The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting

5.4 DIRECT VERSUS INDIRECT METHOD

5.4.1 Allowed Options

5.4.1.1 Basic Concepts of the Two Methods

Two main approaches exist in constructing a statement of cash flows: the direct and the indirect methods. The former builds up net changes in cash flows by adding individual gross cash inflows and subtracting gross cash outflows. The latter method starts from the statement of income as if it were on a cash basis, and then adds or subtracts noncash items. It also backs out deferrals and accruals, and cash items that do not affect the statement of income.

Comment: The direct and the indirect methods relate to the way of determining and presenting cash flows from operating activities. Presentation of cash flows from investing activities and of cash flows from financing activities remains the same.

5.4.1.2 Comparison with the Reconciliation Method under U.S. GAAP

IAS 7 and Section 230-10-45 (FASB Statement No. 95) permit the direct and the indirect method of reporting cash flows from operating activities.106 Both encourage the use of the direct method.107 U.S. GAAP also calls the indirect method the reconciliation method.108 In addition, unlike IFRSs, U.S. GAAP requires a reconciliation of net cash flow from operating activities to net income in any case, to benefit from both approaches even when companies use the direct method. If the entity adopts the direct method, it shows such reconciliation in a separate schedule. Section 230-10-45 (FASB Statement No. 95) encourages this approach. ...