What can the Statement of Cash Flows tell you?

The statement of cash flows, as its name implies, summarizes a company’s cash flows for a period of time. The statement of cash flows explains how a company’s cash was generated during the period and how that cash was used. Even if the statement of cash flows seems to be a replacement for the income statement, the two statements have distinct objectives.

The income statement measures the results of operations for a period of time. Net income is the reporting Continue reading

Trading in securities and loans

IAS 7.14 includes a number of examples of operating cash flows, including cash receipts and payments from contracts held for dealing or trading purposes. IAS 7.15 notes that when an entity holds securities and loans for dealing or trading purposes, those items are similar to inventory acquired specifically for resale. As a result, the cash flows arising from the purchase and sale of dealing or trading securities are classified within operating activities.

Consistent with this approach, IAS 7.16(c) and … Continue reading

Group cash pooling and company accounts

Cash pooling arrangements arise where one group entity (which may be the ultimate group parent, or a fellow subsidiary) acts as the treasury function for the rest of the group. Under these arrangements, one entity within a group holds and maintains all cash balances with an external financial institution(s) and advances funds to group entities.

Often, a group treasury function is used in order to make the most efficient use of cash resources within a group, and to enable hedge … Continue reading

Foreign currency cash flows

IAS 7.25 requires cash flows arising from transactions in a foreign currency to be recorded at the exchange rate between an entity’s functional currency and the foreign currency at the date of the cash flow.

A similar approach is required for cash flows of a foreign subsidiary (IAS 7.26).

IAS 7.27 Foreign currency cash flows notes that cash flows denominated in a foreign currency are dealt with in a manner that is consistent with that required by IAS … Continue reading

Cash flows for income tax and sales tax

IAS 7 includes some specific standards for the treatment of cash flows in the Statement of cash flows for income tax and sales tax (and other taxes).

(i) Income taxes

IAS 7.35 requires cash flows arising from income taxes to be disclosed separately, and classified within operating activities unless they can be specifically associated with financing or investing activities.… Continue reading

Bank overdrafts and cash and cash equivalents

IAS 7.8 notes that although bank borrowings are generally considered to be financing activities, in some countries bank overdrafts form an integral part of an entity’s cash management. In such cases, bank overdrafts are included as a component of cash and cash equivalents meaning that bank overdraft balances would be offset against any positive cash and cash equivalent balances for the purposes of the statement of cash flows.

However, care is required when presenting bank overdrafts, and cash and cash … Continue reading

Cash inflows and outflows offsetting

IAS 1 Presentation of financial statements paragraph 32 prohibits the offset of assets and liabilities, and income and expense, unless this is specifically required or permitted by an other IFRS.

IAS 7.1317 sets out requirements for, and examples of, individual cash inflows and outflows that are to be presented separately in respect of operating, investing and financing activities. The offset of cash inflows and outflows is not permitted (except in limited circumstances, that are relevant for financial institutions … Continue reading

Common cash flow classification errors in practice

Although the definitions of operating activities, financing activities and investing activities may appear straightforward, in practice a number of classification errors are frequently made. These include:

1. Cash outflows related to the acquisition of intangible assets and items of property, plant and equipment incorrectly included within operating activities.

Some items of property, plant and equipment are purchased from suppliers on standard credit terms that are similar to those for inventory and for amounts payable to other creditors.… Continue reading

Changes in liquidity and risk of cash equivalents

The definition of cash equivalents makes reference to them being both highly liquid and subject to an insignificant risk of changes in value. IAS 7 does not include any specific requirement to revisit either of these criteria after the initial recognition of a cash equivalent.

In general, amounts that initially meet the definition of cash equivalents would not be expected to be subject to significant risk of adverse changes in liquidity and changes in value. However, it is possible that … Continue reading