion of Standard & Poor’s Ratings Services, if the proposals described in the DP are introduced, the implications for the analysis of financial statement information would be no less significant. The question S&P would raise, therefore, is whether simple enhancements could be made to the current format of company financial statements that might better resolve concerns than a complete replacement of the format.
The proposal from the two boards aims to cohesively link classification of items across the balance sheet, income statement and statement of cash flows. This entails a complete redesign of the three statements so that all assets, liabilities, earnings and cash items are categorised as relating to either operating, investing, financing, income tax, or discontinued operations.
On the cash flow statement, the boards also propose to replace the ‘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 a method that shows all cash flow amounts directly, listing amounts paid and received on a line-by-line basis that corresponds with lines on the income statement.
We believe it is crucial for the boards to examine how financial information is presented and as such Standard & Poor’s welcomes the wide debate that this DP has triggered on this important, far-ranging topic. Our firm belief is that in order to enable analysts to better estimate how a company may perform in the future, reporting should both explain the past well and provide a basis for understanding how the company responded to existing conditions.