Research FellowDaehwa Jung

Financial Statement Presentation

Agenda-G-2

Contents

2

BackgroundWorking GroupDiscussion IssuesSummary

Contents

3

Working Group

Summary

Background

Discussion Topics

Background

4

Establish Global StandardProject Objective

Improve Usefulness of FSThe Boards’ Goal

Joint ProjectIASB FASB

Background continued

Steps for the Financial Statement Presentation(FSP) Project

• Discussion Paper(DP) published: Oct. ‘08

• Comment period given: until Apr. ‘09

• 1st AOSSG meeting: Nov. ‘09

• Staff Draft posted: Jul. ‘10

• 2nd AOSSG meeting: Sep. ‘10

• Exposure Draft(ED) expected to be issued: Q1 of ‘11

• Final standards expected to be issued: Q4 of ‘11

5

The IASB Staff Draft of ED on FSP

The IASB Staff Draft on FSP

• Reflects the cumulative, tenative decisions made by the boards.

• Includes almost all important issues related to FSP

Core principles of FSP are

• Portraying a cohesive financial picture, and

• Disaggregating information (useful in assessing future cash flows)

6

Contents

7

SummaryDiscussion TopicsWorking GroupBackground

Working Group

8

Purpose • To assist the AOSSG in preparing improvement proposals to the IASB regarding the staff draft on FSP

Lead country • Korea

Co-lead country • China

Members• Australia, Hong Kong, Japan, Macao, Malaysia, New Zealand

Chronology of Working Process in 2010

• Jul. 1: staff draft posted

• Aug. 7: distribution of a questionnaire for FSP WG

• Sept. 9: circulation of lead country’s comments on the ques-tionnaire for FSP WG → Australia, China, Hong Kong, Japan, Macao, and New Zealand commented

• Comment period given: until Sep. 15

• Sep. 29: 2nd AOSSG meeting

9

Contents

10

Working Group

Summary

Discussion Topics

Summary

Topics to be discussed

11

Topic 1 Operating & Investing Categories

Topic 2 Operating Finance Subcategory

Topic 3 Direct & Indirect Cash Flow(CF) Statement

Topic 4 Reconciliation of Income to CF

Topic 5 Multi-category Transaction

Topic 6 Cash & Cash Equivalents

What is the main issue?

• To appropriately classify operating and investing activities.

1. Operating & Investing Categories

12

Business Activities

Operating Investing

The IASB Staff Draft’s Proposal

• An operating category is comprised of assets(liabilities) re-lated to an entity’s day-to-day business.

• An investing category is comprised of assets(liabilities) which generate return with no significant synergy from combined assets.

Changes from the DP to the Staff Draft

• The notion of “Core and non-core activities” was the key principle to classify the business section in the DP, however it is eliminated.

• The boards proposed the independent definition for each category.

1. Operating & Investing Categories continued

13

WG’s Comments

• The definitions of the categories are rule-based.

• The underlying use may not be reflected in classifications.

• Most financing activities exist inseparably with operating ac-tivities.

Lead Country’s Suggestion

• To be principle-based, the notion of “Core and non-core” should be reflected in their definitions.

• It is recommended that the concept of the business section be eliminated, resulting in three sections: Operating section, Investing section, Finance section.

14

1. Operating & Investing Categories continued

15

2. Operating Finance Subcategory

What is the main issue?

• To classify some activities with both operating and financing characteristics in their proper place.

FinancingOperating

The IASB Staff Draft’s Proposal

• Any activity directly related to an operating activity is classi-fied as an operating finance subcategory.

Changes from the DP to the Staff Draft

• The operating finance subcategory was not stated in the DP.

• However, many argued some parts of the operating category were attributable to the finance section.

• The boards added the subcategory to the staff draft.

16

2. Operating Finance Subcategory continued

WG’s Comments

• It is difficult to conclude that the benefit is greater than the cost since it is arbitrary and burdensome.

• The proposal is not consistent in itself since it does not con-sider the concept of an investing finance subcategory.

• The operating finance subcategory is better to be included in a debt category.

Lead Country’s Suggestion

• It is appropriate to divide until reaching the operating cate-gory level; the operating finance subcategory is unnecessary.

2. Operating Finance Subcategory continued

17

3. Direct & Indirect CF Statement

18

What is the main issue?

• To identify applicable and accommodating method to both users and preparers of financial information.

Revenue

Cost

Profit

Cash Inflow

Cash Outflow

Operating CF

direct

indirect

The IASB Staff Draft’s Proposal

• Operating CF shall be prepared in a direct method

Changes from the DP to the Staff Draft

• The proposal of the DP created considerable controversy be-tween an indirect and a direct method.

• Nevertheless, the boards retained the proposal to present all CF directly, including operating CF.

3. Direct & Indirect CF Statement continued

19

WG’s Comments

• The current accounting system is mostly based on an accrual basis.

• The users are accustomed to the indirect CF statement.

• The cost to maintain the required cash receipts and pay-ments will be tremendous.

• In Japan’s case most preparers prefer the indirect method.

Lead Country’s Suggestion

• The boards should still consider whether the direct method would improve the CF statement’s usefulness compared to the cost.

3. Direct & Indirect CF Statement continued

20

4. Reconciliation of Income to CF

21

What is the main issue?

• To identify the type of income to focus on and its appropriate place to be put.

Operating Income Operating CF

Net Income

SCI or Notes

The IASB Staff Draft’s Proposal

• A reconciliation is required to be presented as part of the statement of CF.

• An entity shall present a reconciliation of operating income to operating CF.

Changes from the DP to the Staff Draft

• It should be an integral part of the SCF

• Operating income is adjusted to operating CF, but not with each account.

4. Reconciliation of Income to CF continued

22

WG’s Comments

• It might distract users’ attention if the reconciliation is an in-tegral part of the SCF.

• Net income is vested to shareholders, not operating income.

Lead Country’s Suggestion

• The reconciliation should be disclosed as a note.

• It is more appropriate to reconcile from net income to operat-ing CF.

4. Reconciliation of Income to CF continued

23

5. Multi-category Transaction

24

What is the main issue?

• To articulate a suitable accounting policy for basket transac-tion.

The IASB Staff Draft’s Proposal

• The net effects on SCI and SCF shall be classified in the multi-category transaction section.

Changes from the DP to the Staff Draft

• The boards did not reach a preliminary view in the DP, and requested comments from the respondents.

• The multi-category transaction section is introduced.

5. Multi-category Transaction continued

25

WG’s Comments

• The proposal is not consistent with the cohesiveness princi-ple.

• Other standards, such as IAS 16 and IFRS 3, require alloca-tion for basket transactions.

• Classification in an independent section is more pragmatic and cost-effective than allocations.

Lead Country’s Suggestion

• The multi-category transaction should be allocated.

5. Multi-category Transaction continued

26

6. Cash & Cash Equivalents

27

What is the main issue?

• To articulate appropriate guidelines for cash and cash equiva-lents.

or

The IASB Staff Draft’s Proposal

• Cash equivalents shall be classified as short-term invest-ments regardless of their liquidity or maturity.

Changes from the DP to the Staff Draft

• There was not a congruent opinion upon the DP.

• However, the statement of the staff draft is identical to the DP without more persuasive explanation.

6. Cash & Cash Equivalents continued

28

WG’s Comments

• Cash equivalents function mostly the same as cash.

• Current requirements should remain until a sufficient princi-ple is identified

• Cash equivalents have different economic characteristics than cash.

Lead Country’s Suggestion

• Entities should not be prevented from classifying cash equiv-alents in the operating category.

6. Cash & Cash Equivalents continued

29

Contents

30

Working GroupDiscussion TopicsSummary

Background

Summary

31

Topic Key words

1. Operating & Investing Categories “Core and non-core” principle& Three section, no category

2. Operating Finance Subcategory Unnecessary

3. Direct & Indirect CF Statement Indirect method

4. Reconciliation of income to CF Note disclosure & Net income

5. Multi-category Transaction Allocation

6. Cash & Cash Equivalents Operating category

Thank you !!

32