The proposals in the FRED are a natural progression from FRS 3 ‘Reporting Financial Performance’. The proposals will change the existing requirement on reporting financial performance and it will reflect the shift in views internationally towards reporting comprehensive income. The proposal remains the information set approach of FRS 3. the FRED propose that such information on dividends, earnings per shares should be shown as memorandum items at the foot of the statement. Notes to the single performance such as a reserve notes and historic gains and losses are also specified.
One of the developments from FRS 3 is that the profit and loss account and the statement of total recognized gains and losses are combined to form a single statement of financial performance. “The idea that is emerging, largely within the IASB, but explicitly as a eventual basis for convergence by ASB and other national regulatory bodies, is for a single statement of financial performance replacing, or combining depending on your point of view, both the profit and loss account and the statement of recognized gains and losses”( Alexander,p633). The statement is divided into three sections which are operating, financing and treasury and finally other gains and losses. Recycling of gain and losses between different sections of the performance statement is not permitted.
The FRED would not permit the inclusion of dividends for the period in the statement of financial performance because they represent transactions with owners as owners rather than expenses of the entity. Dividends for the period should be shown as memorandum items at the foot of the performance statement, both in total and per share.
Reconciliation of ownership interest is required as a primary statement. A primary statement should be presented reconciling the opening and closing totals of ownership interests of the period. “Certain reconciling items, namely the results of the period as reported in the performance statement, dividends for the period (broken down into equity and non-equity dividends as required by FRS4 ‘capital instruments’), and the cumulative effect of prior period adjustment, should be disclosed separately in the reconciliation” (Accounting Standards,p1672). The changes in ownership interest which is the additional information not from the performance statement are important in understanding the change in the entity’s financial position over the period. The purpose of the reconciliation of ownership interests is to highlight the additional change and it needs to be shown as a primary statement, separately from the statement of financial performance.
After the proposals have been issued, the UK reporting of financial performance will come in the same line with the international accounting standards. The introduction of a single performance statement will allow users of accounts to view more easily the whole performance of a reporting entity. The information which is contained in the performance statement can be connected with the balance sheet changes by the users, and it may increase the comparability between the reporting entities. After the proposal the format of the performance is getting close to the format of cash flow and it could help users appreciate the cash impact on performance items.
In early 2004, the IASB is not near agreement on an exposure draft, because the result of this will be that the IAS exposure draft, UK exposure draft, then it comes out with IAS standard and UK standard. It is likely that the new UK standard to replace FRS 3 will take a long time to be complete. The main thing to do now is to replace the income statement with a layered matrix structure. Information will be represented vertically layered under various subheadings (such as business which include operating, other business and financial, financing; tax discounting activities and cash flow hedges profit. The horizontal headings come out with totals; profit before remeasurement and remeasurement which could represent the effect of remeasurment.
“The objective of financial is to provide information about reporting entities financial performance and financial position that is useful to a wide range of users for assessing stewardship of the entity’s management and making decisions.” To evaluate this kind of statement with matrix structure, we need to look at its relevance,reliability,comparability and understandability. The investors are likely to be interested in the performance statement which shows the expenses and income about the future, so the proposal is relevant for decision making. The different accounting policy may affect the final result showed on the performance statement ant it may not be comparable with other entity. For people knows very little about accounting, this statement may be difficult for them to understand.
References:
Financial reporting, David Alexander & Anne Briton, 7th edition.
Accounting standards 2004/2005
