The Costs and Benefits of Requiring an Additional Presentation of Direct Cash Flow Statements – Evidence from Accounting Practice and Empirical Research

Abstract

IASB and FASB staff are proposing that the direct in addition to the indirect method of presenting operating cash flows should be required. Critics argue that direct presentation would be too costly, less reliable and impede the timely release of filings. Based on a recent report on the practices of German firms, we show that these concerns are not well founded. We corroborate this result with evidence from Australian firms that only exceptionally discontinued the direct method when, in 2007, the IAS 7 choice between both methods was introduced. Critics further argue that the direct method would not provide useful information, while the staff proposal assumes it to be more useful, referring in particular to academic research. Recent reviews of related empirical studies (e.g. Bradbury, 2011; Hales and Orpurt, 2013) indeed favor mandating the direct method. In our detailed review, we show that extant studies do not adequately address the current standard-setting issue of requiring direct in addition to indirect presentation. Thus, we conclude that it is not appropriate to use the results of extant academic research in support of the staff proposal.

Keywords: Cash Flow Statement, Direct Method of Presentation, Operating Cash Flows, Financial Statement Presentation Project

JEL Classification: K22, M41, M48