Wednesday, August 5, 2009

FASB, IASB Support Moving to Direct Method For Cash Flow

As the FASB and IASB consider their proposed overhaul of financial statement presentation, one of the
significant changes would be the utilization of the direct method
rather than the indirect method for calculating cash flows.

The requirement to use the direct method is part of the proposed
changes that the two boards introduced in Discussion Paper (DP) No.
1630-100, Preliminary Views on Financial Statement Presentation.

The boards are planning to discuss the proposal in the near future, as
part of a broader discussion on financial statement presentation. In
this paper, the boards are advocating greater use of the direct method
of calculating operating cash flows.

Under the direct method, companies would present separately the main
categories of their operating cash receipts, such as cash collected
from customers, and operating cash payments, such as cash paid to
suppliers to acquire inventory. This approach is also known as the
income statement method because it requires companies to compute the
net cash provided by operating activities by adjusting each item in
the income statement.

Currently, most companies use what is known as the indirect method, by
reconciling profit or loss or net income to net operating cash flows.

Both U.S. GAAP and IFRS permit both the direct and indirect methods of
presenting operating cash flows. However, in DP No. 1630–100, the
boards said a major deficiency of the indirect method is that it
derives the net cash flow from operating activities without separately
presenting any of the operating cash receipts and payments.


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