9
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y S P R I N G 2 0 1 6 , V O L . 1 7 , N O . 3
Indeed, the level of discretionary accruals and portion
of accruals that result in actual cash flows in a timely
manner are two methods for assessing earnings quality
that are discussed in the academic literature.
1
0
Because companies often manage earnings to meet a
targeted amount of earnings per share with the aggres-
sive use of accruals, persistent increases in current re-
ceivables accompanied by accrual net income similar to
that of the prior period (or close to zero) could indicate
the presence of earnings management. While profes-
sionals can conduct earnings quality assessments by
other means, the cash flow statement prepared using
the IM readily shows the differences in accrual- vs.
cash-basis income and the changes in accruals.
Therefore, in our opinion, eliminating the option for
the IM or allowing the DM without reconciliation to
net income could result in a less useful statement for
some users.
As the accounting community struggles to come to
terms with the presentation of cash flows, many respon-
dents state the DM is likely more advantageous for
some users. This is a position that the existing literature
supports, but the consensus favored the IM throughout
the life of the statement. Over the years, opinions re-
mained remarkably consistent. As we described, the
comments from the NFPRG in 2015 are consistent with
those for the 2008 discussion paper and with the 1987
consensus for Exposure Draft #23 issued for SFAS 95 at
the Statement’s inception. The one notable exception is
banks that preferred the DM for SFAS 95 but favor the
IM in the 2008 discussion paper. Over the Statement’s
life, interested parties have indicated that the cost of
switching to the DM is not worth any incremental bene-
fit over the IM that might exist. Because rule makers
have consistently favored mandating the DM, it is likely
that the Statement will undergo a transformation in the
future. The discussion to mandate the DM is almost
certainly going to continue, so accounting and finance
professionals will need to consider the potential costs
and benefits of the DM and IM going forward.
■
Note: On August 18, 2016, the FASB issued ASU
No. 2016-14, “Not-for-Profit Entities (Topic 958):
Presentation of Financial Statements of Not-for-Profit
Entities.” The Board says these new rules complete
Phase I of the project. They continue to allow nonprof-
its to choose either the DM or IM to present operating
cash flows, and they no longer require the inclusion of
an indirect reconciliation of operating cash flows. But
more could happen in other areas.
Nathan H. Jeppson, Ph.D., CPA, is an assistant professor
in the accounting department at Montana State University
at Bozeman. You can reach Nathan at (406) 994-6204 or
John A. Ruddy, CPA, CFA, is an assistant professor in the
finance department at the University of Scranton in
Scranton, Pa. You can reach John at (570) 941-4303 or
David F. Salerno, Ph.D., CPA, is an assistant professor in
the accounting department at the University of Scranton.
You can reach David at (570) 941-4313 or
Endnotes
1 David M. Katz, “FASB Revisits the Cash-Flow Statement,”
CFO, September 30, 2014.
2 Tammy Whitehouse, “FASB Proposal May Foreshadow
Changes to Cash Flow Rules,” Compliance Week, April 24, 2015.
3 It should be noted that the 91 respondents in the 2015 NF-
PRG and the 229 respondents to the 2008 discussion paper
were self-selected participants when they commented. Thus,
similar to prior studies, self-selection bias may exist, so it can-
not be assumed the discussion represents the opinions of all
preparers and users of financial statements.
4 R.S. Olusegun Wallace, Mohammed S.I. Choudhury, and
Maurice Pendlebury, “Cash Flow Statements: An International
Comparison of Regulatory Positions,” The International Journal
of Accounting, Volume 32, Issue 1, January 1997, pp. 1-22.
5 Ibid.
6 While some letter writers only provided one explanation for
their preference, many provided two. No more than two argu-
ments were tallied for each letter.
7 Jeffrey Hales and Steven Orpurt, “A Review of Academic
Research on the Reporting of Cash Flows from Operations,”
Accounting Horizons, September 2013, pp. 539-578.
8 Tammy Whitehouse, “FASB Shifts Gears on Cash-Flow
Classification Issues,” Compliance Week, April 7, 2015.
9 Tammy Whitehouse, “FASB Proposal May Foreshadow
Changes to Cash Flow Rules,” Compliance Week, April 24, 2015.
10 For a discussion of discretionary accruals, see Jennifer Jones,
“Earnings Management During Import Relief Investigations,”
Journal of Accounting Research, Volume 29, Issue 2, Autumn
1991, pp. 193-228; for a discussion of accruals and cash flows,
see Patricia Dechow and Ilia Dichev, “The Quality of Accruals
and Earnings: The Role of Accrual Estimation Errors,” The
Accounting Review, Volume 77, Supplement 2002, pp. 35-59.