Just got back from AAA meeting in San Francisco.  Great meeting.  One session consisted of a panel of preparers and users debating the costs and benefits of the joint IASB/FASB project on financial statement presentation.  In general it was very good. But I think the analysts were so focused on pushing for a direct method cash flow statement, that they perhaps gave an erroneous impression to the academics in the audience.

In particular, they kept stating that analysts’ use of earnings in valuation (specifically PE multiples) would probably decrease when the analysts could take the numbers from the direct method cash flow statement, plug them in a spreadsheet, and use those numbers to project future cash flows.  If you listened to their words, it seemed like they preferred a valuation model that did not use any accrual accounting concepts.  Several audience members mentioned this to me later.

I believe that their push for the direct method resulted in the use of short-cut terms like “cash earnings”.  Having read some explanations of what analysts do in projecting future profitability, my impression is they start with accrual earnings and then back out a few accruals that they feel might behave in special ways (e.g., special items) which could reduce the predictive ability of their model.  But the majority of accruals are incorporated in the “cash” numbers that are the main inputs for their analysis.

If I am wrong, and they really meant what they said, then maybe the direct method cash flow statement is not such a good idea.  Research shows that the accrual numbers are more correlated with stock price performance than cash flow numbers (see Dechow 1994).  Investors might give more weight to the cash and less to the earnings because the cash is now salient and some finance professors seem infatuated with cash.

Did any of the rest of you attend the session?  What was your impression?