The usefulness of direct cash flow statements under IFRS

The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have recently proposed to mandate the use of direct cash flow
statements as part of their project to harmonise accounting standards. Despite the magnitude of the proposed change to cash flow reporting, to date, the IASB and FASB
have provided no empirical evidence under International Financial Reporting Standards (IFRS) to support their assertion that direct cash flow statements provide financial
statement users with useful information. Given the growing evidence that adopting IFRS significantly changes the quality of financial reporting information, the usefulness
of direct cash flow statements may have also changed. This thesis, therefore, examines the usefulness of reporting direct cash flow statements under IFRS in Australia.
Australia is specifically examined because it was one of the few countries where all firms were mandated to report direct cash flow statements, and which prohibited the
early adoption of IFRS.

The findings of this research show that, relative to Australian Generally Accepted Accounting Principles (AGAAP), direct cash flow statements are more value relevant
after the adoption of IFRS. Moreover, the results demonstrate that direct cash flow statements provide financial analysts with useful information for their cash flow forecasts, and this information is more useful under IFRS compared to AGAAP. Finally, this thesis provides evidence that, while financial analysts use information from direct cash flow statements when issuing stock recommendations, buy-and-hold investors are better off identifying mispriced stocks by using analysts’ cash flow forecasts in discounted cash flow valuation models.

In sum, these results provide strong support for the current IASB/FASB proposal to mandate the use of direct cash flow statements and are consistent with IFRS improving
the information set of investors.