Disclosing cash flow per share in financial statements – don’t do it!

A while ago, at its June 2010 meeting, CPA Canada’s IFRS Discussion group addressed the issue of reporting cash flow per share, in the following terms:

  • Since 2003, (old) Canadian standards have specifically prohibited financial statement presentation of cash flow per share information. IFRSs are silent on this issue; neither IAS 7 Statement of Cash Flows nor IAS 33 Earnings per Share specifically discusses cash flow per share. Two views were presented on whether cash flows per share information can be presented under IFRSs:
  • (a) View A — per share information based on other metrics is not permitted. IAS 33 only addresses per share information based on earnings.
  • (b) View B — in the absence of a specific prohibition, cash flow per share is acceptable.
  • The issue was whether a request should be made to the IFRS Interpretations Committee for clarification of the appropriate accounting treatment.
  • As there is a current related project by the IASB, the members recommended communicating with the staff of the IASB’s project on earnings per share because it is not clear whether presentation of cash flow per share information is acceptable under IFRSs.

At the next meeting, in September 2010, the group closed off the issue as follows:

  • At the June 2010 meeting, the members had discussed whether it was appropriate to present cash flow per share information in the financial statement under IFRSs. The members noted that there is no specific prohibition under IAS 7 Statement of Cash Flows or IAS 33 Earnings per Share. As recommended by the Group, the AcSB staff sent a letter requesting that the IASB clarify this point as part of its project to revise IAS 33.

Nothing has happened since then as far as I can see: the project to revise IAS 33 hasn’t moved for years. But I always find it a little odd to request guidance from higher powers on whether reporting a particular piece of information (as opposed to employing a particular accounting treatment) is specifically prohibited or not; it carries the air of praying for divine intervention to save us from ourselves. I mean, if management and the auditors can’t agree on the propriety (or not) of something so fundamentally simple, what hope do they have of working through more nuanced and complex matters? But I suppose the issue carries a disproportionate visibility and therefore a heightened risk of regulatory intervention.

Although I often find myself on the more liberal end of such debates, it’s my view here that cash flow per share shouldn’t be reported in IFRS financial statements. As noted, old Canadian GAAP used to explicitly address this: “Those cash flow amounts do not accrue directly to the benefit of the owners of an enterprise’s residual equity, as would be implied if they were reported on a per-share or per-unit basis.” (It distinguished this, quite rightly, from information on cash distributions per share, which do accrue directly to the owners.) The information in the cash flow statement only makes sense as an integrated portrayal of how cash moved through the enterprise. Otherwise, say, a development-stage mining company might report positive cash flow per share in a period when it happened to issue a big chunk of debt. How would that possibly lead readers in a constructive direction? I really couldn’t see any difference between that kind of disclosure and issuing per-share information on whatever piecemeal aspects of the income statement happened to come out most favourably.

Earnings per share information is problematic too of course. Although those amounts do technically “accrue directly to the benefit of the owners of an enterprise’s residual equity,” it’s not as if the owners can somehow approach the company and access that “benefit.” Even in a winding up, legal and other fees (if nothing else!) will usually mean the amount ultimately distributed to owners bears little relationship to their supposed accumulated residual wealth. Still, starting out in a rickety boat isn’t much of an argument for jumping into one that’s even less seaworthy.

Currently, a measure of cash flow per share information does sometimes turn up in the MD&A, where it’s subject to the CSA’s disclosure expectations applying to non-GAAP financial measures. Even there, the utility of the information is often vaguely expressed at best. One entity says “Management believes that cash flow per share is a useful measure to consider, as it demonstrates the Company’s ability to generate cash flow necessary to fund future growth.” Another says simply that the measure is “used by the Company to evaluate its performance”; another that it’s a “measurement of the company’s efficiency.” Even if somewhat supportable in particular circumstances, these explanations are too thin to facilitate much informed engagement by the investor. But anyway, MD&A is a different animal – it’s understood to represent a picture taken through the eyes of management (and, to some extent, if those eyes are clouded by cataracts or smog, so be it!). The information contained in financial statements, by comparison, is meant to carry objective value and relevance and reliability. Which sometimes, however regretfully, has to mean just saying no.

The opinions expressed are solely those of the author.

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