Financial Statement Overhaul: An Analysis of the Implementation of the Joint FASB/IASB Proposal on Financial Statement Presentation

Open Access
Author:
Keasey, Elizabeth A.
Area of Honors:
Accounting
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Dan Givoly, Thesis Supervisor
  • Orie Edwin Barron, Honors Advisor
Keywords:
  • financial statement presentation
  • convergence of financial reporting standards
Abstract:
As part of the convergence toward a single set of financial statements, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are working on a project to develop a new standard for financial statement presentation. The proposed standard is intended to make financial statement presentation uniform for all companies. It is intended to enhance the comparability, understandability, and usefulness of financial statements to investors, creditors, and other external users. Significant changes in presentation include the classification of line items on the statement of financial position as part of the business activities or financing activities of the firm. These classifications are to be carried through to the statement of comprehensive income and the statement of cash flows enhancing the cohesiveness of the financial statements. Companies will be required to present a single statement of comprehensive income and will disaggregate revenue and expense items by function and nature. Instead of having a choice between the indirect and direct methods for preparing cash flow statements, the new proposal will require entities to use the direct method for presenting operating cash flows. Through analysis of the project materials made available by the FASB, consideration of research related to specific aspects of the proposal, and interviews with members of the business community affected by the proposal, this thesis draws a conclusion on the effectiveness of the proposed changes to financial statement presentation. The proposed changes will create advantages as well as disadvantages for users and preparers of financial statements. With increased transparency and disaggregation come lack of understandability and considerable expenditure of time and money. Though it is widely agreed that the proposed financial statement presentation model has the potential to provide external users of financial statements with more useful information, it is unclear why such a drastic change is needed, if a change is needed at all. The same decisions will most likely result from the use of the newly formatted financial statements; financial statements already provide enough information for users to make informed decisions. Adding more rules and changing the current format will make it hard for companies to communicate with the average investor. The benefits of implementing the new model will not outweigh the costs.