Skattenytt nr 9 2014 s. 712

Review of: Ásgeir B. Torfason “Cash Flow Accounting in Banks”


On the 16th of May this year, Ásgeir B. Torfason, licentiate of philosophy, successfully defended his doctoral thesis “Cash Flow Accounting in Banks” at the School of Business, Economics and Law, Gothenburg University.1 As obvious from the title, the subject for the thesis is cash flow statements in banks. The thesis consists of 320 pages and is divided into nine chapters. These chapters are in turn referred to an introducing, descriptive part, dealing with theory and methodology, and an analytic part, containing four specific studies concerning cash flow statements in banks.

The four chapters of the first part deals with research idea and research problem, the wider background context from literature in banking, finance and economics, accounting theory and the methods used in the study. Disregarding the introductory character of the first part, Torfason early in the thesis lists the main problems dealt with in each chapter.


Problem in Chapter

Main Content

Key Point


Financial crisis

Banks & financialization

Cash flow & liquidity


Economics of banking

Background & Context

Previous literature


Cash flows in banks

Accounting Theory

Development & Framework


How to investigate it

Multiple Methods

Illustrate the study


Accounting rules for banks

Accounting standards

Banks are different


Reporting bank's cash flow

Comment Letters

Practice is different


Financial operations

Cash Flow Statements

Numbers are negative


Banking is about cash flow

Interview Bankers

Find explanations


Connect it together


Answer research question

The author was a member of the examining committee together with Professor Sten Jönsson, Gothenburg University, and Professor Rolf Solli, University of Borås. Faculty opponent was Professor Chris Lefebvre, Faculty of Economics and Business, KU Leuven, Belgium.


It is obvious that all these questions are not research questions in a narrow sense. Very early in the thesis, Torfason relieves one of the most important findings of the study, that cash flow statements are not used in practice by bankers. This statement, which logically rather would have been presented after the findings have been made in the study, is made the primary research question in the study. The question is why these cash flow statements are not used by bankers. It is of course a bit problematic to base the research question on a finding that still waits to be established in the thesis. In fact, is it not until in the last of the four specific studies that the fact is found that cash flow statements are not used by bankers. Torfason also early in the study dismisses the question whether cash flow statements are important for other users than bankers.2 The motive for this exclusion seems mainly to be caused by the fact that bankers both sets up and uses the cash flow statement. However, it would have been useful with some findings whether the statements are or are not used by other users than the bankers themselves. Financial accounting is generally intended for the users in the financial markets, and not for the preparers of the statements themselves. Torfason also relays to well-known bankruptcies from different periods related to accounting matters as Kreuger & Toll, Enron, Leman Brothers and Kaupting Bank.3 But the two first examples where not financial companies, while the two latter bears little resemblance to the banks that have been investigated by Torfason. In contrast, the Swedish Handelsbanken is probably one of the best operated banks in the world.4 The accounting methods used in the investigated banks therefor probably will have limited interest regarding the prevention of new bankruptcy scandals in companies that do not follow the accounting standards as carefully as the Scandinavian banks.

Thesis, p. 2.

P. 3.

P. 203.


In chapter 2 Torfason explains how banks functions and also the peculiarities of the cash flow in the banks. While the purpose of non-financial companies generally may be described as to generate cash, in the banks cash is the product delivered to customers. As a departure point, Torfason shows that the usual business activities in banks, lending and borrowing, do not lead to allocation of more cash in the bank.5 Lending to a customer of the bank corresponds to more borrowing.

In chapter 3, Torfason shows that accounting theory has not taken much interest in the peculiarities of banking. To large extent, no special standards for accounting have been issued by the international standard setters.6

In order to answer his research question and aim, Torfason reaches towards a multidisciplinary method. In his four studies, different methods and approaches are used. As basis for the studies, Torfason has used accounting standards (chapt. 5), comment letters on the standards (chapt. 6), statements of cash flow from Scandinavian banks (chapt. 7) and interviews with bankers (chapt. 8). According to Torfason, the analysis of the accounting standards is descriptive and made in an accounting view perspective.7 On the contrary, the comment letters to the standards are analyzed with an interpretative method in an economic view perspective. Again, the financial statements analyze is made in a descriptive way in a finance view perspective. Finally, the study is concluded with a series of interviews with bankers. The interviews are made with an interpretative analysis in a money view perspective.

The handling regarding the relevant accounting standards is probably the least impressive part of the study. Torfason limits himself to study the accounting standards FASB 95 and IAS 7. The reason for studying the American standard from FASB is that the international standard IAS 7 has been written under great influence from the FASB standard. Torfason relays heavily on what he describes as Comment letters (chapt. 6). These are comments delivered by practitioners and other interested parties before the standards were adopted. Regarding the 2010 update of IAS 7 these comments might be of interest, but the comments from 1986 on FASB 95 seems too out of date for the emphasis Torfason gives them. The fact that Torfason has not conducted an exhausting study of relevant EU and national sources of law makes his study less reliable than what it preferably should have been. Torfason does not comment that before 2005, the IAS 7 was not applied by the Swedish banks but the national standard RR 7 from the old Swedish Accounting Board (Redovisningsrådet).8 This was to large extent a mere translation of IAS 7, but contained for example guidance for the setup of cash flow statements in banks. The relationship between IAS/IFRS-standards and EU/national law is not quite clear, since Torfason writes that “In 2005, the International Accounting Standards Board (IASB) presented regulatory framework for the European Union (EU), with the International Financial Reporting Standards (IFRS) becoming legislation in many countries”.9 In fact, it was EU that adopted the council regulation 1606/2002, which made the IAS/IFRS-standards compulsory in setting up consolidated statements in companies whose entities are subject to trading in a regulated market in EU from 2005 and on.10 Neither does Torfason even comment the existence of EU-directive dir. 86/635/EEC regarding the setup of annual accounting in banks, or of national legislation.11 Preparatory works of the national legislation has neither been consulted. Torfason does neither convince the reader that the literature has been studied exhaustingly. It is quite easy to find material that is not referred to in the study and that might have been of interest for the study.12

On the contrary, the concluding study containing interviews with bankers is by far both the most impressive and interesting part of the thesis. It is obvious from Torfasons own accounting, that it was not until he conducted the last of the interviews that the function of the cash flow statements in banks became clear.13 Neither seemed it be clear for the interviewed bankers themselves. Torfason shows that some of the bankers were not aware of the fact that their own banks had shown a negative cash flow for several years.14

It is obvious that it has taken considerable effort both to plan and conduct the interviews.15 However, the most common answer he got was that cash flow statements in banks were not used by the banks and were considered to be irrelevant for banking.16 Instead, other figures were used to measure the performance of the banks.

P. 13.

P. 62–63.

P. 115.

The situation was probably similar in the other Nordic countries.

P. 6.

See for example van Hulle, Karel, From Accounting Directives to International Accounting Standards, in Leuz, Christian Pfaff, Dieter Hopwood, Anthony, Economics and Politics of Accounting: International Perspectives on Research Trends, Policy and Practice, Oxford 2004, p. 349–375.

Relevant legislation in Sweden is the Annual Accounting Act (Årsredovisningslagen, 1995:1554, ÅRL) and the Annual Accounting Act for credit institutions and investment firms (lagen om årsredovisning i kreditinstitut och värdepappersbolag, 1995:1559, ÅRKL).

For example Olson, Olov, Falkman, Pär, Pauli, Stefan, Redovisning av kassaflöden – en kommentar till Redovisningsrådets utkast till rekommendation, Balans 1998:1.

P. 259–260.

P. 119–120.

P. 125–127, 230–233.

P. 231.


A general remark that should be made is that Torfason often repeats his statements to an extent that the thesis could have been several pages shorter, without losing any of its content. Another remark is that some of the many figures and tables are quite similar.17 Despite these reiterations, the thesis is easily read and written in a way that really encourages the reader to continue the reading. Torfason has written an academic text which is very pleasant to read.

As concluding words, Torfasons thesis has brought us new and interesting findings regarding the use of cash flow statements in banks. The thesis is recommended for anyone with an interest of accounting in banks or of accounting in general.

Stefan Olsson is a Professor in tax law, Karlstad Business School, Sweden.

Compare for example figure 8 in p. 112 with figure 11 in p. 139.