The Analysis of SFAS No. 109's Usefulness in Predicting Future Cash Flows from a Conceptual Framework Perspective

This paper empirically tests whether the various SFAS No. 109 reporting and disclosure requirements provide information that is consistent with the FASB's Conceptual Framework. To address this question, we examine whether information required by SFAS No. 109 provides any incremental ability to predict future operating cash flows (OCFs). Our findings suggest that separate recognition of deferred tax assets, liabilities and valuation allowance provides useful information to predict future cash flows. To determine whether SFAS No. 109 data provides incremental useful information when predicting future cash flow, we develop a model (restricted) using financial statement information available in 1994. Next, we add the separate SFAS No. 109 components to the restricted model and test whether the full model is more appropriate. The results indicate that the SFAS No. 109 reporting requirements provide information useful for predicting future cash flows. These findings support the FASB's position that SFAS No. 109 information is consistent with the conceptual framework of accounting. In addition, we find that separate recognition of deferred tax amounts required by SFAS No. 109 is a better predictor of future cash flows than reporting net deferred tax information as required by APB No. 11.