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The New FASB Format: Clear or Complicated?

The talk about town seems to be revolving around the upcoming public draft release of a new financial statement format due to arrive in the second quarter of 2008. Presented by the Financial Accounting Standards Board, the reform is intended to change both the surface and the content of financial statements.

The most glaring change is the intentional elimination of net income. There is a big push among some board members to eliminate net income by design and promote business income (income from operations) as the preferred basis for investment metrics.  CFO Magazine listed several other proposed changes including: “reconfiguring the balance sheet and the income statement to follow the three categories of the cash-flow statement, requiring companies to report cash flows with the little-used direct method; and introducing a new reconciliation schedule that would highlight fair-value changes.” Additionally, companies would be required to include expanded segment disclosure.

Reception of FASB’s new format is mixed. The financial data is presented.  However, others suggest that the difference lies mostly in the presentation of the information because “companies would mostly be reporting data they already collect.” A poll from CFO Magazine showed that nearly 70 percent of those finance chiefs polled are not in favor of eliminating net income as an item.

Although I recognize the cost and time that can be associated with this sort of change, I tend to agree with those top finance chiefs.  However, from an investor standpoint, I would find it very useful to have a new hybrid financial statement that emphasized business income (income from operations) as the preferred basis for investment metrics.  This would give a much clearer picture of how well a company did in operating their core business.  However, I’m not in favor of eliminating net income completely.  There is definitely a place and use for it.  The problem is that the average person can’t read a financial statement and doesn’t know what net income really includes and doesn’t include.  At the end of the day, I think the FASB should subscribe to the “KISS” method-Keep It Simple Stupid!  The rules can be so convoluted.  Let’s simplify and focus on intention.  As top public accountants, you all have extensive experience with financial statements. What are your thoughts?

Posted by David Flax, CPA on March 19, 2008 • Email to a Friend

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