ias 7 cash flow statements
TRANSCRIPT
05/02/2023IAS 7 2
Objective Classify historic cash flows during a
period into operating, investing and financing activities
Basis to assess ability to generate cash Assess needs to utilise cash Assess timing and certainty of
generation of cash
05/02/2023IAS 7
3ScopeAll entities must present a cash flow statement as part of financial statements for each period for which financial statements are prepared under IFRS
05/02/2023IAS 7 4
Benefits of cash flow information
Evaluate › how net assets have changed› financial structure, liquidity and solvency› ability to affect amounts, timing and certainty of cash flows› ability to adapt to changing circumstances and opportunities› ability to generate cash› accuracy of past assessments› relationship between profit and cash flow› impact of changing prices
Develop models to assess and compare present value of future cash flows of different entities (in order to perform business or project valuations)
Enhance comparability of operating performance Eliminates effects of differences in accounting treatment
between entities
05/02/2023IAS 7 5
Definitions Cash: Cash on hand and demand deposits Cash equivalents: Short-term liquid investments readily convertible
to known amounts of cash with insignificant risk of changes in value › 3 months or less to mature› Short term preference shares with definite redemption date› Fluctuating bank overdrafts› Exclude movements between cash and cash equivalents as cash
management is not an operating, investing or financing activity
Cash flows: Inflows and outflows of cash and cash equivalents Operating activities : Principal revenue-producing activities and other
activities that are not investing or financing Investing activities : Acquisition and disposal of long term assets and
other investments not included in cash equivalents Financing activities : Changes in the size and composition of
contributed equity and borrowings of the entity
05/02/2023IAS 7 6
Presentation of a cash flow statement: Operating activities
Operating activities primarily contribute to profit or loss› Indicate if operations generate enough cash to repay loans,
maintain operations, pay dividends and invest without external sources of cash
Includes:› Receipts from turnover and other income› Cash paid to suppliers and employees› Insurance payments and receipts› Tax payments and receipts› Trade or dealing payments and receipts› Securities and loans held for sale› Cash advances and loans made by financial institutions
Excludes profit or loss on sale of property, plant and equipment
05/02/2023IAS 7 7
Presentation of a cash flow statement: Investing activities
Expenditure to generate future income and cash flows
Includes:› Payments to buy long term assets › Development costs› Receipts from sale of long term assets› Payments and receipts from intangible assets› Payments and receipts for debt or equity instruments
in other entities, if not held for dealing or trading› Futures contracts, forward contracts, option contracts
and swap contracts not held for dealing and trading
05/02/2023IAS 7 8
Presentation of a cash flow statement: Financing activities
Financing activities include› Proceeds from issuing shares and equity
instruments› Payments to acquire or redeem shares› Proceeds from debentures, loans, notes,
bond, mortgages and other borrowings› Cash repayments on borrowings› Cash repayments on finance leases
05/02/2023IAS 7 9
Reporting cash flows from operating activities Direct method: disclose major
classes of gross cash receipts and payments
Direct method encouraged by IAS 7
Obtain information from:› Underlying accounting
records e.g. bank statements or general ledger
› Adjust income statement for Changes in inventories Changes in receivables Changes in payables Non cash items Investing cash flows Financing cash flows
Indirect method: adjust profit or loss for :-› Non-cash transactions› Accruals and deferrals› Income or expenses with Investing
or financing cash flows Adjust profit or loss for effects of:
› Changes in inventories› Changes in receivables› Changes in payables› Non-cash items
Depreciation Provisions Deferred tax Unrealised foreign currency gains &
losses Undistributed profits of associates and
minority interests› Investing cash flows› Financing cash flows
05/02/2023IAS 7 10
Reporting cash flows from operating activities
ALTERNATIVE TREATMENT UNDER INDIRECT METHOD:› Net cash flow from operating activities is
presented by: Revenues Expenses Changes in inventories Changes in receivables Changes in payables
05/02/2023IAS 7 11
Reporting cash flows from investing and financing activities
Present major classes of gross cash payments and receipts separately but the following may be presented on a net basis:› Payments and receipts on behalf of customers for the activities of the
customer Demand deposits at banks Investment funds Rents for property owners
› Payments and receipts for items with quick turnover of large amounts and short maturities Credit card customers Purchase and sale of investments Short term borrowings with maturity of 3 months or less
› Cash flows from activities of financial institutions Deposits with fixed maturity dates Placement and withdrawal of deposits Loans to customers and repayments of loans
05/02/2023IAS 7 12
Foreign currency cash flows Treatment consistent with IAS 21 Permits exchange rates approximate to actual rate
e.g. weighted average rate for a period Unrealised gains and losses arising on translation
are reported separately in the statement to reconcile cash and cash equivalents at the beginning and end of the period
Convert to reporting currency at date of cash flow› Transactions in foreign currency› Cash flows of foreign subsidiary (use of rate at balance
sheet date not allowed)
05/02/2023IAS 7 13
Interest and dividends Cash flows from interest and dividends
received and paid are› Disclosed separately
Whether interest is expensed or capitalised› Classified in a consistent manner from period
to period as Operating (e.g. for financial institutions) Investing (cost or returns on investments) Financing activities (cost of obtaining finance) There is no consensus for entities other than
financial institutions
05/02/2023IAS 7 14
Taxes on income Disclose cash flows separately under
operating activities If specifically identified with financing or
investing activities, classify as appropriate (usually difficult to identify as cash flows of tax and transactions arise in different periods)
When tax cash flows are allocated over more than one class, the total amount of taxes paid is disclosed
05/02/2023IAS 7 15
Investments in subsidiaries, associates and joint ventures
Only report cash flows between the entity and investee e.g. dividends and advances
Joint ventures› Proportionate consolidation method:
proportionate share of jointly controlled cash flows are reported in consolidated CFS
› Equity method: disclose cash flows representing investment in the entity, distributions and other payments and receipts between entity and jointly controlled entity
05/02/2023IAS 7 16
Acquisitions and disposals of subsidiaries and other business units
Present aggregate cash flows of the following in separate line items and classify as investing activities› Cash flow effect of disposals versus acquisitions (not
deducted from each other)› Cash paid or received as purchase or sale consideration net
of cash and cash equivalents acquired or disposed of Disclose
› Total purchase and disposal consideration› Cash and cash equivalent portion of total consideration › Cash and cash equivalents in the business unit acquired or
disposed of› Other assets and liabilities in the subsidiary acquired or
disposed of, summarised by each major category
05/02/2023IAS 7 17
Non-cash transactions Exclude non cash investing and
financing transactions from cash flow statement e.g.› Assets purchased with loans or finance
leases› Acquisition of shares in another entity› Conversion of debt to equity
05/02/2023IAS 7 18
Components of cash and cash equivalents
Reconcile cash and cash equivalents in the cash flow statement with cash and cash equivalents in the balance sheet
Disclose the accounting policy to determine cash and cash equivalents
Report changes in accounting policy in accordance with IAS 8
05/02/2023IAS 7 19
Other disclosures Significant cash and cash equivalent balances held
but not available for use by the group› E.G. cash held by a subsidiary in a country with
exchange controls Information about financial position and liquidity of
an entity› Undrawn borrowing facilities and restrictions on use› Cash flows of joint ventures reported using proportionate
consolidation› Cash flows that increase operating capacity vs cash
flows that maintain operating capacity› Segmental cash flows by industry and geographical
segment
05/02/2023IAS 7 20
Summary All IFRS financial statements must contain a cash
flow statement Cash flows are presented using the direct
method or the indirect method Non-cash transactions are excluded Cash flows are classed as operating activities,
investing activities or financing activities Cash flows are reconciled to movements of cash
and cash equivalents in the balance sheet Accounting policy and major restrictions on cash
flow are disclosed
05/02/2023IAS 7 21
Direct method cash flow statement
Cash flows from operating activities› Cash receipts from customers› Cash paid to suppliers and employees› Cash generated from operations› Interest paid› Income taxes paid
Cash flows from investing activities› Acquisition of subsidiary net of cash acquired› Purchase of property, plant and equipment› Proceeds from sale of equipment› Interest received› Dividends received
Cash flows from financing activities› Proceeds from issue of share capital› Proceeds from long-term borrowings› Payment of finance lease liabilities› Dividends paid
Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
05/02/2023IAS 7 22
Indirect method Cash flows from operating activities
› Profit before taxation› Adjustments for:
Depreciation Foreign exchange loss Investment income Interest expense (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories Increase/(decrease) in trade payables Interest paid Income taxes paid
Cash flows from investing activities› Acquisition of subsidiary net of cash acquired› Purchase of property, plant and equipment› Proceeds from sale of equipment› Interest received› Dividends received
Cash flows from financing activities› Proceeds from issue of share capital› Proceeds from long-term borrowings› Payment of finance lease liabilities› Dividends paid
Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period