A FRAMEWORK FOR MORE EFFECTIVE

FINANCIAL REPORTING
Corporate financial statements and their related disclosures are fundamental to sound
investment decision making. The well-being of global financial markets, and of the investors
who entrust their financial present and future to those markets, depends directly on the
information financial statements and disclosures provide. The following framework is
intended to enhance effectiveness in financial reporting.
Guiding Principles
The primary financial statements
must provide the information needed
by equity investors, creditors, and
other suppliers of risk capital.
In financial reporting, standard-setting
as well as statement preparation,
the entity must be viewed from the
perspective of an investor in the common
equity issued by the company.
Fair value information is the most relevant
information for financial decision making.
Recognition and disclosure must
be determined by the relevance
of the information to investment
decision making and not based upon
measurement reliability alone.
All transactions and events must
be recognized as they occur in
the financial statements.
Investors information requirements must
determine the materiality threshold.
Financial reporting must be neutral.
All changes in net assets, including
changes in fair values, must be recorded
in a single financial statement, the
Statement of Changes in Net Assets
Available to Common Shareowners.
The cash flow statement provides
information essential to the analysis
of a company and should be prepared
using the direct method only.
Changes affecting each of the financial
statements should be reported and
explained on a disaggregated basis.
Individual line items should be
reported based upon the nature
of the items rather than by the
function for which they are used.

A Better Model
Disclosures must provide the additional
information investors require to
understand the items recognized in the
financial statements, their measurement
properties, and their risk exposures.

Criteria for Development of

Effective Disclosures
Disclosure is not a substitute for
recognition and measurement, and
recognition and measurement do not
eliminate the need for disclosure.
Standards for recognition and
measurement of financial statement
items and their related disclosures
must be developed concurrently.
Policy choices, assumptions,
judgments, and methods must
be fully and clearly disclosed.
Disclosures should provide sufficient
disaggregated information for investors
to be able to fully understand and
interpret the summary information
in the financial statements.
Investors require clear and complete
disclosure of a companys risk exposures,
its strategies for managing risks, and
the effectiveness of those strategies.
Investors must have clear and complete
disclosure of all off-balance sheet
assets, liabilities, and other financial
arrangements and commitments.
Investors require clear and complete
information about intangible
assets held by a company.
Investors require clear and complete
information about a companys
contingencies and commitments.

The complete Comprehensive Business Reporting Model is available at www.cfainstitute.org/CBRM.

We propose that standard setters provide

investors with a revised set of four
financial statements. All statements are of
equal importance.

Comparative Balance Sheets

Minimum of three years (three balance
sheets and two income and cash flow
statements provide two full years of
data), with accounts listed in order of
decreasing liquidity within each category.
Comparative Cash Flow Statements
Minimum of two years, prepared using
the direct method, with a supplemental
schedule of significant noncash
financing and investing activities.
(New) Comparative Statements of
Changes in Net Assets Available
to Common Shareowners
Minimum of two years, that:
a. Identify and distinguish among:
i. Current-period cash and accrual
transactions;
ii. Estimates; and
iii. Changes in the fair values of
balance sheet accounts.
b. Provide information by nature of each
resource consumed rather than
the function for which it is
consumed; and
c. Display transactions with owners
that affect net assets, such as
dividends and new share issuances.
Reconciliation of Financial Position
Reconciles the comparative balance
sheets by further disaggregating the
amounts in the statements mentioned
previously and by clearly showing
how the statements articulate.

2014 CFA Institute

v. 2.0