Mark Fielding-Pritchard IAS 7 Cashflows Mark Fielding-Pritchard mefielding.com 2015

Some Benefits of Cash Flow Information Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents Enables users to develop models to assess and compare the present value of the future cash flows of different entities It provides information that enables users to evaluate the changes in net assets of an entity Its financial structure (including its liquidity and solvency) Its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities Enhances the comparability of the reporting of operating performance by different entities mefielding.com 2015

Definitions of terms in the standard Cash comprises 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 an insignificant risk of changes in value Cash flows are inflows and outflows of cash and cash equivalents Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities Investing activities are the acquisition and disposal of long- term assets and other investments not included in cash equivalents Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity mefielding.com 2015

IAS 7Cash Flow Statement Need to report movements in cash and cash equivalents Cash = cash in hand, on demand deposits Cash equivalents = short-term, highly liquid investments. Readily convertible into cash. Show movement in cash and cash equivalents defined as: Operating Investing Financing WHAT: - IAS 7 and IPSAS 1 put some definitions around cash and cash equivalents (new definition under IFRS) – See slide Explain ‘Cash Equivalents’ – short-term, highly liquid investments convertible to a known amount of cash with little or no risk – usually 3 month time frame. Held for meeting short-term cash commitments, not longer term investment They also identify how the information is presented, i.e. under three main heading of Operating, Investing and Financing. borrowing costs – usually financing activity, however an ‘overdraft’ may usually be an element of the entities daily cash management therefore would be included as part of cash and cash equivalents. mefielding.com 2015

IAS 7 Cash Flow Statement Operating cash flows = Those relating to activities that are not investing or financing Investing cash flows = Those relating to the acquisition and disposal of long term assets and other investments, excluding cash and cash equivalents Financing cash flows = Those that result in the size and composition of contributed capital and borrowing Three headings – Investing and Financing tend to be defined in the standard. While Operating Cash Flows are all cash flows that are not Investing and Financing. Difficulty may arise when choosing what classification certain items fall into. Its about choosing the most appropriate classification taking into the account the nature of the transaction and the entities normal activities. As a rule (confirmed in the IASB’s Annual Improvements in 2009) Investing Activities usually result in an asset on the statement of financial position. LOOK AT examples of how Interest might be treated, Dividends etc. mefielding.com 2015

IAS 7 Cash Flow Statement Cash flows that can be reported across any of the headings: Interest paid/ received Equity dividends paid Dividends received Must show gross receipts and payments across each of the three headings May net off cash flows where: Relate to the same customer The inflow and outflow occur within a short period of time Point 1 illustrates that some items can be reported across different categories (as discussed) IAS 7 and IPSAS 2 permit this. Equity Dividends may be shown as financing activities as they form part of the cost of obtaining those financial resources. They may also be shown as operating activities as the company pays dividends out of operating cash flows Dividends received could Investing activities or operating or financing activities OTHER points might be about netting of cash flows usually shown gross (Separate Income and Payments) but in the case of an agency type relationship such as collection of rates, you can show net position, i.e. collected and paid over the recipient. In the private sector this might also happen where related inflow and outflow occur in a short space of time (purchase and sale of an Investment) mefielding.com 2015

IAS 7 Operating activities Cash flows from operating activities Can present on direct or indirect basis Direct = identifying all receipts and payments that are operating in nature, disclosing the major categories of these, e.g.: Payments to suppliers; Receipts from customers; Payments to employees; and Other operating payments and operating receipts Can present cash flows from operating activities on a DIRECT or INDIRECT basis DIRECT – discloses major classes of gross receipts and payments INDIRECT – starts with the net surplus or deficit and adjusts for non-cash transactions Direct method (note examples of receipts and payments above on slide) will generally be obtainable from the entities ledger records, in one of TWO ways:- From its cash book records or; Adjusting its accrual based records. GO THROUGH the example of the direct method mefielding.com 2015

IAS 7 Indirect method Indirect = adjust statement of financial performance results to report operating cash flows Adjust for non cash items, e.g. Depreciation, gains/ losses on sale of non current assets Working capital accruals Non operating items (e.g. Interest payable, where this is not disclosed as an operating cash flow) Indirect Method = adjusting surplus or deficit for non-cash items and working capital movements to arrive at the operating cash number. MORE COMMON to do it this way. NOTE point on non-operating item where say Interest Payable is not classified as an operating cash flow. CONTINUE with EXAMPLE IF you use the direct method, you are also encouraged to provide a reconciliation of the surplus/deficit from ordinary activities with the net cash flow from operating activities in the notes to the accounts. mefielding.com 2015

IAS 7 Investing activities Cash flows from investing activities Typically would include: Cash paid to acquire, or a receipt from the sale of, an item of property, plant or equipment; Cash paid to acquire, or a receipt from the sale of, an intangible asset such as a brand or trademark; Cash paid to acquire, or a receipt from the sale of, a separate entity; Cash paid to acquire, or a receipt from the sale of, an equity or debt instrument in another entity, such as a joint venture; and Cash given as an advance or loan to another entity, or the repayment of such items. INVESTING ACTIVITIES KEY POINT is that an Investing Activity should result in a recognised asset in the statement of financial position. (Clarified in the 2009 Annual Improvements Process) Cash inflows and outflows from the sale or acquisition of an entity should be shown separately as a net figure in the statement of cash flows under Investing Activities. NOTE examples of Investing Activities on the slide Its also important to remember that as cash flow we only want to record cash. So for example to sale of an item of plant may result in a surplus or deficit on sale, but the cash flow is only interested in the sales proceeds, not the profit or loss on sale. SEE EXAMPLE on page 31. mefielding.com 2015

IAS 7 Investing activities Where cash flows arise from the sale or purchase of a controlled entity or other operating unit, these cash flows should be separately identified. Need to show: The total purchase or disposal consideration, separately identifying the proportion that is discharged by cash and cash equivalents; The amount of cash and cash equivalents that is included in the entity being purchased or sold; and A summary of the assets and liabilities, other than cash and cash equivalents, of the entity acquired or disposed of. Acquisitions and disposals of entities or other operating units can have a significant impact on the organisations cash flows and on-going cash position, therefore extra information is required for the users to understand the impact of these transactions. SEE SLIDE Both IAS 7 and IPSAS 2 specifically require this information to be disclosed for acquisitions and disposals of controlled entities or other operating units made during the period. mefielding.com 2015

IAS 7 Financing activities Cash flows from financing activities Typically would include: Cash proceeds received from issuing debt instruments, such as debentures, bonds or long-term borrowings; Cash paid to repay debt instruments; and The capital element in finance lease payments made during the period. FINANCING ACTIVITIES These change the amount and composition of the entities contributed capital and borrowings. EXAMPLES are noted on the slide Dividends can also form part of the financing activities of an entity if that is the chosen classification. Recognising the actual outflow of cash for dividends, not ones declared but not yet paid at year-end. LOOK AT EXAMPLE OTHER POINTS Cash flows from foreign transactions should be translated at the exchange rate on the date that the cash flow occurred. Accounting for foreign currency transactions is dealt with in IAS 21 and IPSAS 4 (Accounting for the effects of changes in foreign exchange rates). Usually transaction exchanges at rate applicable at the date of the transaction (spot rate) with monetary balances at year-end being translated at the closing rate (no average rate). DO EXERCISE mefielding.com 2015

Cash and Cash Equivalents Cash equivalents are held for the purpose of meeting short- term cash commitments It must: Be readily convertible to a known amount of cash Be subject to an insignificant risk of changes in value Have a short maturity of, say, three months or less from the date of acquisition mefielding.com 2015

Non-Cash Transactions IAS 7 requires that noncash investing and financing activities should be excluded from the cash flow statements and reported “elsewhere” in the financial statements, where all relevant information about these activities is disclosed. This requirement is interpreted as the necessity to disclose noncash activities in the footnotes to financial statements instead of including them in the CFS. Common examples of noncash activities are Conversion of debt (convertible debentures) to equity Issuance of share capital to acquire property, plant and equipment mefielding.com 2015

Reporting Cash Flows from Operating Activities Use either: The direct method; or The indirect method Entities are encouraged to report cash flows from operating activities using the direct method. mefielding.com 2015

The Direct Method Information about major classes of gross cash receipts and gross cash payments may be obtained either: From the accounting records of the entity By adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the statement of comprehensive income for: Changes during the period in inventories and operating receivables and payables Other non-cash items Other items for which the cash effects are investing or financing cash flows. mefielding.com 2015

The Indirect Method The net cash flow from operating activities is determined by adjusting profit or loss for the effects of: Changes during the period in inventories and operating receivables and payables Non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign currency gains and losses, and undistributed profits of associates All other items for which the cash effects are investing or financing cash flows. mefielding.com 2015

Acquisitions and Disposals of Subsidiaries and other Business Units IAS 7 recognises that an entity may acquire or dispose subsidiaries or other business units during the year and thus requires that the aggregate cash flows from acquisitions and from disposals of subsidiaries or other business units should be presented separately as part of the investing activities section of the CFS. IAS 7 has also prescribed these disclosures in respect to both acquisitions and disposals: The total consideration included. The portion thereof discharged by cash and cash equivalents. The amount of cash and cash equivalents in the subsidiary or business unit acquired or disposed. The amount of assets and liabilities (other than cash and cash equivalents) acquired or disposed, summarised by major category. mefielding.com 2015

Components of Cash and Cash Equivalents Disclose: Components of cash and cash equivalents The policy which it adopts in determining the composition of cash and cash equivalents The effect of any change in the policy for determining components of cash and cash equivalents A commentary by management of the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group. mefielding.com 2015

Other Disclosures Disclosure of the following together with a commentary is encouraged: The amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities The aggregate amounts of the cash flows from each of operating, investing and financing activities related to interests in joint ventures reported using proportionate consolidation The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity The amount of the cash flows arising from the operating, investing and financing activities of each reportable segment. mefielding.com 2015

Format of Cash Flow 1- operating activities   $m Cash flows from operating activities Profit before taxation 3,390 Adjustments for: Depreciation 450 Loss on disposal of property, plant and equipment 100 Investment income (500) Interest expense 300 3,740 Increase in trade and other receivables Decrease in inventories 1,050 Decrease in trade payables (1,740) Cash generated from operations 2,550 Interest paid (270) Income taxes paid (900) Net cash from operating activities 1,380 mefielding.com 2015

Format of Cash Flow 2- investing activities Cash flows from investing activities Purchase of property, plant and equipment (900)   Proceeds from sale of equipment 20 Interest received 200 Dividends received Net cash used in investing activities (480) mefielding.com 2015

Format of Cash Flow 2- investing activities Cash flows from financing activities Proceeds from issue of share capital 250   Proceeds from long-term borrowings Payment of finance lease liabilities (90) Dividends paid* (1,200) Net cash used in financing activities (790) Net increase in cash and cash equivalents 110 Cash and cash equivalents at beginning of period (Note) 120 Cash and cash equivalents at end of period (Note) 230 mefielding.com 2015

Worked Examples P328 Cost Depreciation 1/1/07 b/f 760000 270000 Disposals (240000) (180000) Additions Revaluations/ Impairments Charge for Year 50000 31/12/07 c/f 520000 140000 Carrying amount of disposals $60000. Loss on sale 7000, therefore cash received $53000 mefielding.com 2015

Worked Examples P327/330/333 Opening receivable/ payable 35000 3500 Interest P330 Dividends P333 Tax P327 Opening receivable/ payable 35000 3500 940000 P&l 90000 7000 1270000 Received / Paid (?) Cl receivable 42000 1125000 Received / Paid 83000 10500 1085000 mefielding.com 2015