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A New Vision for Accounting

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The difficulty in constructing a direct cash-flow statement largely depends on the company. As controller for multinational McCormick, Kelly says he found the exercise "virtually impossible," with thousands of transactions involving currency translations and so-called intercompany eliminations (what one division charges another for a product) gumming up the works. "If I were to get a cash-flow statement from each of my divisions around the world and try to add it up, it would never add up to my general cash-flow number," he says.

Rickard, on the other hand, switched CVS/Caremark to the direct cash-flow method three years ago as part of an experiment, and found it so easy he never bothered to switch back. That's in part because all of the company's operations are stateside, and because Rickard had no intercompany eliminations.

Survey respondents were similarly split. About 40 percent said constructing a direct cash-flow statement would require major adjustments, while it would take minor adjustments for nearly 30 percent. Given such disparity, finance executives can expect something of a reprieve. The IASB, for one, doesn't think the direct method should be required, and FASB members say they are looking closely at a hybrid direct/indirect method now used in Australia and New Zealand as a compromise.

"Radical Yet Insightful"
The concept of the reconciliation schedule, on the other hand, is gaining much wider support. Young thinks it is one of the most critical components of the new format, and more important than mandating the direct cash-flow statement. Wall Street is pushing for it as well.

"As we see more fair value coming through the financial statements, those statements need to do a better job of showing where the changes are coming from; this would help a lot," says Pegg of Bear Stearns. Jonas of Moody's considers the reconciliation schedule "the most radical yet most insightful" part of the project so far. "Many fundamental analysts are trying to understand the business's ability to generate recurring, persistent cash flows," he says, and the schedule helps them do that.

Surprisingly, some finance executives endorse it, too. "It's the kind of schedule you do to make sure you haven't made a mistake anyway, and to me, there's no difference if we publish it," says Rickard. More than 50 percent of survey respondents said they thought the reconciliation schedule would help explain revenue changes to investors; only 28 percent said it would not.

Again, though, the appropriate level of detail remains an open question. The basic categories that FASB is contemplating right now are: cash flows not affecting income, accruals and systematic allocations, recurring valuation changes, and remeasurements other than recurring valuation changes. Beyond that, the number of columns and precision of reconciliation vary greatly among the drafts. In some scenarios, the reconciliation schedule would replace the cash-flow statement (since it would contain it).

Inside Info
A potentially explosive change that is still only a twinkle in standard-setters' eyes is expanded segment disclosure. Last September, FASB said it was asking the IASB to sign off on the view that companies should have to classify segment as well as corporate data into operating, financing, and investing buckets. How much detail will be provided within those buckets remains to be seen. The alternatives FASB proposes range from including only significant line items to including enough segment data to total the general financials.

FASB members, particularly Young, are eager to push this part of the project forward. "I'm beginning to believe that's where some of the greatest payoffs are," he says. And it's hard to find an investor or an analyst who would turn down such plum information. Jonas, for one, is clamoring for it. "For a complex business, the unit of analysis is often the segment," he explains. "When we're analyzing GE, for example, we do look at GE consolidated, but only after we analyze each segment. But yet we don't get nearly the info in segments that we get at the consolidated level."