Sometimes, in business, cash needs to be on the table before a deal can be done. In the film Jerry Maguire, the client’s nervousness was illustrated by his repeated call to ‘Show me the money’. It is fair to say that we are currently living in nervous times and, inevitably, there is a greater focus on corporate cash flow.
Some of you may have seen my colleague David Phillips’ Corporate Reporting blog in October where he drew attention to articles in the Financial Times addressing reporting of cash in company accounts. One of these was a letter from the Corporate Reporting Users' Forum (CRUF) highlighting the importance of providing a clear reconciliation of cash flows to movements in net debt.
The phrase ‘net debt’ is well known in some parts of the world, including in the UK where its disclosure is required by entities reporting under UK accounting standards. The UK’s Financial Reporting Standard 1, ‘Cash flow statements’, defines net debt as, “the borrowings of the reporting entity (comprising capital instruments classified as liabilities in accordance with [IAS 32], ‘Financial Instruments: Presentation’, together with related derivatives and obligations under finance leases) less cash and liquid resources”. The terms ‘capital instruments’ (basically, instruments issued as a means of raising finance), ‘cash’ and ‘liquid resources’ are separately defined.
In other parts of the world there is less clarity about what ‘net debt’ actually means. But does this mean that the IASB should not consider introducing a disclosure similar to that existing in the UK? IAS 1, ‘Presentation of financial statements’, includes disclosure requirements in respect of an entity’s capital. The word ‘capital’ is not defined but an entity is required to explain what it considers to be capital. The IASB commented that “this disclosure is intended to give entities the opportunity to describe how they view the components of capital they manage”. Could not net debt be viewed in a similar way?
In a previous posting, I asked whether the IASB may have missed an opportunity in its recent discussion paper on financial statement presentation by not tackling some of the more complex topics in financial reporting. Given the prominence of cash flow reporting in the discussion paper and the focus on cash flows by users and others in the current environment, I wonder also whether the IASB should be taking the opportunity to suggest a disclosure requirement for net debt.
The importance of cash flow cannot be over-emphasised in the current economic environment and companies could improve their disclosures by going beyond regulatory compliance in order to improve trust and transparency. But if an objective of financial reporting is to provide information that is useful to investors and others in making decisions, the views of investment professionals such as the CRUF are important - so maybe it is time for the IASB to ‘show me the money’.
I would be interested in your thoughts, either by commenting here or by email.
Comments