New FASB Proposal: A Balance Sheet That Doesn't Balance!

A balance sheet that doesn't balance? Financing and operating classifications that depend on your company type? A cash-basis income statement?

Well, not quite. But accounting standards-setters are online and on the road urging investors and companies to weigh in now on a proposal to radically alter financial statements. And while accrual accounting isn't going away, accountants might be surprised to find that the above descriptions do accurately describe the look and feel that financial statements might have just two years from now.

Issued as a discussion paper in October by both the FASB and the International Accounting Standards Board, the goal of the redesign is to address investor complaints that items on each of the financial statements are not linked across the three statements, and that dissimilar items are often aggregated.

Among the notable features: all three statements — balance sheet, income statement, and cash-flow statement — will be divided into two major sections: business and financing.
The "business" section — which is subdivided into operating and investing categories — will focus on what a company does to produce goods and provide services. The operating category will include its primary or "core" revenue and expense-generating activities, and the investing category will include activities that generate a return but are not "core."

The "financing" section will include those activities that fund a company's business activities. For nonfinancial institutions, that would primarily include cash, bank loans, bonds, and other items that arise from general capital-raising activities.

One effect of the new format is that the balance sheet won't balance the way we expect it to. That is, assets won't equal liabilities and equity because assets and liabilities will be in each category.

Another feature guaranteed to generate some controversy is that management will decide whether items in the financial statements are related to operations or to financing. That means different companies might account for the same item differently. A manufacturer might record proceeds from mortgage-backed securities as investment earnings, while a bank might record identical proceeds as operating earnings.

Although the new statement categories may resemble those used on current cash-flow statements, they won't actually be handled the same way. For example, under SFAS No. 95, if you've invested in property, plant, and equipment, you would call that an investing activity. But under the FASB's new proposal, capital expenditures may well end up in the operating category (property, plant, and equipment used to develop your inventory is an operating asset).
Another big change for preparers: using the direct method to generate a cash-flow statement. Though companies have the option to do so under current accounting, that option is almost universally ignored in favor of the indirect method.

Although this is only in the “discussion stage” at this point, one thing’s for sure: huge changes are coming to financial statement presentations.