Financial performance reporting: striking a balance between transparency and simplicity.

As corporate finance moves towards ever-greater transparency, the Financial Accounting Standards Board (FASB) is engaged in a significant project to redesign he income statement. Financial Performance Reporting by Business Enterprises has two main objectives:

* To improve the quality of information displayed in financial statements so that investors, creditors and others can better evaluate an enterprise's financial performance.

* To ascertain that the financial statements provide sufficient information to permit calculation of key financial measures used by investors and creditors.

Users of financial statements have expressed strong interest in developing reporting standards with enhanced predictive value. This is consistent with the objectives of a parallel project being undertaken by the International Accounting Standards Board (IASB) and the Accounting Standards Board (ASB)of the U.K. However, IASB's tentative conclusions so far are headed in a different direction from FASB's.

At the same time, the importance of not adding to the current complexity and volume of disclosures was recognized. Forcing compliance to performance metrics irrelevant to a specific industry, with the stated aim of consistency, would accomplish nothing.

FASB continues to deliberate on this complex project. Here are specific, tentative decisions made to date:

* There should be a single statement of comprehensive income, reporting all items of revenue, expense, gains and losses.

* The statement of comprehensive income should comprise three major categories: 1) Business Activities--a management-defined category; 2) Financing--a defined category; and 3) Other--a residual category.

* Income tax expense is to be presented as a separate classification after the categories.

* Income from continuing operations would be a required subtotal.

* Discontinued operations are presented as a separate classification, net of tax effects and after income tax expense.

* Other comprehensive income is retained, as required by FASB Statement 130.

* The cumulative effect of change in accounting principle is included in other comprehensive income.

* Extraordinary transactions and events are to be reported in the applicable category, before tax, not labeled as "extraordinary."

While categorization, if done properly, could add clarity to the report, it could also add confusion. Statement users must be given a way to bridge from the old income statement categories to the new ones, with language explaining how the new categories represent an improvement, and provide examples using both the old and new formats. The required systems overhaul to operationalize these changes would be massive and far-reaching.

Several existing items should continue on the statement. It is sufficiently important to distinguish between realized and unrealized transactions that the concept of recycling should be retained. A potential argument against the comprehensive income statement may, in fact, be that it is polluted with too many unrealized gains and losses. Earnings per share is a critical measurement for investors and should be retained in some form.

The new statement must not become excessively complex. This becomes especially worrisome if extraordinary events and restructurings are added in. Discussion continues on including a column distinguishing transactions and events, representing remeasurements from all other types of transactions and events, as used in the IASB model. Footnote disclosure would simplify the face of the statement and would be a preferable option.

FASB has already moved from "revolutionary" to "evolutionary" in describing its project. It must not venture too far in introducing new concepts into the statement and in determining how information will be disaggregated within the categories.

A key consideration in the income statement redesign should be to keep the new statement as simple as possible. If not, this will be a classic case of throwing the baby out with the bathwater. If simplicity is sacrificed to the goal of all-in-one comprehensiveness, the ultimate aim of transparency will be ill-served. It is vital that FASB sufficiently field-test suggested proposals to ensure that all the kinks are worked out before finalization.

Lastly, as FASB takes on additional projects that also portend radical changes, consideration needs to be given to the resource constraints already being felt by many companies, particularly small and medium-sized ones. The SEC is hiring staff in the hundreds, as is the PCAOB. FASB is hiring more staff. The accounting firms need more experienced resources. Meanwhile, companies need more staff to keep up with all of the new regulations and requirements. We are all looking for the same skill sets. At some point, we will break.