April 8, 2021
The Financial Accounting Standards Advisory Council (FASAC) held a lean-in session on Thursday, April 8, 2021 to solicit Council members’ views about various financial reporting areas to understand priority topics that the Board should address. Council members discussed the following topics:
Financial Performance Reporting, Including Non-GAAP Metrics: Council members discussed whether improvements to financial reporting are needed relating to (a) disaggregation of certain income statement line items, either on the face of the income statement or through disclosure in the notes, (b) whether there should be standardization of certain non-GAAP financial metrics or key performance indicators (KPIs), such as earnings before interest, taxes, depreciation, and amortization (EBITDA), in the GAAP financial statements, and (c) separate presentation of recurring and nonrecurring income and expenses.
Investors and other financial statement users noted that disaggregation of income statement line items would provide useful information, increase transparency, and allow investors to adjust the information for their own analyses. Some preparers and practitioners indicated that the potential costs associated with further disaggregation of the income statement could be significant because it could require new systems and changes in control processes. Individual Council members also (1) observed that increased income statement disaggregation could require a company to present information that could result in a competitive disadvantage and (2) summarized certain academic research about investors’ use of disaggregated financial statement information.
Council members had mixed views about whether the FASB should prioritize standardization of certain KPIs. Some investors and other financial statement users acknowledged that standardization of certain non-GAAP measures may be challenging, while other Council members suggested that the Board focus on greater standardization of certain financial KPIs such as EBITDA or free cash flow. Preparers expressed that even if the FASB were to standardize certain financial KPIs, companies would continue to provide their own non-GAAP metrics in order to tell the company’s financial story for the reporting period.
Additionally, some Council members observed that standardizing certain financial KPIs may not be feasible because there are differences in how management internally views the financial performance of their business as well as differences between industries.
Environmental, Social, and Corporate Governance (ESG) Disclosures: FASAC members discussed potential improvements to financial reporting disclosures related to ESG matters.
Council members noted that disclosures concerning ESG matters and the impact on financial statements would provide decision-useful information for investors and other financial statement users. However, most Council members also agreed that it would be operationally difficult to differentiate whether (and which) ESG matters have a direct (or indirect) impact on financial statements due to the broad nature of these matters and the challenges in distinguishing the effects of an ESG-related matter and other changes affecting a company’s financial statements. In addition, Council members noted that certain of the suggested improvements related to ESG matters are broader than the financial statements.
Presentation of Statement of Cash Flows: FASAC members discussed the presentation of the statement of cash flows. Overall, investors and other financial statement users noted that the statement of cash flows should be a priority for the Board’s consideration. Investors and other financial statement users shared their individual views on suggested improvements, including:
- Targeted improvements to the cash flow statement for financial institutions. Specifically, requiring separate cash flow information for significant financial subsidiaries of a parent company. This could allow investors to (a) make better comparisons of those financial subsidiaries with other similar financial organizations and (b) gain a better understanding about the core business performance of the parent company.
- More detailed information about certain line items within the statement of cash flows to help investors gain a better understanding of a company’s core operations.
- Greater consistency in presentation of certain cash flow items within the operating and financing sections.
- Consideration about the classification of cash flows related to improvements to a company’s digital infrastructure.
Some preparers generally do not view changes to the statement of cash flows as a high-priority area for the Board. Those preparers indicated that both implementation and ongoing costs associated with changes to the cash flow statement could be significant and would require major system changes.
Other Topics: FASAC members also briefly raised a few other topics for considered by the Board as part of its agenda consultation process.
FASAC Meeting Recaps are provided for those interested in following the activities of the FASAC. Official positions of the FASB are reached only after extensive due process & deliberations. More details on the FASAC’s input on the FASB’s projects can be found within the meeting minutes, which will be published on the FASB website in the coming weeks.