Shocker: Financial reporting just got easier
I’m a CPA, and I’m here to tell you financial reporting became simpler and easier to use in two significant areas. Yes, I realize you’re not used to hearing that from your accountant or auditor. That’s understandable, as it seems that each effort during the past several years to make financial reporting simpler in practice actually made it more complex and expensive.
Companies have complained for years about having to mark to market assets and record differences in values on the income statement. In addition, consolidation rules have expanded to encompass more entities and the whole international standards adoption movement has been confusing and largely unsuccessful.
But here are two little publicized guidance changes by the Financial Accounting Standards Board that will help development stage entities and companies that have a large number of discontinued operations – such as real estate or oil and gas properties – and had to restate their books to reflect the sold-off or shut-down assets.
Minor discontinued operations no longer have to be broken out and restated
Presently, if you are an oil and gas company and you sell off a small field of producing wells, you have to report the associated revenues and expenses on a separate discontinued operations line at the bottom of the income statement. Not only that, you have to restate previous financial statements to reflect the discontinued operations. The concept was to provide the user with financial statements that are more comparable from period to period as well as to show the operations that will be continuing into the future. But it got out of hand. Oil and gas and real estate companies, for example, sell assets frequently. The FASB said the discontinued operations reporting was “less decision useful,” and noted the reporting resulted in “higher costs for preparers because it is complex and difficult to apply.”
In an update this last April, the FASB changed its guidance to eliminate reporting of discontinued operations unless the disposition of an asset represented a strategic shift or would have a major effect on operations and financial results. Then the discontinued operation would be treated under the former rules. Disposals of operations in a major geographic area, line of business or significant equity method investment were all examples given by the FASB as qualifying as a strategic shift or having a major effect on results.
For example, if you are a real estate company that owns 10 office buildings in downtown Denver and you sold one and purchased another, it would not constitute a major shift in strategy. If however, you sold your commercial properties and used the proceeds to buy a medical complex in Chicago, it would constitute a major shift in strategy. The accounting change brings with it more of a judgment approach, along the lines of international standards, upon which the change is based.
The result of this change will be to separate far fewer discontinued operations from the income statement. It will reduce the complexity and expense of preparing financial statements.
Development stage companies receive a break
In Accounting Standards Update No. 2014-10 regarding development stage entities, the FASB removed incremental reporting requirements, such as inception-to-date information. Under previous rules, start-up companies that haven’t begun principal operations or generated significant revenues were required to provide a significant amount of financial information going back to the inception of the company.
For companies that took some time to get off the ground, it could get very cumbersome. Some companies might remain in the development stage for 10 years or more, which caused financial statements to become exceedingly lengthy. Another problem occurred when a company changed auditors and would have to include reports from both audit firms as long as they remained in the development stage. With the elimination of the separate category of development stage companies, inception-to-date reporting is no longer required. This change will significantly reduce the time and expense of the reporting burden on start-up companies and allow management to spend more time on growing the company.
In June 2014, the FASB began a simplification initiative that starts with areas that it believes can be identified quickly and effectively. In addition to the changes discussed above, the board also recently identified five more areas where it believes it can simplify and save time and expense. The areas include the classification of debt and issuance costs on the balance sheet, the treatment of defined benefit plan assets and how to classify tax assets.
Stakeholders, both producers and users of financial statements, have become concerned that the FASB in its effort to impose higher standards has made reporting too complex and expensive. Not always. The two changes recently made, as well as the initiative to provide further simplification, show that the FASB is concerned about its constituents and is listening. It eliminated rules that imposed burdens on preparers and had limited usefulness to readers of financial statements, bringing some common sense back into reporting. The changes have not received much attention but could have a positive impact.