After receiving public comments that investors and lenders want clearer information on company performance, the Financial Accounting Standards Board (FASB) has begun developing a framework for performance reporting. The purpose of this reporting is to make it easier for investors and securities analysts to understand from reading a company’s financial statements how — and how well — the business works. Although the proposed guidance is a long way from being published, it could be one of the most significant changes to financial statements since revenue recognition.
What is “performance reporting”?
The FASB undertook this project in September 2017, after completing its major projects, such as the updated standards on recognizing revenue, credit losses and leases. The board then sought feedback from the public on where to focus its efforts next.
This project won’t address recognition or measurement; rather, it’s broadly described as “performance reporting.” The FASB’s plan is to examine the presentation and display of revenue, expenses, and gains and losses that can be reported in the statement of performance, segment information, financial statement footnotes and the statement of cash flows.
On the income statement, the FASB plans to address such issues as:
- Presenting operating vs. nonoperating activities in a more user-friendly format
- Disaggregating income by product line or segment
- Evaluating the components of other comprehensive income and the basis for which those items may be reclassified into net income
Feedback from public stakeholders indicates that the performance reporting project is a priority for investors. So, the FASB outlined a research plan in March 2018.
When will these changes be effective?
This is a long-term project, and it’s still in the research and discovery phase. “Part of the project will be to talk to users about what we think might be possible additional information and for them to try to tell us how they’d use this information if it was available. And is it really going to improve their decision-making?” said FASB member Marsha Hunt at the Current Financial Reporting Issues conference, hosted by Financial Executives International in November 2018.
Hunt explained that the FASB doesn’t plan to rush this project. “This is very early days, and this is really a departure from what we’ve done in the past,” she said. “Our staff is getting a better understanding of the different ways data is captured within financial systems and getting a better understanding of the limitations of certain systems. They’re working on extended research to present in a very public format the results of that, for us to try to evaluate: Is there a better system?”
For now, the FASB is a long way from issuing an exposure draft on the performance reporting project. The standard setter wants to gather as much information as possible before proceeding. It’s initially focusing on how companies should break down, or disaggregate, information on their income statements by speaking directly with corporate controllers and other accounting officers.
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