By Raman Jokhakar, Tarunkumar Singhal, Chartered Accountants
New Page 4
5. A New Vision for Accounting Robert Herz and FASB are
preparing a radical new format for financial statements
Last summer, McCormick & Co. controller Ken Kelly sliced and
diced his financial statements in ways he had never before imagined. For
starters, he split the income statement for the $2.7 billion international
spice-and-food company into the three categories of the cash-flow statement :
operating, financing, and investing. He extracted discontinued operations and
income taxes and placed them in separate categories, instead of peppering them
throughout the other results. He created a new form to distinguish which changes
in income were due to fair value and which to cash. One traditional ingredient,
meanwhile, was conspicuous by its absence : net income.
Kelly wasn’t just indulging a whim. Ahead of a public release
of a draft of the Financial Accounting Standards Board’s new format for
financial statements in the second quarter of 2008, the McCormick controller was
trying out the financial statements of the future, a radical departure from
current conventions. FASB’s so-called financial statement presentation project
is ostensibly concerned only with the form, or the ‘face,’ of financial
statements, but it’s quickly becoming clear that it will change and expand their
content as well.
Some major changes under discussion : reconfigur-ing the
balance sheet and the income statement to follow the three categories of the
cash-flow statement, requiring companies to report cash flows with the
little-used direct method; and introducing a new reconciliation schedule that
would highlight fair-value changes. Companies will also likely have to report
more about their segments, possibly down to the same level of detail as they
currently report for the consolidated statements. Meanwhile, net income is
slated to disappear completely from GAAP financial statements, with no obvious
replacement for such commonly used metrics as earnings per share.
FASB, working with the International Accounting Standards Board (IASB) and accounting standards boards in the UK and Japan,
continues to work out the precise details of the new financial statements. “We
are trying to set the stage for what financial statements will look like across
the globe for decades to come,” says FASB Chairman Robert Herz. (Examples of the
proposed new financial statements can be viewed at FASB’s website.) If the
standard-setters stay their course, CFOs and controllers at every publicly
traded company in the world could be following Kelly’s lead as soon as 2010.
(Source : CFO Magazine, 1-2-2008)
