The IASB have been accused of being too theoretical in their approach to the development of financial reporting and detached from reality.  However, I have seldom come across an idea of theirs that I consider as incredible as the proposed cash flow reconciliation schedule contained within their recent Financial Statement Presentation discussion paper.

To put this into context for those of you with better things to do than to read IASB discussion papers; the IASB has a project to review the format of the financial statements of entities complying with International Financial Reporting Standards.  There are some quite fundamental changes proposed with the Profit and Loss Account and the Balance Sheet, not least renaming both, to the Statement of Comprehensive Income and the Statement of Financial Position respectively, but it is the proposals for cash flow that I find so incredulous.

The IASB propose that companies should report their cash flows using the Direct method i.e. reporting cash actually received from customers and analysing cash paid relating to materials, labour, advertising, capital expenditure, lease obligations, R&D, pensions etc.  At the moment this method is optional with the majority of companies, in my experience, using the alternative Indirect method – starting with net profit, adjusting for non-cash items, working capital movement and then investing and financing cash flows.  To some the proposed change might seem a sensible idea based on how they forecast the cash flows within their company.  But major organisations with centralised purchasing and payment functions face major system change costs if these proposals are approved.

But the idea that I am astounded with is the format of the proposed reconciliation of cash flows to total profit or loss.  The draft schedule has five columns of numbers with row headings both left and right of these figures and over 60 line items.  This small-fonted double page spread is then replicated for the prior period.  Annual Reports are being roundly accused of being too complex and difficult to understand, this reconciliation schedule is only going to add to these problems and I fear open up the IASB and the accountancy profession in general to ridicule.

The comment period for the IASB discussion paper has now closed but there is still time to influence the debate prior to the issuing of the next phase of this project – an exposure draft due to  be issued in the first half of 2010.  Take a quick look at this aspect of the discussion paper available on the IASB website at www.iasb.org and give me your thoughts.  Am I totally off beam here or are there merits in the IASB approach?  Do you use the direct method and, if so, how do you reconcile the movement in cash to the profit and loss account?  If you use the indirect method to report your cash flows, how much of an upheaval would it be to move to a direct method and would the cost be significant?