CFO Blog: Commentary and Opinion

"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]?"

Last week, the European Union deferred the adoption of the international accounting rule known as IFRS 9, the first part of the three-part financial-instruments. The EU refused to endorse the standard until its pan-European members got a look at the remaining pieces.

IFRS 9 deals with the classification and measurement of financial assets, while the other two parts, which are currently being worked on by the International Accounting Standards Board, concern hedge accounting and impairment of financial assets.

From a practical perspective, the temporary snub from the EU isn't earth shattering, although it does nix early adoption. The rule likely won't go into effect until 2013, and IASB expects to have the other parts completed by the end of 2010, the same time the U.S. Financial Accounting Standards Board plans to finish all three parts of its standard on financial instruments.

Some executives were disappointed at the EU's decision. In a letter to the Financial Times published today, Douglas Flint, CFO of banking giant HSBC, said the EU's decision was "regrettable, noting that"while IFRS 9 does not make things perfect, it does make them better."

Whatever your opinion of the new rule, this momentary blip may portend further politicization of the accounting standard-setting process -- if the past is any guide. Indeed, last year France's Nicolas Sarkozy and Germany's Andrea Merkel lent their voices to an EU threat that lawmakers would pass their own fair-value rules if IASB didn't hurry up and publish its version.

In the United States, two legislative proposals -- one from Colorado Democrat Rep. Ed Perlmutter, the other from California Republican Rep. Gary Miller -- aim to increase the level of federal oversight over FASB. Further, a move away from U.S. GAAP and to international standards is currently in the hands of a political appointee, as CFO.com's David Katz reports today. In the past, that has spelled trouble, considering that under former SEC Chair Christopher Cox the SEC strong-armed FASB to get more say over the appointment of board members.

The year ahead will produce several significant changes to accounting rules. Whether the non-so-invisible hand of politics will be pulling the strings is another story.

Paul Volcker, a former Federal Reserve Board chairman and currently one of President Obama's economic advisors, was asked during a recent conference whether he thought the Big Four accounting firms were "too big to fail." He replied, "That's an obvious problem."

In general, being too big to fail is the notion that a company's economic reach is so vast and interconnected with the viability of so many other companies and individuals that allowing it to collapse would cause a crushing systemic financial blow to the economy. Over the past year, banks, auto makers, and financial service firms all were deemed too big to fail by the U.S. government, and as a result received federal aid to keep afloat.

Volcker, the keynote speaker at a conference sponsored by the AICPA and the IASB, noted that in its final report released last year, the U.S. Treasury Advisory Committee to the Auditing Profession questioned whether there was enough competition in the global auditing profession. He too wondered whether the PCAOB needed to have the same discussion about the auditing profession that bank regulators had had about their industry, namely that some type of "resolution process" might be needed that allowed the government to take control of bankruptcy proceedings if one of the Big Four folded.

Volcker said he didn't particularly like the idea of government intervention regarding a possible accounting firm meltdown. Yet he admitted that the auditing industry's "interdependence and consolidation" would likely require a solution of "extraordinary means."