Then, in 2004, the Financial Accounting Standards Board and International Accounting Standards Board embarked upon a joint project to address the issue.

Financial Statement Presentation, one of the seven IASB-FASB Memo of Understanding (MOU) projects to be jointly completed by 2011, is based on three objectives. These objectives state that information should be presented in the financial statements in a manner that:

• Portrays a cohesive financial picture of an entity's activities;
• Disaggregates information so that it is useful in predicting an entity's future cash flows; and
• Helps users assess an entity's liquidity and financial flexibility.

The two boards believe that a common format for presentation based on these objectives will improve communication between users and preparers of financial statements.

With the assistance of a joint working group (JIG) - of preparers, users, auditors and other professionals last October this project went from its "talking" stage to the issuance of a discussion paper. Preliminary Views on Financial Statement Presentation. (Comments on the paper were due April 14.)

The debate is now focused on whether the preliminary views are indeed an improvement to the current statements.

When it was published last fall, FASB Chairman, Robert Herz commented, "Providing investors with the most transparent, consistent financial reporting possible is more critical than ever to the efficiency and soundness of our capital markets.

"By working together to create one common, high-quality global standard for financial statement presentation, the boards are aiming to increase the usefulness of financial reports while enhancing their comparability across international capital markets."

Usefulness, comparability, communication transparency
The current format for balance-sheet presentation - assets, liabilities and equity - was developed by the U.S. Securities and Exchange Commission in the early 1940s. Now, more than 60 years later, the balance sheet as it's been known for years - and its partner statements - are undergoing major reconstruction.

The changes are significant. Is the boards' new direction the right way to go? Is this change really necessary - especially now?

Robert A. Howell, the David T. McLaughlin distinguished visiting professor of Business Administration at the Tuck School of Business at Dartmouth and FEI member, believes that change is necessary.

"Financial reporting is clearly at a critical point in its history," he says, adding that current practices have not kept up with changes in business conditions and practices. Financial statements do not adequately provide the information needed by creditors, investors and others to make rational economic-based decisions," says Howell.

He believes that greater emphasis should be placed on the cash-flow statement by reorganizing it to better distinguish between the cash generated from the activities of the business; the cash required to be reinvested into the business to sustain and grow it; and the cash available to creditors and investors.

The balance sheet, according to Howell, should also be recast to reflect the sources of capital, the financing and uses of capital as well as the investing. Also, he says, the earnings statement should be "reorganized to reflect the business' stream of activities rather than continue to utilize an outdated manufacturing model."

As proposed, the revised presentation model for all statements requires an entity to present information about the way it creates value - business activities - separately from information about the way it funds or finances those business activities - financing activities. Additionally, business activities would need to be further separated into operating and investing activities. (See chart below.)

In addition to business and financing classifications, separate classification for income taxes and discontinued operations would also be required. Relative to the "old" income statement, the new proposal requires a single statement of comprehensive income that would include a subtotal of profit or loss or net income and a total for comprehensive income for the period.

The proposal would also mandate the use of the direct method for presenting cash flows, as well as include a new schedule in the notes of the financial statement that reconciles cash flow to comprehensive income.

Another significant change to the presentation would require the disaggregation of line items when "such presentation will enhance the usefulness of the information in predicting future cash flows."

Income and expense items will need to be disaggregated based on their function within the categories of operating, investing and financing, as well as further disaggregating by nature within those functions to the extent that this will help users in predicting future cash flows.

Many voice concerns
While supportive of change, Howell believes that the proposal currently out for comment "misses the mark" in several areas.

Relative to the proposed statement of comprehensive income, Howell says, making "total comprehensive income" the bottom line of the income statement suggests that realized and unrealized income are comparable. He argues that these are quite different, "especially in terms of their impact and timing on cash flows."

The revised presentation is largely based on presenting financial statements so that they can be used to predict future cash flows. Some believe that while prediction of future cash flows is important, making this the sole focus for revision is not appropriate.

Members of FEI's Committee on Corporate Reporting (CCR) have significant concerns with the proposal and feel passionately that several of the points require immediate attention in advance of the April comment letter deadline. CCR represents the views of many large, public companies.

Indeed, in a Feb. 9 letter signed by CCR Chairman Arnie Hanish, vice president and chief accounting officer, Eli Lily & Co., the group indicated its "primary concerns related to the proposal are in three areas: the cost/benefit proposition of a direct-method cashflow statement; the associated reconciliation of the direct-method cash flows to the statement of comprehensive income; and the cost/benefit proposition and usefulness of disclosures of expenses by nature."

In its comments on the cost-benefit analysis for using the direct-method cash flow statement, CCR indicated: "In our experience dealing with users of financial statements, any incremental benefit of a direct-method cash flow statement would be greatly outweighed by the associated cost to the shareholders."

The group recommended as an alternative, that FASB and IASB "continue to allow for the use of the indirect method, with additional disaggregation of data provided in notes to the financial statements.

"The incremental data, as an example, would be provided in areas such as which solicit the most inquiries from their financial statement users about future projections: 1) increased breakdowns of expenses such as further information on Cost of Sales and Selling, General and Administrative expenses; and 2) additional perspective on working capital and its impact on cash flow."

From a cost perspective, some preparers have even indicated that depending on a company's current infrastructure, the cost for changing systems to develop a direct cash-flow method could eclipse the cost of the potential conversion to adopt International Financial Reporting Standards.

The cost-versus-benefit argument related to many areas of this proposal, beyond even the direct cash-flow statement, is prevalent across the board from preparers, and even more strongly from those from private companies.

Darryl Buck, senior vice present and chief financial officer of Reasor's Inc., who is also an FEI member and member of the FASB-AICPA Private Company Financial Reporting Committee, says: "many of the difficulties public companies will experience in assembling the information, specifically the direct-cash flow statement and proposed reconciliation schedule, will also be present for private companies, though perhaps on a smaller scale."

More broadly, he notes that "in general, users of private company financial statements are not asking for this change."

Users: 'Project has merit'
CFA Institute, the global not-for-profit association of investment professionals, argues, however, that the project has definite merit.

Specifically, in a Jan. 8, 2008 letter, CFA indicated that the presentation of data by nature, an area of concern from CCR above, "will further improve an investor's and other user's ability to understand the drivers - sources and uses - of a firm's resources and its capacity to generate cash flows."

The letter referenced a 2007 survey of CFA Institute members that found 97 percent of 407 respondents indicated "information about a company's capacity to generate future cash flows is important to their analyses and/or investment decision-making process."

Of these respondents, 84 percent also indicated that, "operating cash flows by nature e.g., cash flows received from sales ... and cash flows used for [by expense type]," are of high importance."

Additionally, with regard to the proposed reconciliation statement, CFA highlighted the discussion of a September 2007 Joint Working Group meeting in which several "preparer" participants stated that the reconciliation would be difficult to produce and questioned its usefulness.

Preparers also stated that they find the direct method cash-flow statement the most difficult part of the possible reconciliation schedule.

"User" participants, however, said that the reconciliation is the most important part of the financial-statement presentation project and that the reconciliation is definitely worth the cost. They stated that analysts spend significant time trying to create a schedule similar to the reconciliation to assess the quality of earnings.

During a FASB-sponsored webcast on the proposal in January, Greg Jonas, managing director of Moody's Investors Service, also supported revisiting statement presentation. Relative to mandating the use of the direct cash-flow statement, he said he believed "the benefits of direct [method] could be substantial - very much like a cash-basis income statement; [it] allows the analyst to relate directly what's going on in the income statement to the cash-flow statement."

Ken Kelly, vice president and controller of spices and seasonings firm McCormick & Co., FEI member and a member of JIG, has mixed reviews of the project.

He does feel that this is a "good and worthwhile project, as current standards do not define what constitutes a basic set of financial statements and what should be contained in those statements."

Consequently, he says, "We have variations in disclosure for what may be very similar companies." Thus, while he agrees that a "fresh" look is warranted, what is now being discussed in the proposal are the pros and cons and, "more importantly, the costs versus the benefits of different alternatives - these are critical areas for discussion."

The future
There is no doubt that this project has garnered much attention and debate; the pros and cons and costs versus benefits will likely be evident in the comments received later this month.

Those who have concerns with the project are hopeful that FASB and IASB will be open to alternatives, especially as they relate to the proposed requirements for direct cashflow and the associated reconciliation statement. But, it appears this group will be faced with those who believe the project should move ahead as proposed.

Little argument seems to exist that in an ideal setting the accounting standards should define what constitutes a basic set of financial statements, as indicated by Kelly. But, the question remains: is now the time to make that determination? And, if so, does the proposal do so effectively?

With the economy in turmoil, financial reporting already under much scrutiny and IFRS potentially looming on the horizon - does this project present a solution or will it only further existing problems?