Statement of Cash Flows IAS 7 IFRS Primer Wiecek and Young

Statement of Cash Flows
IAS 7
Wiecek and Young
IFRS Primer
Chapter 3
Statement of Cash Flows
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Related standards
IAS 7
Current GAAP comparisons
Looking ahead
End-of-chapter practice
Related Standards
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FAS 95 Statement of cash flows
FAS 102 Statement of cash flows—
exemption of certain enterprises and
classification of cash flows from certain
securities acquired for resale
FAS 104 Statement of cash flows—net
reporting of certain cash receipts and cash
payments and classification of cash flows
from hedging transactions
Related Standards
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IAS 1 Presentation of financial statements
IAS 7 - Overview
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Objective and scope
Cash flows
Reporting operating cash flows
Reporting investing cash flows
Reporting financing cash flows
Specific items
Disclosures
IAS 7 – Objective and Scope
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IAS 7 objective: to provide a statement to
help investors assess the prospects for future
cash flows, and to confirm or change their
past expectations
Statement provides historical information on
the entity’s operating, investing and financing
cash flows and how its cash balances have
changed in the period as a result
IAS 7 – Cash Flows
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Cash and cash equivalents:
Cash on hand and on deposit and “shortterm, highly liquid investments that are
readily convertible to known amounts of cash
and which are subject to an insignificant risk
of changes in value”
Can include bank overdrafts if part of cash
management activities and balance
fluctuates between positive and negative
amounts
IAS 7 – Reporting Operating
Cash Flows
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Operating activities are the principal
revenue-producing activities; and those that
are not investing or financing activities
Operating cash flows are important: surplus
cash flows needed to invest in increased
capacity, pay debt when due, and provide a
return to shareholders
IAS 7 – Reporting Operating
Cash Flows
Operating cash flows:
a) Cash received from customers for the sale
of goods and provision of services, or on
account of royalties, fees, or commissions
b) Cash payments to suppliers for goods and
services provided; and to and on behalf of
employees for their services
c) Cash received from or paid for financial
instruments held specifically for dealing or
trading purposes
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IAS 7 – Reporting Operating
Cash Flows
Two methods:
 Direct method
 Indirect method
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Either allowed although preference for direct
method
IAS 7 – Reporting Operating
Cash Flows
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Direct method
IAS 7 – Reporting Operating
Cash Flows
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Indirect method…same entity?
IAS 7 – Reporting Operating
Cash Flows
Common adjustments to convert profit or
loss to cash from operations:
 Changes in working capital accounts
 Elimination of non-cash items
 Elimination of investing and financing items
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IAS 7 – Reporting Operating
Cash Flows
What is used…direct method or indirect?
KPMG : The Application of IFRS: Choices
in Practice – International Financial
Reporting Standards, December
2006
http://www.kpmg.co.uk/pubs/304574_ifrg.pdf
: see page 10 of 44
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IAS 7 – Reporting Investing
Cash Flows
Investing activities:
“the acquisition and disposal of long-term
assets and other investments not included in
cash equivalents”
Importance:
Is the entity maintaining its capacity and
increasing the potential for increased
operating cash flows in the future?
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IAS 7 – Reporting Investing
Cash Flows
Examples:
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Cash payments to acquire property, plant, and equipment;
intangibles; and other long-term assets, including capitalized
development costs
Cash receipts from the disposal of items in (a)
Cash payments to acquire debt and equity instruments of other
entities or interests in joint ventures; excluding investments held
for trading or in cash equivalents
Cash receipts from the disposal of items in (c)
Cash advances and loans to other parties and their cash
repayments
Cash payments for and receipts from futures, forwards, options
and swaps unless they are held for trading or are classified as
financing flows.
IAS 7 – Reporting Investing
Cash Flows
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Example – Wienerberger AG, Austria
IAS 7 – Reporting Financing
Cash Flows
Financing activities:
“result in changes in the size and composition
of the contributed equity and borrowings of
the entity”
Importance:
Financing cash flows change the capital
structure of the firm and affect the relative
interests of those with claims to future cash
flows of the entity
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IAS 7 – Reporting Financing
Cash Flows
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Example – Wienerberger AG, Austria
IAS 7 – Specific Items
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No netting of inflows and outflows
Interest and dividends received and interest
and dividends paid – choice of operating,
investing or financing flows as appropriate
Income tax cash flows – generally operating
flows
Non-cash transactions – not included in
statement; disclosed instead
IAS 7 – Specific Items
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Cash flows between an entity and its
subsidiaries, associates and joint ventures
reported only if accounted for by the cost or
equity method
Acquisition/loss of control of subsidiary –
investing cash flow
Exchange rate changes on foreign cash
balances – reconciling item at bottom of
statement
IAS 7 - Disclosures
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Operating, investing, financing flows
Change in cash and cash equivalents
Components of cash and cash equivalents
Reconciliation of change to amounts on
statement of financial position
Explanation of significant cash balances not
available for use
Current GAAP Comparisons
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Pages 20 and 21 of 164 of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOv
erview(2008).pdf
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Looking Ahead
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Part of Phase B of Financial Statement
Presentation project
Likely to link related items on each financial
statement; e.g., business items (operating
and investing) and financing items
May move to explain change in cash only –
exclude cash equivalents
May require use of direct method on
statement with reconciliation to profit or loss
in the notes
Phase B discussion paper issued in late
2008
End-of-Chapter Practice
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End-of-Chapter Practice
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End-of-Chapter Practice
3-3 Companies are affected by a number of events and transactions, some of which have an effect on their cash and
cash equivalents, and some which do not. Following are some examples of such events and transactions:
1. Annual payment of $100 on a finance lease obligation, $2 of which is interest
2. Acquisition of a 4100, 3%, 90-day government treasury bill
3. Payment of $25 to a pension fund trustee
4. Cash received on the maturity of the treasury bill in item 2 above
5. Annual payment of $100 on an operating lease for sales office space
6. Receipt of $10 on the sublease of excess sales office space
7. Acquisition of the company’s treasury shares at a cost of $75
8. Conversion of convertible debt into common shares
9. Payment of $30 of a portion of long-term debt reported in current liabilities along with $3 of interest
10. Costs incurred to repair a customer’s product under warranty—inventory supplies used $1; labor paid $4
Instructions
For each item listed above
(a) identify the effect on the company’s cash and cash equivalents; and
(b) indicate how the transaction or event will be reported on the company’s statement of cash flows, if at all,
and if any special disclosures are required.
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End-of-Chapter Practice
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End-of-Chapter Practice
3-5 In this chapter, flag icons identify areas where there are GAAP differences
between IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside back cover of this book, and
prepare a concise summary of the differences that are flagged throughout the
chapter.
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