Financing activities

Financing activities Financing activities

Definition: Activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.

Cash receipts and cash payments relating to equity and debt related instruments:

  • cash receipts of payments from owners on shares issued and additional paid-in capital,
  • cash payments to owners in respect of repayments on shares redeemed, re-payment of additional paid-in capital and dividend paid,
  • cash receipts from third party financiers in respect of new debt loans received,
  • cash payments to third party financiers in respect of debt loans repayments/redemptions (interest paid is part of operating activities, see below)
  • cash receipts in respect of new lease liabilities entered into,
  • cash payments  in respect of the redemption of lease liabilities – the loan nominal component in the lease term.

Investing activities

Definition: The acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Cash receipts and cash payments relating to non-current assets:

  • Cash payments on additions to property plant and equipment (capital expense, purchases of productive longer term available assets),
  • Cash payments to obtain financial assets/subsidiaries, Financing activities
  • Cash receipts in respect of sales proceeds in respect of sales of property plant and equipment and sales or redemptions of financial assets,
  • Cash receipts in respect of interest income earned and dividends received from investments in financial assets.

Operating activities

Definition: The activities of the entity that are not investing or financing activities.

Cash receipts and cash payments resulting from operations, items included in here are:

  • cash payments of salaries and wages, Financing activities
  • cash receipts from trade receivables/customers, government (related) bodies (employee sickness reimbursements) and other operating income (insurance claims),
  • cash payments to  trade payable/suppliers, government (related) bodies (wage taxes, social securities, corporate income tax) and in respect of other operating expenses (rent, auditor, tax advisers etcetera), Financing activities
  • cash payments to third party financiers in respect of interest paid on debt loans, Financing activities
  • cash payments  in respect of the redemption of lease liabilities – the interest nominal component in the lease term.

The statement of cash flows ends with the change in cash and cash equivalents in the year.

Note: Revaluations of property plant and equipment and FX translation differences (other than a reconciliation of change in cash and cash equivalents from average/transaction rates to balance sheet dates) are not included in the statement of cash flows because there is no cash flow related to such items.

Note: In the acquisition of new financial assets/subsidiaries cash and cash equivalents in subsidiaries are netted into the cash payment to acquire subsidiaries and the cash receipts in respect of sales of subsidiaries. Financing activities

Why IAS 7?

The statement of cash flows shows the ability of any company to generate cash. Financing activities

Many investors explore the statement of cash flows right after looking to the net profit figure, because they sometimes feel that the profit could be manipulated by some non-cash transactions, such as recording provisions as a just sufficient level or at a very prudent level, fair value adjustments, etc.

However, cash is cash and the statement of cash flows not only shows you how much cash the company generated over the year, but also from which source the cash was generated:

  • Did the company increase their sales/margins/lower costs (as evidenced in the Statement of profit or loss) and increase the generation of cash in-flows by operating activities (a potential structural improvement)?
  • Dis the company increase the generation of cash in-flows from operating activities by improving working capital management (a mostly short-term (one, two-time improvement)?
  • Did the company sell some of its non-current assets (productive property resulting in lower capacity for manufacturing, abandoned property put-out-of production, investment property or investments in equity or debt instruments and generated cash by investing activities?
  • Or did the company take new loans and obtain cash inflows by financing activities?

So, looking to where the cash was generated and spent is as important as assessing the state of affairs and condition of a reporting entity.

Performance indicator – Operating Cash Flow/Net Sales

This ratio, which is expressed as a percentage of a company’s net operating cash flow to its net sales, or revenue (from the income statement), tells us how many dollars of cash are generated for every dollar of sales. Financing activities

There is no exact percentage to look for, but the higher the percentage, the better. It should also be noted that industry and company ratios will vary widely. Investors should track this indicator’s performance historically to detect significant variances from the company’s average cash flow/sales relationship along with how the company’s ratio compares to its peers. It is also essential to monitor how cash flow increases as sales increase since it’s important that they move at a similar rate over time.

Free Cash Flow 

Free cash flow (FCF) is often defined as the net operating cash flow minus capital expenditures. Free cash flow is an important measurement since it shows how efficient a company is at generating cash. Investors use free cash flow to measure whether a company might have enough cash, after funding operations and capital expenditures, to pay investors through dividends and share buybacks.

To calculate FCF from the cash flow statement, find the item cash flow from operations—also referred to as “operating cash” or “net cash from operating activities”—and subtract capital expenditures required for current operations from it. Financing activities

Example Statement of cash flows

Here is the 2019 layout of an IFRS consolidated statement of cash flows with links to the IFRS standards paragraphs and some explanations to consider.

IAS1(10)(d) IAS7(1),IAS7(10)

IAS1(113)

Consolidated statement of cash flows 1-3

Notes

2019

CU ‘000

2018

CU ‘000

IAS7(10),IAS7(18)(a)

Cash flows from operating activities

10(a)

IAS7(14)(a)

Cash generated from operations

65,818

49,525

IAS7(31)-(33)

Interest received 4

1,262

905

IAS7(31)-(33)

Interest paid 4

-6,895

-4,127

IAS7(14)(f),(35),(36)

Income taxes paid 5

-16,458

-12,161

Net cash inflow from operating activities

43,727

34,142

IAS7(10),IAS7(21)

Cash flows from investing activities

IAS7(39)

Payment for acquisition of subsidiary, net of cash acquired

14

-2,600

IAS7(16)(a)

Payments for property, plant and equipment

8(a)

-25,387

-17,602

IAS7(16)(a)

Payments for investment property Financing activities

8(c)

-1,900

IAS7(16)(c)

Payments for financial assets at fair value through other comprehensive income

-259

-2,029

IAS7(16)(c)

Payments for financial assets at amortised cost

7(b)

-1,175

IAS7(16)(a)

Payment of software development costs

8(d)

-880

-720

IAS7(16)(e)

Loans to related parties Financing activities

-1,180

-730

IAS7(39)

Proceeds from sale of engineering division

15

3,110

IAS7(16)(b)

Proceeds from sale of property, plant and equipment

9,585

639

IAS7(16)(d),IAS7(14)

Proceeds from sale of financial assets at fair value through other comprehensive income

1,375

820

IAS7(16)(f)

Repayment of loans by related parties

469

626

IAS7(38)

Dividends from joint ventures and associates

16(e)

160

220

IAS7(31),IAS7(33)

Other dividends 4

3,300

4,300

IAS7(31),IAS7(33)

Interest received on financial assets held as investments 4

258

249

Net cash (outflow) from investing activities

-13,949

-15,402

IAS7(10),IAS7(21)

Cash flows from financing activities

IAS7(17)(a)

Proceeds from issues of shares and other equity securities

9(a)

12,413

Proceeds from calls on shares and calls in arrears

9(a)

1,500

IAS7(17)(c)

Proceeds from borrowings Financing activities

10(c)

46,053

25,796

IAS7(17)(b)

Payments for shares bought back Financing activities

9(a)

-1,350

IAS7(17)(b)

Acquisition of treasury shares Financing activities

-1,217

-299

Share issue and buy-back transaction costs

9(a)

-245

IAS7(17)(d)

Repayment of borrowings Financing activities

10(c)

-33,484

-24,835

IAS7(17)(e)

Principal elements of lease payments (2018 – Principal elements of finance lease payments) 6

10(c)

-1,942

-835

IAS7(42A),IAS7(42B)

Transactions with non-controlling interests

16(c)

-1,500

IAS7(31),IAS7(34)

Dividends paid to company’s shareholders

13(b)

-22,357

-10,479

IAS7(31),IAS7(34)

Dividends paid to non-controlling interests in subsidiaries

16(b)

-3,017

-1,828

Net cash (outflow) from financing activities

-5,146

-12,480

Net increase in cash and cash equivalents

24,632

6,260

Cash and cash equivalents at the beginning of the financial year

28,049

21,573

IAS7(28)

Effects of exchange rate changes on cash and cash equivalents

-248

216

Cash and cash equivalents at end of year

7(e)

52,433

28,049

IAS7(43)

Non-cash financing and investing activities

10(b)

IFRS5(33)(c)

Cash flows of discontinued operation 7

15

Not mandatory

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.

IFRS Explanations – Statement of cash flows

IAS 7 6,

IAS 7 7

Definition of cash and cash equivalents

1. Cash is cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. Investments normally only qualify as cash equivalent if they have a short maturity of three months or less from the date of acquisition. Financial instruments can only be included if they are in substance cash equivalents, e.g. debt investments with fixed redemption dates that are acquired within three months of their maturity.

IAS 7 16

Reporting cash flows

Expenditure on unrecognised assets to be classified as operating cash flows

2. Cash flows can only be classified as arising from investing activities if they result in the recognition of an asset in the balance sheet. Examples of expenditure that should be classified as operating cash flows on this basis are:

  1. expenditures on exploration or evaluation activities, unless the entity has a policy of capitalising these expenditures as permitted under IFRS 6 Exploration for and Evaluation of Mineral Resources

  2. expenditures on advertising or promotional activities, staff training and research and development, and

  3. transaction costs related to a business combination.

IAS 7 22 – 24

Disclosing cash flows on a gross or net basis

3. Cash inflows and outflows must generally be reported gross unless they relate to:

  1. cash receipts and payments on behalf of customers which reflect the activities of the customer rather than the entity, or

  2. items in which the turnover is quick, the amounts are large, and the maturities are short. Financial institutions may also report certain cash flows on a net basis.

IAS 7 31 – 34

Interest, dividends and taxes

4. IAS 7 does not specify how to classify cash flows from interest paid and interest and dividends received. IFRS Reporting Entity Corp. has chosen to present interest paid and interest received on financial assets held for cash management purposes as operating cash flows, but dividends and interest received on other financial assets as investing cash flows because they are returns on the group’s investments. Dividends paid are classified in this publication as financing cash flows, because they are a cost of obtaining financial resources. However, they could also be classified as operating cash flows, to assist users in determining the ability of an entity to pay dividends out of operating cash flows.

IAS 7 35

5. Cash flows arising from income taxes must be separately disclosed and are classified as operating cash flows unless they can be specifically identified with financing or investing activities.

IFRS 16 59

Leases

6. Cash flows relating to leases must be presented as follows:

  1. cash payments for the principal portion of the lease liabilities as cash flows from financing activities

  2. cash payments for the interest portion consistent with presentation of interest payments chosen by the group, and

  3. short-term lease payments, payments for leases of low-value assets and variable lease payments that are not included in the measurement of the lease liabilities as cash flows from operating activities.

IFRS 5 33(c)

Discontinued operations

7. Entities must disclose separately the net cash flows attributable to each of operating, investing and financing activities of discontinued operations. There are different ways of presenting this information, but the underlying principle is that the cash flow statement must give the cash flows for the total entity, including both continuing and discontinued operations. Entities might comply with the disclosure requirements in the following ways:

  1. No presentation of cash flows from discontinued operations on the face of the cash flow statement (that is, gross cash flows are presented), with a breakdown between the three categories presented in the notes. This is the presentation chosen by IFRS Reporting Entity Corp., see note 15.
  2. Cash flows from discontinued operations are split between the three relevant categories on the face of the cash flow statement, with one line being included within each category including the relevant results from discontinued operation. A total is presented for each category.
  3. Information is presented separately for continuing and discontinued operations on a line-by-line basis, on the face of the cash flow statement. A total is presented for each category.

10(a) Cash generated from operations

Notes

2019

CU ‘000

2018

CU ‘000

Profit before income tax from:

Continuing operations

51,086

39,675

-Discontinued operations

15

1,111

570

IAS7(18)(b),IAS7(20)

Profit before income tax including discontinued operations

52,197

40,245

Adjustments for:

Depreciation and amortisation

5(c)

12,540

9,518

– Impairment of goodwill

4

2,410

– Write-off of assets destroyed by fire

4

1,210

– Non-cash employee benefits expense – share-based payments

2,156

1,353

– Net (gain)/loss on sale of non-current assets

-1,620

530

– Gain on disposal of engineering division

15

-760

Fair value adjustment to investment property

8(b)

-1,350

-1,397

– Fair value adjustment to derivatives

-11

621

– Fair value (gains)/losses on non-current financial assets at fair value through profit or loss

7(d)

-120

– Share of profits of associates and joint ventures

16(e)

-340

-355

– Gain on derecognition of contingent consideration payable

14

-135

– Gain on remeasurement of contingent consideration receivable

15

-130

– Dividend income and interest classified as investing cash flows

-3,558

-4,549

– Finance costs – net

5,875

5,450

– Net exchange differences

5(d)

604

479

Change in operating assets and liabilities, net of effects from purchase of controlled entity and sale of engineering division:

– (Increase) in trade receivables

-6,470

-4,647

– Decrease/(increase) in contract assets

1,258

-1,220

– (Increase) in inventories

-1,340

-1,832

– Decrease/(increase) in financial assets at fair value through profit or loss

465

-1,235

– Decrease in other operating assets

87

5,202

– Increase/(decrease) in trade creditors

1,429

-36

– Increase in contract liabilities

457

870

– Increase in other operating liabilities

-251

-46

– Increase in other provisions

1,215

574

Cash generated from operations

65,818

49,525

10(b) Non-cash investing and financing activities

2019

CU ‘000

2018

CU ‘000

IAS7(43)

Acquisition of plant and equipment by means of finance leases (note 7(g))

3,000

IAS7(43)

Acquisition of retail store furniture and fittings from lessor as lease incentive (note 8(a))

950

Non-cash investing and financing activities disclosed in other notes are:

  • Acquisition of right-of-use assets – note 8(b)
  • partial settlement of a business combination through the issue of shares – note 14
  • deferred settlement of part proceeds of the sale of the engineering division – note 15
  • dividends satisfied by the issue of shares under the dividend reinvestment plan – note 13(b), and
  • options and shares issued to employees under the IFRS Reporting Entity Corp. Employee Option Plan and employee share scheme for no cash consideration – note 21.

Financing activities

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