Financial Management and Accounting

Graduate School of Management and Technology

Announcements/News

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Rethinking Financial Statements

Since 2004, the FASB and the IASB have worked together on reformatting the four current major financial statements into a presentation that provides “investors with the most transparent, consistent financial reporting possible” (Herz, 2008). In October 2008, the joint working group released a proposed model for comment. The revised presentation model requires companies to provide information on how they create value through business activities separately, to separate activities between operating and investing and to show how they fund/finance those activities. The income statement becomes the statement of comprehensive income, with a separate classification for income taxes and discontinued operations. Accountants would be required to employ the direct method to prepare the statement of cash flows and include a reconciliation schedule in the notes to the financial statement reconciling cash flows to comprehensive income.

(Source: Financial Executive, 2009)

The proposed model also requires the disaggregation or further breakdown of line items in statements when the information will help users predict future cash flows. Income and expenses would be separated into functional categories of: operating, investing and financing.

Proponents offer that mandated use of the direct cash flow statement effectively results in a cash-basis income statement that allows users to tie the income statement to cash flows and assists in predicting future cash flows. Critics of the proposed model argue that the direct method of cash flow statement and reconciliation schedule will be difficult and costly to prepare, and may outweigh the benefits for many firms. Additionally, there are questions as to whether cash flow information translates into fair value information that market analysts crave, and how the model will fit with IFRS convergence on the international horizon.

(Source: Financial Executive, April 2009)

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Looking Ahead at Financial Risk

The current financial downturn requires us to reexamine of our past thinking to assess what we were “getting right” and what we were “getting wrong”.  In The New World of Financial Risk (Financial Executive, January/February 2009), authors Johnson and Kwak offer their insights into the role risk assessment and management played leading up to the credit-crisis.  They predict a new risk climate of increased disclosure requirements for off-balance sheet exposure and hedge funds; restructuring of regulatory roles; stricter loan underwriting standards; greater conservatism by bond rating agencies; and expanded testing of quantitative financial models. What else might the risk environment hold?  Read more at Looking Ahead at Financial Risk.  

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The Credit Crisis in a Snapshot

As students of finance and accounting, there is a lot to learn from the history being lived this month. Some individuals in the media are questioning whether flaws in foundational principles of economics and finance are the source of our credit crisis. This is not the case. What we are seeing are the behavioral aspects at work that lead to our current situation. 

In an informative timeline, The Washington Post documents the development of the current credit crisis and captures the behavioral pitfalls that trapped participants in terms of excessive optimism, overconfidence, confirmation (information) bias, control illusion and loss aversion, that many individuals succumb to when engaging in financial decision-making. 

The Washington Post timeline shows investment dollars, losses, and social-economic factors that influenced the course of events. To view the timeline, see Anatomy of a Meltdown: The Credit Crisis.

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FEI’s 2008 Top Challenges for Financial Executives

The February 2008 issue of Financial Executive listed the following as the most pressing challenges for CFOs in 2008:

• Fair/Value Measurement – Application for FASB 157 was delayed due to issues remaining around valuing assets and liabilities with no active markets.
• Global Convergence of GAAP and IFRS – CFO’s question if convergence isn’t already impacting Small and Medium Sized Entities (SMEs).
• Complexity in Financial Reporting – The SEC Advisory Committee on Improvements to Financial Reporting (CIFR) is due to release its report later in 2008.
• XBRL – The SEC continues to pressure for adoption.
• Business Combinations – FASB & IASB released a new standard on business combinations, effective for fiscal years ending, Dec 15, 2008.  It includes reporting of contingent assets and liabilities at fair value, with future adjustments going to earnings.
• Internal Controls - COSO report on Monitoring Internal Controls expected out by June 30.
• Healthcare – There will be pressure for companies to manage their costs better.
• Corporate Taxation – There is speculation that tax deferrals for multinationals will be eliminated, as will LIFO accounting for taxes. 
• Rating Agency Regulation – SEC ramp-up of credit rating agencies may continue a tightening on credit.
• IRS Policy of Restraint/Privilege – FIN 48 may motivate the IRS to more frequently ask for tax accrual workpapers than in previous years. 

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