Cashflow reporting – could do better

That cash is (still) king needs to be high in the minds of companies as company reports are made in 2009.

The Corporate Reporting Users Forum (CRUF) recently wrote to finance directors/chief financial officers appealing for an improvement in the level of cash disclosure in company accounts.

We at the ACT endorse CRUF’s appeal and are alerting our members to the proposals. But I believe there are two dynamic relationships that many companies may also need to consider alongside movements in cashflow from one point-in-time balance sheet date to the next.

First, some companies may need to provide data on average net cash / net debt throughout the year to further explain the underlying cash/debt position. This will not only help explain the interest figure but ensure that analysts/investors have a better understanding of the ongoing working capital requirements and be less confused by the impact of efforts to generate cash at the year end.

Secondly, companies may need to explain differences between cashflow and reported profits. Over time, cash generated by a business will equal the reported profits. However, cash locked up in capital employed or non-cash accounting adjustments as required by IAS 19 (Pensions) movements in provisions and many other factors may cause material differences between cash flow and profit in a reporting period. Investors have a reasonable expectation that profits will be reflected by cashflow. Good quality explanation is required if there are material differences. Some accounting standards may require subjective assessments but cash is cash!

CRUF is also correct that a specific format for an (abridged) cashflow is not appropriate as such a requirement will only make disclosure too complex again. The same applies to the further explanations I propose. It is often said that accounting standards are very complex. The complexity of the back half of the accounts does not relieve finance directors and treasurers of their responsibilities to ensure that cashflow is properly explained and reconciled. A well structured and insightful front half would move us to a much better place. Surely this can be dealt with on a voluntary, best practice basis and should not require yet more accounting rules.

By Stuart Siddall