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"My first reaction to the direct cash-flow method was that my forehead bounced off my desk," quipped David Bond, senior vice president of finance and control for Safeway Inc., at the Financial Executives Internal financial reporting conference in New York on Tuesday. Besides getting a big laugh, he also caused many conference attendees to nod their heads in agreement.
Many of the 229 comment letters received by FASB about its discussion paper on changing the face of financial reflected similar views. That is, a new standard requiring companies to account for cash via the little-used direct cash method rather than the ubiquitous indirect method seems too costly compared to its perceived benefits.
"We don't collect this type of information [required by the direct method]," asserted Bond, a panelist at the conference. "That's not the way our ERP system is set up to do things." Steve Whaley, controller for WalMart, agreed, saying the enterprise-resource-planning system for the king of the box stores would also have to be reprogrammed to spit out financial results under the direct method.
Basically, the direct method of accounting tracks cash changes from the bottom up to arrive at net income, rather than starting with net income and making adjustments. The astronomical number of changes that would be required if FASB mandates the direct method would make the move a lot like requiring U.S. companies to use international accounting standards, noted Whaley, adding that the systems changes would have to be in place before the rule could be implemented.
When opponents of the direct method say most companies use the indirect method, they aren't exaggerating. Neri Bukspan, chief accountant, Standard and Poor's, estimated that fewer than five companies in the Fortune 500 use the direct cash-flow method. Further, a recent survey by the American Institute of Certified Public Accountants found that only six to eight companies out of 600 large public and private companies polled go direct.
Bukspan told CFO that S&P is agnostic on whether companies should use the direct or indirect method. The credit agency is more concerned with another aim of the board's financial-statement project: to develop a line-by-line reconciliation between the cash-flow statement and income statement.
FASB is expected to release an exposure draft of the new rule for public comment by the second quarter of 2010, with a final standard slated to come out in mid-2011. That means the rule would likely take effect 2012.
For his part, Bond says the project's timing is all wrong. "It may be a good idea to think about this ý but with all the other changes we have to make over the next few years, are we going to get the best bang for our buck [with the financial statement presentation project]?"
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