On Wednesday, Feb 3rd, 11 am ET, we will be joined by Steven Orpurt of Pepperdine University. Steve will be discussing his paper, entitled “Do Direct Cash Flow Disclosures Help Predict Future Operating Cash Flows and Earnings? This work is co-authored with Yoonseok Zang, also of Singapore Management University, and was recently published in The Accounting Review.

The abstract of the paper follows in its entirety:

Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these stimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance. After conducting several tests for self-selection concerns, we conclude that the direct method is valuable to investors when forecasting future cash flows and earnings.

The topic of whether the direct method of reporting operating cash flows benefits users is very timely, given that the joint staffs of the FASB and IASB are preparing to issue an exposure draft that recommends that firms be required to present a direct method statement of cash flows.

I suspect this will be an interesting discussion as many people seem to hold strong opinions about cash flow reporting, and because Orpurt and Zang (2009) was one of the papers that most influenced the thinking of the boards and staff when deliberating the issue of cash flow reporting.

I hope you will join us on Wednesday, and remember that you can attend Round Table Discussions in Second Life (instructions here) or on the web at our LIVE page.

*Update: We have embedded the video here for easier access.