Research Fellow Daehwa Jung

Agenda-G-2 Financial Statement Presentation Research FellowDaehwa Jung

Contents Background Working Group Discussion Issues Summary

Contents Background Working Group Discussion Topics Summary

Background IASB FASB Joint Project Establish Global Standard Project Objective Improve Usefulness of FS The Boards’ Goal 3

Background continued • Steps for the Financial Statement Presentation(FSP) Project • Discussion Paper(DP) published: Oct. ‘08 • Comment period given: until Apr. ‘09 • 1st AOSSG meeting: Nov. ‘09 • Staff Draft posted: Jul. ‘10 • 2nd AOSSG meeting: Sep. ‘10 • Exposure Draft(ED) expected to be issued: Q1 of ‘11 • Final standards expected to be issued: Q4 of ‘11 4

The IASB Staff Draft of ED on FSP • The IASB Staff Draft on FSP • Reflects the cumulative, tenative decisions made by the boards. • Includes almost all important issues related to FSP • Core principles of FSP are • Portraying a cohesive financial picture, and • Disaggregating information (useful in assessing future cash flows) 5

Working Group Purpose • To assist the AOSSG in preparing improvement proposals to the IASB regarding the staff draft on FSP Lead country • Korea Co-lead country • China • Australia, Hong Kong, Japan, Macao, Malaysia, New Zealand Members 7

Chronology of Working Process in 2010 • Jul. 1: staff draft posted • Aug. 7: distribution of a questionnaire for FSP WG • Sept. 9: circulation of lead country’s comments on the questionnaire for FSP WG → Australia, China, Hong Kong, Japan, Macao, and New Zealand commented • Comment period given: until Sep. 15 • Sep. 29: 2nd AOSSG meeting 8

Contents Summary Working Group Discussion Topics Summary

Topics to be discussed Topic 1 Operating & Investing Categories Operating Finance Subcategory Topic 2 Direct & Indirect Cash Flow(CF) Statement Topic 3 Reconciliation of Income to CF Topic 4 Multi-category Transaction Topic 5 Cash & Cash Equivalents Topic 6 10

1. Operating & Investing Categories • What is the main issue? • To appropriately classify operating and investing activities. Business Activities Operating Investing 11

1. Operating & Investing Categoriescontinued • The IASB Staff Draft’s Proposal • An operating category is comprised of assets(liabilities) related to an entity’s day-to-day business. • An investing category is comprised of assets(liabilities) which generate return with no significant synergy from combined assets. • Changes from the DP to the Staff Draft • The notion of “Core and non-core activities” was the key principle to classify the business section in the DP, however it is eliminated. • The boards proposed the independent definition for each category. 12

1. Operating & Investing Categories continued • WG’s Comments • The definitions of the categories are rule-based. • The underlying use may not be reflected in classifications. • Most financing activities exist inseparably with operating activities. • Lead Country’s Suggestion • To be principle-based, the notion of “Core and non-core” should be reflected in their definitions. • It is recommended thatthe concept of the business section be eliminated, resulting in three sections: Operating section, Investing section, Finance section. 13

2. Operating Finance Subcategory • What is the main issue? • To classify some activities with both operating and financing characteristics in their proper place. Operating Financing 14

2. Operating Finance Subcategorycontinued • The IASB Staff Draft’s Proposal • Any activity directly related to an operating activity is classified as an operating finance subcategory. • Changes from the DP to the Staff Draft • The operating finance subcategory was not stated in the DP. • However, many argued some parts of the operating category were attributable to the finance section. • The boards added the subcategory to the staff draft. 15

2. Operating Finance Subcategory continued • WG’s Comments • It is difficult to conclude that the benefit is greater than the cost since it is arbitrary and burdensome. • The proposal is not consistent in itself since it does not consider the concept of an investing finance subcategory. • The operating finance subcategory is better to be included in a debt category. • Lead Country’s Suggestion • It is appropriate to divide until reaching the operating category level; the operating finance subcategory is unnecessary. 16

3. Direct & Indirect CF Statement • What is the main issue? • To identify applicable and accommodating method to both users and preparers of financial information. Revenue Cash Inflow direct Cost Cash Outflow Profit Operating CF indirect 17

3. Direct & Indirect CF Statementcontinued • The IASB Staff Draft’s Proposal • Operating CF shall be prepared in a direct method • Changes from the DP to the Staff Draft • The proposal of the DP created considerable controversy between an indirect and a direct method. • Nevertheless, the boards retained the proposal to present all CF directly, including operating CF. 18

3. Direct & Indirect CF Statement continued • WG’s Comments • The current accounting system is mostly based on an accrual basis. • The users are accustomed to the indirect CF statement. • The cost to maintain the required cash receipts and payments will be tremendous. • In Japan’s case most preparers prefer the indirect method. • Lead Country’s Suggestion • The boards should still consider whether the direct method would improve the CF statement’s usefulness compared to the cost. 19

4. Reconciliation of Income to CF • What is the main issue? • To identify the type of income to focus on and its appropriate place to be put. SCI or Notes Operating Income Operating CF Net Income 20

4. Reconciliation of Income to CFcontinued • The IASB Staff Draft’s Proposal • A reconciliation is required to be presented as part of the statement of CF. • An entity shall present a reconciliation of operating income to operating CF. • Changes from the DP to the Staff Draft • It should be an integral part of the SCF • Operating income is adjusted to operating CF, but not with each account. 21

4. Reconciliation of Income to CF continued • WG’s Comments • It might distract users’ attention if the reconciliation is an integral part of the SCF. • Net income is vested to shareholders, not operating income. • Lead Country’s Suggestion • The reconciliation should be disclosed as a note. • It is more appropriate to reconcile from net income to operating CF. 22

5. Multi-category Transaction • What is the main issue? • To articulate a suitable accounting policy for basket transaction. 23

5. Multi-category Transactioncontinued • The IASB Staff Draft’s Proposal • The net effects on SCI and SCF shall be classified in the multi-category transaction section. • Changes from the DP to the Staff Draft • The boards did not reach a preliminary view in the DP, and requested comments from the respondents. • The multi-category transaction section is introduced. 24

5. Multi-category Transaction continued • WG’s Comments • The proposal is not consistent with the cohesiveness principle. • Other standards, such as IAS 16 and IFRS 3, require allocation for basket transactions. • Classification in an independent section is more pragmatic and cost-effective than allocations. • Lead Country’s Suggestion • The multi-category transaction should be allocated. 25

6. Cash & Cash Equivalents • What is the main issue? • To articulate appropriate guidelines for cash and cash equivalents. or 26

6. Cash & Cash Equivalentscontinued • The IASB Staff Draft’s Proposal • Cash equivalents shall be classified as short-term investments regardless of their liquidity or maturity. • Changes from the DP to the Staff Draft • There was not a congruent opinion upon the DP. • However, the statement of the staff draft is identical to the DP without more persuasive explanation. 27

6. Cash & Cash Equivalents continued • WG’s Comments • Cash equivalents function mostly the same as cash. • Current requirements should remain until a sufficient principle is identified • Cash equivalents have different economic characteristics than cash. • Lead Country’s Suggestion • Entities should not be prevented from classifying cash equivalents in the operating category. 28

Summary 30

Thank you !! 31

Research Fellow Daehwa Jung