International Accounting Standards Board
To: From: Subject:
FASB and IASB Board and Joint International Group Members Financial Statement Presentation Team (Petrone 203-956-5329 and Gomez +44-207-246-6469) Summary of the September 15, 2006 Financial Statement Presentation Joint International Group Meeting Date: October 4, 2006
Cc:
FASB: Bielstein, Smith, MacDonald, Allen, T. Johnson, Bossio, Stoklosa, Polley, Carney, Gabriele, Financial Statement Presentation Project Team, FASB Intranet; IASB: Barker, Gomez, Hickey; GASB: Reese and Schermann
The audio of the full day’s discussion is available at www.fasb.org
Location: Topic: Millennium Gloucester Hotel, London Presentation and Display of Information on the Financial Statements Agenda Papers 1 – 9 9:00 a.m. to 4:30 p.m.
Basis for Discussion: Length of Discussion:
Attendance: Staff in charge of topics: Richard Barker, Denise Gomez-Soto, Nobu Kawanishi, and Kim Petrone Richard Barker, Denise Gomez-Soto, Liz Hickey, Nobu Kawanishi, Kim Petrone, and Naoyuki Suzuki Kathryn Cearns (Herbert Smith), Malcolm Cheetham (Novartis), Stephen Cooper (UBS Investment Bank), W Peter Day (Amcor Limited), Bo Eriksson (Stora Enso Oyj), Jacques de Greling (Ixis Securities), Bridget Gandy (Fitch Ratings Ltd), Ken Kelly (McCormick & Co), Chris Legge (Standard and Poors), Stuart MacDonald (Scottish Power), Hans-Joachim Pilz (SBFA Investment Research), Stephen Taylor (Deloitte Touche Tohmatsu), Takashi Yaekura (Hosei University), Hiroshi Yamada (Matsushita Electric Industrial Co Ltd), and Gilles Zancanaro (Bouygues) Greg Jonas (Moody’s Investors Service), Sara Kenny (International Finance Corporation), Guido Kerkhoff (Deutsche Telekom AG), Michael Krzus (Grant Thornton LLP), Elizabeth Mooney (Capital Strategy Research), and Walter Schuster (Stockholm School of Economics) George Batavick, Tom Linsmeier, and Donald Young G. Michael Crooch, Robert Herz, Leslie Seidman, and Edward Trott Tony Cope, Jan Engström, Warren McGregor, Tricia O’Malley, John Smith, and Tatsumi Yamada Mary Barth, Hans-Georg Bruns, Robert Garnett, Gilbert Gélard, Thomas Jones, James Leisenring, Sir David Tweedie Michael Dobbyn (Basel Committee), Francoise Flores (EFRAG), Jenifer Minke-Girard (IOSCO), and Sophie Baranger (IOSCO)
Staff at table:
JIG members present:
JIG members absent:
FASB members present: FASB members absent:
IASB members present:
IASB members absent:
Official observers present:
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Objective of Meeting: The objective of the September 15, 2006, Joint International Group (JIG) meeting was to discuss issues related to the FASB and IASB’s (the Boards) joint project on Financial Statement Presentation with members of the JIG to obtain their views on issues under consideration in Phase B of the Financial Statement Presentation project. Summary of Matters Discussed: 1. FASB and IASB members and staff met with members (including official observers) of the JIG to discuss the following topics: a. Agenda Paper 1, Working Principles and Working Format b. Agenda Paper 2, Financing Liabilities and Treasury Assets c. Agenda Paper 3, Strategic Investments d. Agenda Paper 4, Operating Assets and Liabilities and Liquidity Information e. Agenda Paper 5, Income Taxes f. Agenda Paper 6, Discontinued Operations g. Agenda Paper 7, Measurement of Assets and Liabilities h. Agenda Paper 8, Net Income, Other Comprehensive Income, and Recycling i. Agenda Paper 9, Disaggregation j. Oral Report, Phase A Comment Letters and Project’s Next Steps Working Principles and Working Format 2. Members of the JIG generally expressed support for cohesiveness being the governing working principle, but noted that application of that principle may be difficult for practical purposes as the basic financial statement working format is further developed. That is, JIG members believed that the cohesiveness working principle was a good starting point for developing a financial reporting framework, however, noted that the principle’s designation as “governing” may be challenged by the practicability of its implications. 3. A number of JIG members noted that the term cohesiveness does not translate well in many languages and therefore, should be reconsidered. One JIG member suggested replacing the term cohesiveness with the term linkage as that term is more widely understood and more easily translated.
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4. One JIG member mentioned that a statement of financial position that does not present total assets and total liabilities is innovative and noted that how the user community views this change is important. However, a number of other JIG members (both users and preparers) noted that this approach (separating business assets and liabilities from financing assets and liabilities on the statement of financial position rather than assets and liabilities) is not necessarily innovative, as this is the way in which the balance sheet is currently analyzed. One JIG member noted his reservation about not presenting total assets and total liabilities on the face of the statement of financial position and about offsetting certain operating liabilities with operating assets. One member noted that the breakdown of an entity’s business into business and financing may distort the true picture of the entity as a whole. Some JIG members noted that the proposed working format lends itself to improved segment reporting, as information about how and from what business unit an entity’s funding is generated would be more readily apparent. Financing Liabilities and Treasury Assets 5. In general, JIG members agreed that financing liabilities should include capital raising interest bearing liabilities incurred to fund an entity’s business. Members also generally agreed that these liabilities are long-term in nature. 6. Some JIG members expressed preference for a flexible, eyes of management approach for purposes of defining financing liabilities; others expressed a preference for a narrow, rulesbased approach. Other members expressed a preference for requiring certain items (such as third party interest bearing debentures) to be included in the financing section, while allowing flexibility in determining whether other items (such as pension obligations) should be included in financing. Some members indicated that whether an item is classified as business or treasury should depend on whether that item is managed as part of the treasury function or as part of the overall business. Most JIG members expressed interest in note disclosure, describing what is included in and excluded from the financing section and how that determination is made. 7. The user representatives of the JIG generally stated that pension obligations should be included in the financing section. In performing their analyses, users treat these obligations as part of an entity’s financing activities. The users generally were of the view that pensions are interchangeable with other sources of financing and should be treated as such. That is, an 4
entity has the option of borrowing from a third party to pay off any current pension obligation, making the pension obligation itself effectively a source of financing. 8. The preparer representatives of the JIG generally were of the opinion that pension obligations should be included in the business section. These JIG members stated that an entity should be allowed to exclude from financing items that are managed as part of an entity’s normal core operations. As such, pension obligations would be included in the business section rather than the financing section. 9. In general, JIG members expressed a preference for presenting treasury assets in the financing section. 10. A majority of JIG members agreed that cash and cash equivalents should be included in the treasury category. Members expressed a number of differing views on what, other than cash and cash equivalents, should be included in the treasury category. Some members noted that all items managed as part of an entity’s treasury function should be classified as treasury. Others noted that treasury assets should be defined based on the amount of liquidity risk associated with those assets. Some JIG members stated that the definition of treasury assets should be flexible so that management can classify items consistent with their intent. Similar to the definition of financing liabilities, flexibility in the definition would be accompanied with note disclosure explaining which assets are included in and excluded from the treasury category. One JIG member mentioned that, given a flexible definition, a certain level of comparability will be maintained within industries as companies cede to pressure from analysts to conform to industry standards. Other members suggested that no flexibility be allowed in the definition of treasury assets, so that comparability across entities would be maintained. Strategic Investments 11. JIG member views varied on whether a separate category in the business section (other than operating assets and liabilities) was needed. Some members expressed a preference for not presenting a separate “investments” category. These members stated that descriptive line items and note disclosure would suffice in describing the types of assets. Some of these members also stated that a breakdown of operating assets into their short and long-term components would provide insight as to the purpose they are serving within the entity. 5
12. Other JIG members stated their preference for a category other than operating in the business section. These members generally believed that certain investments that would be included in that category would not be defined as either treasury assets or operating assets. Those members believe that separating these investments into operating and “non-operating” components would assist users in identifying and evaluating these non-treasury and nonoperating type investments. 13. Regardless of whether the JIG members felt that a separate category possibly labeled “strategic investments” is warranted, a majority of the participants expressed disagreement with the proposed definition of strategic investments. Members stated that the definition was confusing and does not accurately describe investments considered to be strategic. Furthermore, some members stated that goodwill should not be classified as a strategic investment. Operating Assets and Liabilities and Liquidity Information 14. JIG members expressed mixed views as to whether short- and long-term assets and liabilities should be defined based on (1) the longer of the operating cycle or one year or (2) a strict one year approach. Those members advocating the longer of the operating cycle or one year notion believe that some flexibility must be allowed for entities that have an operating cycle longer than one year. In addition, they noted that the strict one year approach is arbitrary and does not provide useful information. Some preparers also noted that analysts are primarily concerned with working capital based on the operating cycle notion. 15. Those members advocating the strict one year approach stated that this method would provide comparable information. Further, they believe that the few entities that have an operating cycle longer than one year would be able to explain that situation in the notes to the financial statements. Based on previous SEC staff research, it was noted that the Agricultural Audit Guide mentions that some entities following that Guide have an operating cycle longer than one year. For the industries noted in ARB 43 as having an operating cycle longer than 12 months (tobacco, distillery, and lumber), it is not clear that public companies in those industries use an operating cycle longer than 12 months for financial reporting purposes. 16. JIG members did not object to, and one offered support for, using the shorter of the contractual maturity of the asset/liability or its expected realization/settlement in determining 6
which items are short- and long-term. One JIG member expressed preference for basing the one year approach on expected realization. No other JIG members expressed a preference. 17. JIG members expressed mixed views on what liquidity information and how that information should be presented in the notes to the financial statements. In general, members preferred disclosure that would present a primary categorization of assets and liabilities as either shortor long-term with additional maturity information provided on certain assets and liabilities. JIG members noted that the additional maturity information provided should focus on liabilities rather than assets. Some members expressed preference for presenting assets in order of liquidity in two sections—short-term and long-term, followed by a number for total assets. Others did not support that option, as not enough information was being provided. Some JIG members noted that providing a liquidity schedule that attempts to provide maturity information for each line item is impractical. Income Taxes 18. A majority of JIG members, both user and preparer representatives, expressed a preference for an approach in which income taxes would be presented separately and not allocated to the financial statement sections, categories, or subcategories. JIG members noted that
intraperiod tax allocation is too arbitrary and complex to be useful. Members also noted that sufficient note disclosure would be needed to provide information relating to the effective tax rate drivers of an entity. This disclosure would provide information regarding the
sustainability of an entity’s effective tax rate. 19. Some JIG members expressed a preference for allocating income taxes to the financial statement sections and categories. Those members noted that, although arbitrary, intraperiod tax allocation does provide useful information. The members preferring to retain an
allocation of income taxes offered, as an alternative, only allocating income taxes for those items for which the tax effects are significant, objectively calculated, or both.
Discontinued Operations 20. In general, members of the JIG expressed a preference for presenting discontinued operations as a separate category in the business section. These members noted that a discontinued operation remains part of the business of an entity, and is managed as such, until the 7
component is actually disposed of.
Accordingly, these members noted that presenting
discontinued operations in a separate section would not be useful in predicting future performance and cash flows. 21. A number of JIG members also noted that sufficient note disclosure could be presented regarding discontinued operations and that no separation or identification of those operations on the face of the financial statements would be necessary. These members noted that it is not clear whether a component that is considered discontinued is sufficiently different from the ongoing activities of an entity to be presented in a separate section or category on the face of the financial statements. Supporters of this view also noted that as long as sufficient information is provided, either on the face of the financial statements or in the notes, users will be able to make adjustments as they see appropriate. It was noted that academic research has shown that information in the notes is less effective than information that is recognized on the face of the financial statements. 22. Some JIG members stated that discontinued operations should be presented as a separate section (along with the business and financing sections). Those members expressed the opinion that a component of an entity that has been or is in the process of being discontinued represents a different type of cash flow than the other cash flows generated by the entity. That is, cash flows arising from a discontinued operation are not likely to recur in the future and therefore are not useful in predicting future cash flows of the entity. Measurement of Assets and Liabilities 23. A majority of JIG members noted that the information currently required to be disclosed (for example, in the accounting policy note) adequately describes how or on what attribute assets and liabilities are measured. One member mentioned that additional information should be disclosed when multiple measurement attributes are used in aggregating a single line item on the face of the financial statements. That member suggested that all financial statement line items be measured using only one measurement attribute or that those line items that contain more than one measurement attribute be further disaggregated in the notes. JIG members were also in general agreement that this information can be handled on a standard-bystandard basis, and that an overarching principle requiring a discussion of measurement uncertainty and subjectivity of assumptions would be useful.
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24. Many JIG members expressed concern over identifying changes in assets and liabilities due to remeasurements and those not due to remeasurements. Generally, those members believe that the cost of providing this additional information (which can be complex) will outweigh the additional benefits. JIG members expressed preference for information that provides insight as to the sustainability or realizability of remeasurements. That is, whether a
remeasurement is expected to recur in the future or whether the value of the remeasurement is expected to be realized in the near-term is more valuable than simply whether the change in an asset or liability is due to remeasurement or not. JIG members sharing this view generally agreed that information regarding remeasurement could be provided as additional note disclosure rather than as a categorization scheme on the face of the financial statements. 25. Other JIG members noted separating changes in assets and liabilities due to remeasurements from those not due to remeasurements is useful and that this information should be presented on the face of the financial statements. These members believe that separating changes in assets and liabilities based on whether or not they are due to remeasurements provides additional predictive value. Net Income, Other Comprehensive Income, and Recycling 26. JIG members expressed mixed views regarding the necessity and appropriateness of other comprehensive income (OCI) items and the notion of recycling. Some members supported the notion of OCI items, stating their belief that items recognized initially in OCI (according to current standards) do not represent the current performance of an entity and, as such, should not be recognized in current earnings. Other members stated that all changes in assets and liabilities, other than those arising from transactions with owners in their capacity as owners, do in fact represent the performance, and more accurately, the overall change in wealth of an entity and its shareholders, and therefore, all of those changes should be recognized in current earnings and the concept of OCI should be eliminated. This group of members stated that, if necessary, management could disclose in the notes those items that are not representative of the current performance of an entity. Still other members expressed a preference for eliminating some OCI items and maintaining others. Specifically, a number of JIG members stated that OCI items arising from cash flow hedges and foreign currency translation are the only OCI items that are warranted and that OCI items arising from available-for-sale securities and pension obligations are inappropriate for recognition in OCI. 9
27. Some JIG members expressed a belief that if OCI items were to remain, a conceptual basis for recognizing those items separate from current earnings should be developed. For
example, those members stating that the only items that should be recognized in OCI are those arising from cash flow hedges and foreign currency translation considered what, conceptually, distinguishes the gains and losses arising from those items from the gains and losses arising from available-for-sale securities and minimum pension obligations. Disaggregation 28. In general, JIG members agreed that information should be presented by function on the face of the statement of comprehensive income with further disaggregation or analysis of those amounts by nature in the notes to the financial statements. Some JIG members noted that presentation by nature on the face of the statement is most useful, particularly in the case of consolidated conglomerates. In those instances, operating results from a range of industries are rolled into a single statement of comprehensive income and then presented by the controlling entity’s functions. Other members preferred a presentation based solely on
function, as that presentation allows the best insight into an entity’s operating performance by showing operating margins and other key metrics monitored by management. Some JIG members stated that information presented by function is most useful in segment reporting disclosures. 29. Some JIG members stated that standard setters should provide specific guidance on a limited number of items that should be disclosed by nature and should allow market influence to drive how much other “by nature” information is presented. Some members stated that presentation by nature allows for more comparability than presentation by function, as the latter is dependent on how an entity defines its functions (for example, what is included in R&D or administrative costs). It was noted that there are not common definitions of
functions even within the same industry. Phase A and Project Plan 30. The staff provided a summary of the IASB’s plans related to its Phase A Exposure Draft and gave an overview of the plans for issuing an initial discussion document on Phase B.
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