Statement of Cash Flows to be Narrowly Reorganized for Financial Institutions
FASB has voted to add a rulemaking project to its agenda to reorganize the statement of cash flows to address items that are core to the operations of banks and other financial institutions, agreeing to keep the project narrow—for now. The effort will revise ASC 230, “Statement of Cash Flows,” so that it does a better job of telling a bank’s story, according to the discussions. “When you think about it, we don’t require a single format for balance sheets, we don’t make financial institutions do classified balance sheets, we don’t have a single format for income statements, but we’ve stuck with this over 30 years—a single format to the statement of cash flows as if ‘that one there’s no variance by industry,’ and I think at the end of the day there is,” FASB Chair Richard Jones said. “And I think we’ve heard that pretty loudly from our customers who say they don’t use our product in certain industries and so I think it’s incumbent upon us to see if there’s improvements we can make to the statement of cash flows.” The statement of cash flows has three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. At the crux of the matter is the fact that financial statement preparers and investors have said that many of the activities that are classified as “investing” or ”financing” for a nonfinancial institution are viewed as “operating activities” for a financial institution—such as accepting deposits and making loans. This in turn reduces the usefulness of the statement to users who study financial institutions. In general, the planned changes would fix those issues in a manner that is operable at low cost, FASB staff said.
Investors Suggest FASB Develop ‘Best Practices’ Proposal on Rules for Key Performance Indicators
A panel of investment analysts suggested that FASB develop a “best practices” proposal to create consistency around key performance indicators (KPI)—metrics that show how well a business met its goals in a reporting period. The proposal could include a starting point minimum requirement for firms to comply with or be required to explain “the number adjustments that deviate from the FASB’s best practice or even from peers,” the Investor Advisory Committee (IAC) told the board on November 2. The guidance would help to standardize key items investors typically utilize to evaluate how a business is faring, analysts said, adding that it could be tough for the board as views tend to differ on the subject. “We’re looking for a starting point in metrics that can be used across all industries, and I think most of the team agreed things like EBITDA, free cash flows” are generally used but would be hard to define, said Ronald Graziano on behalf of the group. Other flagged KPIs included: same store sales, organic sales, and foreign exchange (FX). Industry-specific metrics would be challenging to standardize, but the board could put together a starting list, utilizing artificial intelligence (AI) to compile certain data, the discussions indicated. “What are the most relevant KPIs per industry? This could be difficult but this is something that could be pushed back on companies where ‘what does the chief decision officer/person’ use to understand the performance of the company?’” Graziano said. “We could also use things like AI and look at hundreds of, thousands of, conference calls, press releases, what are the most commonly disclosed KPIs across the board, as well as by sector, and that could be a starting list too.” The IAC is a standing committee composed of 10 senior analysts from different companies who advise FASB from the perspective of users of financial statements. The panel meets with the board twice a year. Most of the discussions were privately held, taking place to enable FASB to better gauge whether to advance the topic from its current research stage to a rulemaking project on its technical agenda. Research started last year. Next, the full board will decide at a future meeting whether it is feasible to develop GAAP in this area.
IFRS Foundation Proposes Upgrades to IFRS Accounting Taxonomy 2023
The IFRS Foundation, the trustee body with oversight responsibility of the IASB, said it is seeking public input about proposed upgrades to IFRS Accounting Taxonomy 2023. The organization issued “IFRS Accounting Taxonomy 2023—Proposed Update 2 Common Practice for Financial Instruments, General Improvements and Technology Update,” which reflects the following:
- Common reporting practice and general improvements related to information that entities commonly present or disclose in financial statements: for example: (a) label changes to clarify the accounting meaning of an element, to “help an entity find the right element and avoid making tagging errors or creating unnecessary extensions;” and (b) an enhanced data model to support more consistent tagging or to better reflect the presentation and disclosure requirements in IFRSs in the taxonomy.
- Changes to the taxonomy’s technology (i.e., features): proposed to inform (and seek feedback from) developers and maintainers of Extensible Business Reporting Language (XBRL) software (such as XBRL processors, report creators or review and consumption tools) about technology changes that might affect such software.
- Feedback on the taxonomy from users and preparers of digital financial reports.
- The results of an empirical review of taxonomy elements (extensions) that entities created and used in their filings.
Respondents are asked to weigh in on 12 questions, including whether they agree with the proposed focus “on the primary financial statements and a subsequent update focusing on commonly reported financial instrument concepts disclosed in the notes.” The comment period ends on January 5, 2024.