FASB made some decisions on Financial Statement Presentation on Wednesday.  Here is part that is related to FASRI’s research study, presented two days earlier:

The Board decided to retain an approach to classification within the business section that is based on how a reporting entity organizes its activities and how it uses its assets and liabilities. In a change from the Discussion Paper, the Board decided that there would not be an operating or investing category within the business section. Rather, additional groupings of information within the business section (that is, categories) would reflect the facts and circumstances of that entity and would be left to management’s discretion. At a future meeting, the Board will discuss application guidance to help management determine meaningful groupings of information within an entity’s business section.

I’d love to get more on the reasoning and details, but here are a few quick reactions:

  • The operating/investing distinction has always been a bit problematic, not least because many preparers might not want to identify business assets as peripheral to their business.  Our experiment suggested that the operating/investing classification on the face of financial statements was of limited usefulness on its own, especially if it wasn’t accompanied by disaggregated information about the nature and function of expenses and cash flows.
  • Tying classification to ‘how a reporting entity organizes its activities’ is reminiscent of the language used for segment reporting.  My guess is that the application guidance will focus on internal reporting methods.  Personally, I like this approach–even though firms could conceivably game external reporting by developing distorted internal reporting methods, that seems pretty costly.  Prior research presented by Christine Botoson in a FASRI session (which included two members of the FSP Project team), suggested that it works pretty well for segment reporting.  So who knows, maybe that had some influence on the decision.