This paper is a commentary on the article from the Journal Of Accountancy 2008 issue titled Shaking Up Financial Statement Presentation by Guy McClain and Andrew J. McLelland.
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The new format for presenting financial information to investors, shareholders and other interested stakeholders by companies has been completed in three phases. Each phase had its findings and recommendations pertaining to the new method though the change was to be effected in a wholesome way. Phase A recommended that “a complete set of financial statements for a reporting period should include a statement of financial position, a statement of comprehensive income, a statement of changes in equity and a statement of cash flows” (McClain & McLelland 2008). This information should be given at a minimum of two years for comparison.
According to the stipulations of Phase B “financial statements should be cohesive at the line-item level, thus to the extent practical, an entity would label line items similarly across the financial statements and present categories and sections in the same order in each financial statement.” (McClain & McLelland 2008). This change is important in order to ensure that investors have access to the right and true financial information regarding a company to help them in making the right decisions.
However, I tend to think that the findings of each phase should have been introduced to the involved parties gradually to prepare companies, auditors and investors for the change. For example the exclusion of extraordinary items as per the findings of phase B totally disorients investors and auditors also. This is in spite of the assurance from FASB and IASB that the will be no change on the profit loss items on the statement.
While this may be true, the due the fact that the new balance sheet also balances out despite having liabilities and assets on either side, the information might appear confusing to the investors who are not duly informed of the change. This is very crucial in a time when investors are becoming more sensitive to financial reporting due to the prevailing economic crisis that has seen billions and billions of dollars lost. In addition to this the Enron and Exxon financial reporting errors have taught investors a bitter lesson in judging financial statements.
The simple fact that sections of the balance sheet will have both assets and liabilities netted together will definitely alter how accounting, finance and business as subjects in schools and colleges are taught all over the world. This project has seemingly neglected the contribution of the academic world in drafting up new financial reporting formats. This is because those planning the new format have relied on the old format of assets and liabilities for a long time and the fact that there is no indication of seeking the opinion of the academics professionals then there is going to be a problem in implementing the new financial reporting format. More so auditors in the field will tend to stick to the old familiar way unless the new format is introduced early in schools to ensure a smooth transition.
While the change in the financial reporting and presentation of financial statements is well intended, it might result into a lot of problems both in to the involved stakeholders in the business world and in the academic world. Existing methods and manners of presentation will have to be done away with as companies and scholars come into terms with the new methods of presentation in compliance with the law. This will create confusion in the world of accounting.
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For one the change in method of financial reporting has not been effectively communicated to the involved parties. As a result, the old fashioned balance sheet where assets and liabilities are on different sides might end up being used by some companies before they actually adopt the new methods. As a result, investors will be confused as different companies present their financial statements in a different way. This will create uncertainty on the part of investors as knowledge on the
Some of the changes that are being implemented as stated by the authors such as the “proposed new schedule would supply investors and analysts more information for predicting future cash flows” (McClain & McLelland 2008). Under normal circumstances, I think the impact of such a move would be more negative than beneficial to the companies and investor alike. This is because it will offer more room for speculation by investors who are not familiar with the new format in financial reporting. They may tend to think that the companies are covering up their financial failure in the face of the current economic crisis.
McClain, G. and McLelland A. J. “Shaking Up Financial Statement Presentation” Journal of Accountancy, 2008. Web.