anesu daka ca (sa) - caa - icaz.org.zw€¦ · • cash flows must be analysed between operating,...

Anesu Daka CA (SA) - CAA

Cash FLOW STATEMENT

IAS 7


Objective

• Presentation of information about the historical

changes in cash and cash equivalents of an entity

by means of a statement of cash flows, which classifies

cash flows during the period according to operating,

investing, and financing activities.

CFS = to a reconciliation of the bank balance of an entity


Fundamental Principles • All entities that prepare financial statements in conformity

with IFRSs are required to present a statement of cash flows. [IAS 7.1]

• Cash & cash equivalents comprise (IAS 7.7-9): • cash on hand; and

• demand deposits (bank), • together with short-term, highly liquid investments that are

readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value.

Note: Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition.


Fundamental Principles • Equity investments are normally excluded, unless they

are in substance a cash equivalent (e.g. preferred

shares acquired within three months of their specified

redemption date).

• Bank overdrafts which are repayable on demand and

which form an integral part of an entity's cash

management are also included as a component of cash

and cash equivalents. [IAS 7.7-8]


Cash flows from operating activities

+ Cash flows from investing activities

+ Cash flows from financing activities

Net change in cash during period

+ Beginning cash balance

Ending cash balance

Format and structure of the cash flow statement


• Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]

Elements of a Consolidated Statement of Cash Flows

□ Cash flows from operating activities;

□ Cash flows from investing activities;

□ Cash flows from financing activities;

□ Net changes in cash and cash equivalents,

representing the differences between cash and cash

equivalents at the beginning and end of the reporting

period.

Presentation of the Statement of

Cash Flows


Key Principles:

• operating activities are the main revenue-producing • • • /"T 1 * 1 • • /T« •

activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS7.14]

• investing activities are the acquisition and disposal of long- term assets and other investments that are not considered to be cash equivalents [IAS 7.6]

financing activities are activities that alter the equity capital

and borrowing structure of the entity [IAS 7.6]


Key Principles:

interest and dividends received and paid may be classified as operating, investing, or financing cash flows, PROVIDED THAT they are classified consistently from period to period [IAS 7.31]

cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35] Operating cash flows shall be reported using the: • direct method of presentation (most encouraged), or •indirect method is acceptable [IAS 7.18]


THE DIRECT METHOD

The direct method shows each major class of gross cash receipts and gross cash payments, as follows:

Presentation of the statement of Cash

Flows from Operating Activities


Presentation of the statement of Cash

Flows from Operating Activities


INDIRECT METHOD

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions:

Profit before income taxes xxxxx

+/- Non-cash income & expenses:

- Depreciation expense

- Profit on disposal of PPE, e.t.c xx,xxx

+/- Changes in working capital:

Increase in receivables xx,xxx

Decrease in inventories xx,xxx

Increase in trade payables xx,xxx

+/- Items shown directly on CFS

Interest paid xx,xxx

Income taxes paid xx,xxx

Net cash from operating activities xx,xxx

Presentation of the statement of Cash Flows


Comparison of Direct and Indirect


DIRECT METHOD

• Applying the direct method


Cash Receipts from customers

Balance b/d

Bad Debtors W/O

Credit Sales

New subsidiary Sold Subsidiary

FCTR/forex exchange rates gain

Bank (receipts from customers)

Balance b/d

Debtors Control Account


Cash paid to suppliers and employees

Direct Method- Method 1 Indirect Method- Method 2


Method 1

Use the following when the components of the P/L are clear:

Cost of sales xxxxx

+Other expenses xxxxx

Total expenses accrued xxxxx

ADJUST FOR:

+/- Non-cash items:

- Depreciation expense xxxxx

- impairment loss, e.t.c xx,xxx


Increase in receivables (not applicable in this formula) 0



+/- Items shown directly on CFS (if included in above items)

Interest paid xx,xxx

Cash paid to suppliers and employees & expenses xx,xxx



Method 2

Use the following when the components of the P/L is not given:

Profit before income taxes xxxxx

Less: Revenue (xxxxx)

Total expenses accrued xxxx

+/- Non-cash items:

- Depreciation expense

- Profit on disposal of PPE, e.t.c xx,xxx


Increase in receivables (not applicable in this formula) 0



+/- Items shown directly on CFS

Interest paid

Interest received xx,xxx

Cash paid to suppliers and employees & expenses xx,xxx



• Depreciation and impairment of property, plant and equipment

• Amortisation and impairment of intangible assets

• Share-based payment transaction expense

• Decrease in investment properties

• Decrease in financial instruments

• Gain on disposal of property, plant and equipment

• Fair value adjustment of contingent consideration

• Finance income 9.4 (1,635) (724) IAS 7.20(c)

• Finance costs 9.3 3,305 1,561 IAS 7.20(c)

• Other operating income

• Share of net profit of associate 7 (83) (81)

• Movements in provisions, pensions and government grants

• Forexloss and gains

• Employee benefits expenses on defined benefit plan

Non-cash items includes:


Foreign currency transactions - use the spot rate at payment or receipt date [IAS 7.25]

Cash flows of foreign subsidiaries - use exchange rates prevailing when the cash flows took place [IAS 7.26]

• Cash flows of associates where the equity method is used, the statement of cash flows should report only cash flows between the investor and the investee;

• Cash flows of joint ventures- where proportionate consolidation is used, the

cash flow statement should include the venture's share of the cash flows of the investee [IAS 7.37-38]

• aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business

units should be presented separately and classified as investing activities, with specified additional disclosures. [IAS 7.39]

• The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.42]

Foreign Currency Cash Flows


• Analyse the movements in balance sheet for the year i.e. Difference between prior and current year financial position, and isolate the following:

• Part of the movements relating to the no cash transactions;

• Part of the movements relating to cash transactions already entered else where on the in the statement of cash flows; and

• Part of the movement attributable to cash transactions that are to be entered in the statement of cash-flows

• Note:

• Reverse the accrual principle and apply the Cash principle - identify cash in and outflows and record them appropriately.

Approach to Cashflows


• Investment income: • Show interest and dividends received - reconstruct the T - accounts for the

receivable of these amounts.

• Note the Share of profit from associate is a non-cash item

• Interest Paid - disclose in CFS, both the:

• Finance cost

• Borrowing costs capitalised - IAS 23

• Tax and Dividend paid

• Tax paid - use the tax payable account to determine tax paid

• Dividend paid - use the dividend payable account to determine dividend paid • Note -deferred tax is not a cash item so exclude this on calculating tax paid. -

reduce tax expense with deferred tax expense. • Note - scrip shares allotted in the place of dividend are not a cash-flow item. • Note - dividends paid by subsidiary to non-controlling interest shall be also be

included on the cash flow statement

Items shown directly on the CFS


• Proceeds from sale of property, plant and equipment IAS 7.16(b)

• Purchase of property, plant and equipment IAS 7.16(a)

• Replacement & additions

• Purchase of investment properties IAS 7.16(a)

• Purchase of financial instruments IAS 7.16(c)

• Proceeds from sale of financial instruments IAS 7.16(d)

• Development expenditures IAS 7.16(a)

• Acquisition of a subsidiary, net of cash acquired IAS 7.39

• Acquisition of investment in associates &JVs

• Receipt of government grant

• Proceeds from sale of subsidiary

• Note - use T- Accounts to determine the cash items noted above

Cash flows from investing activities


• Proceeds from exercise of share options IAS 7.17(a)

• Acquisition of non-controlling interest IAS 7.42A

• Transaction costs of issue of shares IAS 7.17(a)

• Payment of finance lease liabilities IAS 7.17(e)

• Proceeds from borrowings IAS 7.17(c)

• Repayment of borrowings IAS 7.17(d)

• Interest paid IAS 7.31

• Dividends paid to equity holders of the parent IAS 7.31

• Dividends paid to non-controlling interests

• Note - use T- Accounts to determine the cash items noted above

Cash flows from financing activities


Reconcile as follows:

Net Change in cash and cash equivalents

Cash and cash equivalents at the beginning of the yr

+/-Forex rate changes for foreign cash (IAS 7.28)

Closing balance

XXXX XXX

_XX

XXXX

Disclosures required:

• Policy of determining cash and cash equivalents - IAS 7.47

• Show the components of cash and cash equivalents - IAS 7.47

• Disclose circumstances around availability of cash

Reconciliation of cash and cash-

equivalents


Specific CF Aspect


Interest and Dividends

• Classification: Basis of classification- entity’s accounting policy as

either operating, investing or financing activities (IAS7.31)

• Interest and dividends received: IAS 7 allows companies to classify them as either operating or investing activities.

• Interest paid: IAS 7 classifies it as either an operating activity or a financing activity; but it must be applied consistently.

• Dividends paid: IAS 7 allows classification as either a financing activity or as an operating activity. NB: always check the entity’s accounting policy on

classification and presentation of interest and dividends in CFS


Principle: • Where control is obtained or lost, include in the CFS under

investing activities the following: □ the amount of cash paid less amount of cash and cash equivalents

acquired on date of acquisition (purchase of a subsidiary) □ The amount of cash received as sales consideration on disposal date

less amount of cash and cash equivalents sold (sale of a subsidiary)

Disclosure of the following may be required: • The total consideration paid or received;

• The portion of consideration consisting of cash and cash equivalents; • The amount of cash or cash equivalents in the subsidiary over which

control is obtained or lost; and • The amount of the other assets and liabilities in the subsidiary over

which control is obtained or lost, summarized by each category (IAS

7.40)

Acquisition and Disposal subsidiary


Example 1 (Disclosure investment in

sub) •

H Ltd acquired 80% of equity of S Ltd for 1.6 m at date of acquisition and net assets acquired are as follows:

Land & buildings

Plant (8ook-3ook)

Mortgage bond

Inventory

Receivables

Payables

Bank

NAV

NCI

Goodwill

Cost of Investment (Bank)

Less Cash and cash equivalents taken over

# ACQUISITION OF SUBSIDIARY (1,600,000 LESS 30,000)

(1,200,000)

(500,000)

500,000

(350,000)

(550,000)

180,000

_(30,000)

(1,950,00)

390,000

40,000

1,600,000

(30,000)

1,570,000


Example 2 (Disclosure a

proceeds from sale)

H Ltd sold its entire interest in S Ltd for $850,000 at 30 September

Land & buildings 350,000

Plant (800k-300k) 240,000

Inventory 180,000

Receivables 420,000 Payables (120,000)

Bank (30,000)

NAV 1,040,000

NCI (260,000)

Goodwill 70,000

Cost of Investment (Bank) 850,000

Less Bank-overdraft sold 30,000

# PROCEEDS OF SUBSIDIARY 880,000


Remember:

• Take into account the non-cash mvt arising from acquisitions and disposals on calculation of cash movements: • Assets

• Liabilities

• ONLY IF AFFECTED BY THE ACQUISITION OR DISPOSAL, E.G. IF ASSET ACQUIRED DOES not have inventory there will not be an impact in the inventory account due to acquisition of subsidiary.

• Also now calculate profit or loss on sale of subsidiary and include in calculation of cash flows to suppliers and employees as well as the reconciliation of profit before tax to the cash flows from operations.

• Profit from sale at date of sale is calculated as follows:

Proceeds on sale 850,000

Less % of NAV sold (75%X $1040K (780,000)

Profit/(Loss) on disposal of subsidiary 70,000


A non-cash or part cash

transaction

• No cash flow arises in this case, however, the following should be shown under investing activities.

Cash and cash equivalents held by a sub at date of acq RXXXX

Acquision of a subsidiary for part cash.

- show the cash paid less the cash and cash equivalents

Disclosure as shown in slide 25 above is still required whether cash is paid or not.


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