Do You Know What’s Ahead for Financial Statements?

July 9, 2010

As a Boston-based venture capital firm that focuses on expansion stage technology companies, we don’t often opine on accounting matters…this is much better left to auditors. The tricky issue here is that not all expansion stage companies have grown to the stage where they can afford an audit firm, and are actually pretty focused on their businesses…often blissfully unaware of upcoming technical pronouncements in the accounting world.

If you haven’t been paying attention to the ongoing discussions of the replacement of GAAP in the US with IFRS (International Financial Reporting Standards), or some semblance thereof, I can’t blame you. Public companies will be hit with this first — when and if the transition date is determined — with private companies following at some later point. If you’re an expansion stage company, you should, however, at least be aware that GAAP as we know it here in the US today will most likely be reaching the end of its lifetime in the next few years.

Last week, as another step down the GAAP/IFRS convergence path, the FASB (Financial Accounting Standards Board) issued a staff draft of proposed sweeping changes to financial statement presentation. This draft proposal is an output of a joint project of the FASB and the IASB (International Accounting Standards Board)…probably a good clue that the convergence of GAAP to IFRS is realistic.

Perusing FASB exposure drafts can be pretty dry, but here are the highlights:

  • Financial information is not presented consistently in financial statements (either worldwide or under GAAP)
  • Financial information is not disaggregated enough to be useful

As a result, FASB is proposing considerable changes to the format of the balance sheet (statement of financial position), statement of operations (statement of comprehensive income), and statement of cash flows as we know them today, so that business and financing activities are consistently presented across all statements and disaggregated into common economic characteristics.  A summary table of the proposed format changes can be found here.

What should expansion stage companies do now? Become familiar with the proposed changes. Explore whether your information systems support will accommodate the proposed requirements. Be aware that your current financial team may need to invest in training and education around the proposed requirements when they do appear imminent.