Financial Statement Comparability in a Principles-Based Reporting Environment: A Look at the Statement of Cash Flows
Mulford, Charles W.
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In this research report we look at how U.S. companies might prepare financial statements in a principles-based accounting environment and how comparability of financial statements may be affected. We identify the statement of cash flows as a principles-based financial statement where only limited reporting rules are provided and use it to analyze how different companies are currently reporting similar transactions in a principles-based setting. We then use the results to comment on how U.S. companies might prepare their financial statements under principles-based standards and how overall comparability might be affected. We look at four types of transactions, book overdrafts, sale and leaseback transactions, capitalized software costs and short-term investments, and find that companies are not consistent in their classification of cash flows. This lack of consistency is due to the principles-based nature of the cash flow statement and the associated lack of rules-based guidance. Due to the lack of consistency, it is difficult to compare among companies an important performance metric, cash provided by operating activities. This lack of comparability could be expected to extend to other financial statements in a principles-based environment.