‘One Statement or Two?’ Tabled by FASB

The board votes to hold off on a proposal to change how companies display comprehensive income in their annual financial statements.
Craig SchneiderDecember 12, 2005

In a 5-2 vote, the Financial Accounting Standards Board has agreed to scratch a planned proposal on reporting financial performance. The most controversial element of the proposal would have been an amendment to Statement No. 130, Reporting Comprehensive Income, that would require a single statement of earnings and comprehensive income and eliminate the currently permitted two-statement approach.

FASB and the International Accounting Standards Board — which are collaborating on a unified standard for reporting financial performance but which deliberate independently — had initially decided to issue an exposure draft that would include all decisions reached by both boards in the project’s so-called Segment A. At its November 16 board meeting, however, IASB decided it would issue an exposure draft that would encourage a single statement but permit a two-statement approach.

The FASB staff then presented the board with four possible ways to proceed. Of the two favorites, one would be to proceed with the proposal to require a single-statement presentation; the other would be to hold off, devoting the time for drafting a proposal to developing a preliminary-views document covering issues in both Segment A and Segment B.

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During Wednesday’s meeting, FASB project manager Jenni Sullivan said the staff’s recommendation would be the latter, for four reasons:

• Moving toward a single-statement presentation may be received more favorably by public companies because it would reflect convergence of FASB and IASB. This would be especially true, Sullivan added, “once constituents can visualize and understand how the requirement for a single statement is congruent with the principles established in Segment B regarding display.”

• No clear concept now supports the two-statement approach — a compromise made when Statement 130 was issued, in 1997 — and continuing to support it “is not consistent with the board’s original decision in Statement 130.”

• It is possible, allowed Sullivan, that as the issues in Segment B are addressed, a clear concept for a two-statement approach may be found, and the FASB staff “does not want to discount this possibility at this time by eliminating that option prematurely.”

• The divergences caused by delaying the proposal are not significant and can still be converged on when FASB addresses Segment B.

Board member Donald Young was still adamant about proceeding with the proposal. “I think the statement of changes in equity under Statement 130 is terrible and we need to get rid of it,” he said on Wednesday. “Unfortunately, the majority of public companies in the United States are using it.” He also expressed that by taking action now, FASB would be providing more support for IASB.

Board member Katherine Schipper also strongly supported a decision to proceed with an exposure draft because it would simplify reporting. “In another project, we’re contemplating putting something else — maybe more than one something else — in ‘other comprehensive income’,” she added, “thereby the elevating the importance of making ‘other comprehensive income’ salient.”

Schipper elaborated that all the arguments supporting the single-statement approach can be found in the original exposure draft for Statement 130. “I believe that the drafting of [the current proposal] merely requires the repackaging of the ideas that were already expressed and compromised away from,” she added.

The single-statement approach would not be a costly change, she maintained, because it doesn’t require new information systems or an expansion of auditor or preparer expertise. “It seems to me it’s a clear enhancement of simplicity of presentation,” she said. “It should make the items much easier to understand. In other words: no cost, all benefit.”

Siding with the FASB staff recommendation, board member Leslie Seidman said she would “rather use the time that it would take to work through our due process and use that time to proceed on the Segment B issue.” Companies would be more receptive to the single-statement proposal, Seidman added, if they understood it as part of a broader change; she pointed especially to the cash-flow statement, which she called “woefully inadequate.” Another board member observed that it would be more efficient for the Securities and Exchange Commission to review and act on a single FASB proposal.

At this Wednesday’s meeting, the FASB board will consider:

• remaining issues raised in the comment letters received on its exposure draft on Accounting for Certain Hybrid Financial Instruments

• proposed amendments that would enable recognition on the balance sheet of the net overfunded or underfunded status of defined-benefit postretirement plans

• three aspects of FASB’s conceptual framework project: qualitative characteristics of financial information, definition of financial statement elements, and the reporting-entity concept