Retail & consumer Retail & consumer

Proposed changes to financial statement presentation

a big issue for the retail & consumer industry
Application date: An exposure draft was issued in May 2010; another two exposure drafts are
imminent. Two final standards are expected as a result of the project - one in Q4 2010 and another
in Q2 2011. Both standards are likely to apply in 2014 accounts.

What is the issue?
The International Accounting Standards Board (IASB)
and the US Financial Accounting Standards Board
(FASB) have issued proposals in relation to their
financial statement presentation project (phase 2).
Phase 1 resulted in the revised IAS 1 Presentation of
financial statements which was issued in 2007. Phase 2
proposes a substantial shift from the look of todays
financial statements. The proposals would result in a
fundamental change to the structure of the financial
statements and the level of detail presented.
The overarching objective of the project is to provide
cohesive presentation within financial statements so that
the relationship between items and across financial
statements is clear and enables users to more easily
understand and predict future cash flows and assess the
entitys liquidity and financial flexibility. Other aspects of
the project deal with the presentation of items in other
comprehensive income and the definition of
discontinued operations.
Why is this issue significant for the
retail & consumer industry?
The way that an entity presents its financial statements
is vitally important because financial statements are a
central feature of financial reporting; they are the means
of communicating financial information to those outside
an entity. Therefore, the proposed changes to the format
of financial statements will have a significant impact on
all entities across all industries.
The significance of the change required is acknowledged
by the IASB staff who have proposed that entities be
given a lead time of four years after the publication of
the standard to enable them to adapt their systems,
particularly to deal with the new requirements for the
cash flow statement and disaggregation of information.
Based on the conversations we have had with entities in
the retail & consumer industry, additional time to prepare
for implementation would be welcomed by all.
What are the overarching proposals?
To align the structure of the statement of
financial position, single statement of
comprehensive income and cash flows with the
line item descriptions and order of presentation.
Items would be classified as operating, investing or
financing across the three statements. For example,
operating assets and liabilities will be classified in a
separate operating category in the statement of
financial position. The related operating income and
expense and related operating cash flows would also
be shown in a separate category in the statement of
comprehensive income and in the statement of
cash flows.
To require assets, liabilities, income, and
expenses to be classified as business or
financing activities. The business classification
would include both operating and investing activities.
To require information about discontinued
operations to be presented separately from
information about the continuing or ongoing
business and financing activities. In practice,
discounted operations commonly include ceasing a
retail operation in a specific location.
To require information about income taxes to be
presented separately from all other information in
the statement of financial position and cash
flows. The rules for presenting income taxes in the
statement of comprehensive income would not
change from the existing rules; therefore, there will
be no impact on current practice within the industry.
September 2010 2
The table below illustrates the new look for the statement of financial position and comprehensive income.
Investing
Cash flows
Investing
Income
Expense
Investing
Assets
Liabilities
OTHER COMPR. INCOME (net)
DISCONTINUED OPS DISCONTINUED OPS (net) DISCONTINUED OPS
INCOME TAXES INCOME TAXES (continued ops) INCOME TAXES
MULTI-CATEGORY MULTI-CATEGORY
Financing
Debt
Equity
Financing
Debt
Equity
Financing
Debt
Equity
Operating
Cash flows
Operating
Income
Expense
Operating
Assets
Liabilities
BUSINESS BUSINESS BUSINESS
Statement of cash flows
Statement of
comprehensive income
Statement of financial
position
Investing
Cash flows
Investing
Income
Expense
Investing
Assets
Liabilities
OTHER COMPR. INCOME (net)
DISCONTINUED OPS DISCONTINUED OPS (net) DISCONTINUED OPS
INCOME TAXES INCOME TAXES (continued ops) INCOME TAXES
MULTI-CATEGORY MULTI-CATEGORY
Financing
Debt
Equity
Financing
Debt
Equity
Financing
Debt
Equity
Operating
Cash flows
Operating
Income
Expense
Operating
Assets
Liabilities
BUSINESS BUSINESS BUSINESS
Statement of cash flows
Statement of
comprehensive income
Statement of financial
position
COHESIVENESS
D
I
S
A
G
G
R
E
G
A
T
I
O
N

Classification within financial statements
What entities will need to do. As a first step, entities
will need to classify assets and liabilities into operating,
investing or financing activities. That classification would
flow into the statements of comprehensive income and
cash flows. For example, inventory would be classified
as an operating asset and the cost of goods sold and
payments to raw materials suppliers would be classified
as operating activities in the statement of comprehensive
income and cash flow statement respectively. This will
allow the entity to portray a clear picture of the
relationship between items across the financial
statements. We expect the financial statements to
complement each other more than is currently the case.
Entities should be aware that the classification of items
as operating, investing, or financing is not prescriptive;
management will need to consider classification in the
context of the way in which they operate their business.
Under the proposals, management would choose the
classification for the components of the financial
statements that best reflects their views of what
constitutes its business (operating and investing) and
financing activities. Entities will need to explain these
classifications as a matter of accounting policy.
No doubt there will be a desire by most entities to
ensure their classifications are consistent with other key
players in the industry.
Resource investment required. It would be a
significant task for most entities to implement these
proposals. Reporting entities would need to re-map the
format of their financial statements in line with the new
requirements. The operating section may include items
typically displayed within operations of a traditional
financial statement; the investing section would include
items such as dividend income and realised gains on
available-for-sale securities. Financing activities would
include interest income and interest expense.
The classification of other items might not be so clear.
For example, this is particularly the case for intangible
assets including brand names and goodwill, properties
that house manufacturing facilities and land available for
development, strategically held equity investments and
businesses that are considered to be non-core.
The remapping exercise would not be a once-off task.
Management would need to revisit the appropriateness
of these classifications each year; any changes in
classification would be implemented through a change in
accounting policy to prior periods.

Industry insight. When developing appropriate
classifications, management should consider how the
new look financial statements would be viewed by a
user. The objective of the financial statement project is
aimed at allowing users to more easily assess changes
in financial position, hence the timing and uncertainty of
the business cash flows.

Statement of financial position
What entities will need to do. Entities will need to
group their activities into operating, investing and
financing (as opposed to the current grouping of assets,
liabilities and equity). Assets and liabilities would be
disaggregated into short term and long term categories
in much the same way as the existing current and non-
current classifications apply.
Resource investment required. Management would
need to apply judgement about how to present assets
and liabilities.
Industry insight. The way entities business activities
are grouped in the statement of financial position will
need to be considered across all countries in which the
entity operates. Different categorisation approaches and
different amendments to systems and processes might
be required depending on whether, for example, a
retailer has strong sales activities and a strong focus on
financing activities (to support sales) across all store
locations, or whether financing activities are a focus only
in certain locations. The categorisation approach will
also be different if the business is run with or without a
joint venture partner or a sales cooperation in a
particular country.

Single statement of comprehensive income
(sub-project of phase 2 - standard
expected Q4 2010)
What entities would need to do. The choice of
presenting two statements - a statement of income and
expense and a statement of comprehensive income -
will be eliminated. All entities would need to present a
single statement of comprehensive income. The
statement will include a subtotal of profit and loss and a
total for other comprehensive income.
Resource investment required. Entities are required to
disaggregate by function (and by nature within those
functions) income and expense items within each
section and category so that the information is useful to
users of the financial statements.
Industry insight. This is unlikely to be a significant
issue in the retail & consumer industry because many
already present comprehensive income in their financial
statements.

Statement of cash flows
What entities will need to do. One of the more
contentious issues in the project is the proposal to
require entities to use a direct statement of cash flows.
This method would require entities to report major
classes of gross cash receipts from revenue and
payments for expenses. The commonly used indirect
method that we see in practice starts with net income
and converts it to net cash flows from operating activities
(eg, considering increase/decrease in accounts
receivable and increase/decrease in accounts payable).
Resource investment required. Consistent with the
statements of financial position and comprehensive
income, disaggregation of similar cash flows is required
to provide an understanding of an entitys change in
cash for the reporting period. The requirement to
disclose an analysis of changes in the most important
assets and liabilities (including changes resulting from
cash inflows and outflows, non-cash transactions,
accounting allocations, remeasurements, etc) provides
greater transparency in the financial statements.
However, compiling this information will be time
consuming for many entities.
Industry insight. To present cash flows using the direct
method, information about major classes of gross cash
receipts and gross cash payments can be obtained
either directly from the accounting records or indirectly
by identifying the changes in asset and liability balances.
Either method will significantly increase the time
required to prepare the statement of cash flows. In
practice, we expect most entities within the retail &
consumer industry to adopt the direct method because
of its ability to provide an appropriate audit trail (from
accounting records).

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