Jeff Wilks has already noted the FASB/IASB decisions regarding lease accounting.  Last week’s meetings also included a number of tentative decisions on financial statement presentation.  Several decisions pertained to cash flow reporting and supplementary reconciliation schedules.  The Boards tentatively decided that entities should be required to use the direct method of presenting cash flows.  In their words, entities should be required to “present line items for cash receipts and payments in each section (and category)” in the Statement of Cash Flows, and “disaggregate its SCF information such that significant or material cash flows are apparent to a user.”

The cash flow reporting is supplemented by a new disclosure that replaces the ‘reconciliation schedule’ proposed in the Discussion Paper with

an analysis of the changes in balances of all significant asset and liability line items.   The analysis will explain the nature of the transactions and other events that gave rise to a change in the account balance.   Each significant asset and liability line item analysis should separately distinguish the following components:

1. Changes due to cash inflows and cash outflows
2. Changes resulting from noncash (accrual) transactions that are repetitive and routine in nature (for example, credit sales, wages, material purchases)
3. Changes resulting from noncash transactions or events that are nonroutine or nonrepetitive in nature (for example, acquisition or disposition of a business)
4. Changes resulting from accounting allocations (for example, depreciation)
5. Changes resulting from accounting provisions/reserves (for example, bad debts, obsolete inventory)
6. Changes resulting from remeasurements

This proposal steps back from the full reconciliation that was proposed in the Discussion Paper, which tracked changes in all accounts, not just ‘significant ones’.  On the other hand, it is a balance-sheet-to-balance-sheet reconciliation, rather than the income-statement-to-cash flow reconciliation that got primary play in the Discussion Paper.  There are a number of transactions that don’t involve cash or income that make cash flow analysis difficult (especially acquisitions and dispositions).

For the time being, I would chalk this up as a win for users who want much greater detail about cash flows.  However, I suspect preparers will still push back, arguing that such detail will be hard to extract from their systems. Also, if the balance sheet isn’t sufficiently disaggregated, this information might not be tremendously useful.  The following paragraph from the Board summary is therefore very important:

The Boards tentatively decided that the Exposure Draft should include an overall disaggregation principle that requires an entity to consider disaggregation by function, nature, and measurement bases in the financial statements as a whole.   Additionally, the Boards tentatively decided that the Exposure Draft should include guidance for applying that disaggregation principle in each financial statement.

What guidance should the Boards provide?