Improving the conceptual framework, but where’s the disaggregation?

As we discussed here, the IASB has published for public consultation proposals to improve the Conceptual Framework for Financial Reporting, with comments to be received by October 26, 2015.

A couple of the IASB members dissented on various points, some of which I covered in previous posts. Here’s another one:

  • “Mr Finnegan believes the Exposure Draft’s discussion of principles for presentation and disclosure should be changed as follows to address two critical areas of financial reporting that require improvement:
  1. disaggregation—Mr Finnegan believes that the Conceptual Framework should discuss the usefulness of financial information from the perspective of disaggregated information, not aggregated information. The financial statements issued by most entities report information that summarizes a large volume of detail…such summarized information cannot provide the essential information necessary for an investor’s understanding of financial performance (or financial position). Moreover, a significant amount of effort is expended by investors when analysing and using financial statements to identify adjust and possibly remove amounts of income and expenses from reported financial performance to estimate ‘sustainable’ or ‘normalized’ performance. Mr Finnegan believes that, to address investors’ needs, the Conceptual Framework should emphasize the importance of providing information in a way that highlights the effects of different economic attributes, different measurement bases and different trends. In particular, the Conceptual Framework should establish principles that would result in Standards specifying appropriate levels of disaggregation, with clear links between amounts recognised in the statements of financial position and financial performance and amounts presented and disclosed elsewhere in the financial statements.
  2. relationships between assets, liabilities, income and expenses with cash flows—Mr Finnegan believes that the disclosure principles in the Conceptual Framework should set an objective for all Standards to include a requirement for the disclosure of entity-specific information that shows or explains changes in assets and liabilities attributable to cash and non-cash changes for all assets and liabilities presented in the statement of financial position. One way of achieving this disclosure objective would be to provide reconciliations for all assets and liabilities, but the simple disclosure of cash and non-cash changes could also satisfy the objective. This would address the frequently heard call for improving the quality (or relevance) of disclosures in financial statements.”

This may take you back about six years, to the FASB and IASB’s “preliminary views” exposure draft on the joint financial statement presentation project they were conducting at the time, and in particular on the FASB staff’s ten-page tabular summary of their “tentative decisions” as of December 2009. This mused on requiring an analysis of the changes in balances of all significant asset and liability line items, with each line item analysis distinguishing between changes from cash inflows and outflows; from noncash transactions that are that are repetitive and routine in nature (for example, credit sales, wages, material purchases); from noncash transactions or events that are non-routine or non-repetitive in nature (for example, acquiring or disposing of a business); from accounting allocations (for example, depreciation); and so forth.

Writing at the time in his Accounting Onion blog, Tom Selling said this:

  • “This is pretty big news, AND IT COULD BE HUGE! …every balance sheet line item should be “rolled forward”, and each line item in the ‘flow financial statements’ (e.g., income statement, statement of cash flows, statement of changes in shareholders’ equity) can be found to be the sum of line items in those balance sheet item roll forwards. That’s what I mean by HUGE.
  • …With XBRL around the corner, analysts will most certainly be competing with each other to create the sexiest non-GAAP measures of financial performance they can by plucking a little tagged something from here, and combining it with a little tagged something from there…To pick just two of hundreds of possibilities an analyst should be able to identify each component of a foreign currency translation adjustment, and decide whether to accept it as presented, or to make one’s own pro forma adjustments. Or, if you don’t like capitalized interest, an analyst should be able to reverse every stinking dollar of it.
  • “…A more subtle, but equally important reason for comprehensive roll forwards is that it will be a huge enhancement to external controls over financial reporting (and along with that, something for an auditor to really audit). Much has been said and written about the importance of internal controls over financial reporting, but a financial regulator’s basic responsibility is not merely to mandate internal controls, but to impose substantive external controls. Any control expert should tell you that if you can’t roll forward a balance sheet account, you can’t hardly test its accuracy. If everyone should be doing their roll forwards internally, and they are quite obviously an efficient form of disclosure, then what is keeping regulators from mandating them?”

He concluded: “by comparison to every other concept or objective offered up by the Boards during the past eight years and counting of this project, everything else is weak tea.” Well, needless to say, the strong tea never came close to getting brewed, and nothing ever came of these ideas. In his blog nowadays, Selling seldom finds a reason to express such infectious excitement; neither, for that matter, does anyone else involved in IFRS. It was nice to be reminded of it by Finnegan’s dissent, even if it only seems to confirm that our socks will be staying on for the foreseeable future…

The opinions expressed are solely those of the author

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