1. IAS 7 - Statement of cash flows

2. Executive summary
In general, the requirements under IFRS and US GAAP are quite similar.
There are some differences with regard to classification among operating, investing and financing activities. The most notable of these are the differences in interest and dividends paid and received:
Under IFRS, interest and dividends paid can be classified either as operating or financing cash flows. Interest and dividends received can be classified either as operating or investing cash flows.
Under US GAAP, interest paid, interest received and dividends received are all classified as operating cash flows. Dividends paid are classified as financing cash flows.

3. Content, format and classification
US GAAP
IFRS
Cash flows are presented in three classifications: operating, investing and financing activities.
Similar
The totals from the three activities (operating, investing, financing) are summed and this balance is reconciled with the beginning and ending cash (and cash equivalents) balances.
Similar
Similar, except for some differences explained on a later slide.
Operating, investing and financing activities are specifically defined.
Both the direct and indirect method of presenting cash flows from operations are allowed.
Similar
Entities must disclose their policy for determining which items are cash equivalents.
Similar

4. Content, format and classification Interest and dividends
US GAAP
Requires that interest paid and interest and dividends received be classified as operating cash flows. Dividends paid are a financing cash flow because they are considered a cost of obtaining resources.
IFRS
Permits an entity: (a) to classify interest and dividends paid or received as operating cash flows; or (b) to classify interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. However, interest and dividends must be classified in a consistent manner from period to period.

5. Content, format and classification Interest and dividends
In practice, there may be little practical significance to this difference because IAS 7 requires separate disclosure of interest paid and received and of dividends paid and received.
Summary of treatment of interest and dividends:
Cash flow classification
Transaction
IFRS
US GAAP
Interest paid
Operating or financing
Operating
Interest received
Operating or investing
Dividends paid
Financing
Dividends received

6. Content, format and classification Income taxes
US GAAP
Requires that income taxes paid be classified as an operating cash flow.
IFRS
Requires that cash payments or refunds of income taxes be classified as operating activities unless they can be specifically identified with financing or investing activities. In that case, the tax cash flows may be classified as financing or investing activities, as appropriate.
Statements would not necessarily result in a loss of comparability with US GAAP since IFRS requires disclosure of the total amount of income taxes paid.
Convergence: The staff draft issued July 1, 2010, specifies income taxes would be a separate section of the balance sheet, the statement of comprehensive income and the statement of cash flows.

7. Content, format and classification Indirect method
US GAAP
When using the indirect method of presenting operating cash flows, the reconciliation from income to cash flows must begin with net income.
IFRS
The particular income line item that must begin the reconciliation is not specified. Thus, an entity could begin the reconciliation under IFRS with operating income.

8. Content, format and classification Direct method
US GAAP
ASC requires that an entity using the direct method of reporting net cash flows from operating activities must provide (in a separate schedule) a reconciliation of net income to net cash flows from operating activities.
This has little practical significance, however, because few enterprises in the United States use the direct method. The AICPA Accounting Trends and Techniques – 2010 reports that 495 companies of the 500 surveyed in used the indirect method of presenting operating cash flows.
IFRS
This reconciliation is not required.
Convergence: The Boards had tentatively proposed presenting cash flows using the direct method (including operating cash flows) and requiring the presentation of an indirect reconciliation of operating income to operating cash flows in the notes to financial statements. In the Staff Paper presented to the combined Boards at their March 2011 meeting, based on outreach to preparers and users of cash flow statements, there was little support for the direct method. The Boards made no formal decisions at this meeting regarding the technical aspects or timing of future discussions on this project.

9. Content, format and classification Components of cash and cash equivalents
US GAAP
No required disclosure of the components of cash and cash equivalents.
Requires that the cash and cash equivalents line item in the statement of cash flows equals the cash and cash equivalents in the statement of financial position.
IFRS
Required disclosure of the components of cash and cash equivalents.
The total cash and cash equivalents presented in the statement of cash flows does not need to agree to a single line item in the statement of financial position.
Entities must disclose a reconciliation of the components of cash and cash equivalents to the amounts presented on the statement of financial position.
Thus, while users of a statement of cash flows prepared might not be able to trace changes in cash and cash equivalents directly between the statement of financial position and the statement of cash flows, this difference from US GAAP has little practical significance.

10. Statement of cash flows example
Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year ended December 31, BDI wants to see what the statement would look like using US GAAP as well as IFRS. On the next slides are the balance sheet and statement of income account balances, and some additional information.
Prepare the following:
A statement of cash flows using US GAAP.
A statement of cash flows using IFRS with net income for the reconciliation of income to operating cash flows.
A statement of cash flows using IFRS with operating income for the reconciliation of income to operating cash flows.

11. Statement of cash flows example
Example 1 (continued):
Balance sheet accounts:
As of
January 1, 2011
December 31, 2011
Cash
$ 555,000
$ 674,480
Accounts receivable
157,800
149,000
Inventory
254,600
269,000
Prepaid expenses
59,000
62,000
Equipment
875,000
Accumulated depreciation
(120,000)
(175,000)
Land
500,000
450,000
Total assets
$2,281,400
$2,304,480
As of
January 1, 2011
December 31, 2011
Accounts payable
$ ,000
$ ,500
Accrued liabilities
45,000
49,800
Notes payable
1,200,000
1,050,000
Common stock
400,000
Retained earnings
541,400
717,180
Total liabilities and equity
$2,281,400
$2,304,480

12. Statement of cash flows example
Example 1 (continued):
Income statement balances:
For the year ended December 31, 2011
Sales
$1,300,500
Interest revenue
5,000
Dividend revenue
4,500
Cost of goods sold
(750,500)
Salary expense
(125,500)
Depreciation expense
(55,000)
Other operating expenses
(49,800)
Loss on sale of land
(5,000)
Interest expense
(23,000)
Income tax expense
(105,420)
Net income
$ 195,780

13. Statement of cash flows example
Example 1 (continued):
Other information:
The following account balances are all zero at both the beginning and end of the year: interest payable, interest receivable, dividends payable, dividends receivable and income taxes payable.
BDI does not include any interest or dividend cash flows in the operating section of the statement of cash flows when it prepares its statement under IFRS.
BDI uses the indirect method for the operating section for both US GAAP and IFRS.
As of December 31, 2011, BDI has one bank account balance that is overdrawn. The overdraft amount is $12,000. BDI has not yet moved this from its cash account into the liabilities section of its balance sheet. Overdrafts are an integral part of BDI’s cash management.
BDI paid dividends of $20,000 during 2011.
BDI paid income taxes of $7,000 that were attributable to financing activities. It paid income taxes of $2,000, all attributable to investing activities.
BDI sold land this year with a cost basis of $50,000. It reported a $5,000 loss on the sale.

14. Statement of cash flows example US GAAP
Example 1 solution:
BDI
Statement of cash flows
For the year ended December 31, 2011
Operating activities
Net income
$195,780
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
$55,000
Loss on sale of land
5,000
Decrease in accounts receivable
8,800
Increase in inventory
(14,400)
Increase in prepaid expenses
(3,000)
Decrease in accounts payable
(7,500)
Increase in accrued liabilities
4,800
Net cash provided by operating activities
244,480

15. Statement of cash flows example US GAAP
Example 1 solution (continued):
Investing activities
Sale of land
$45,000
Net cash provided by investing activities
$ 45,000
Financing activities
Borrowings – loan repayments
(150,000)
Borrowings – bank overdraft
12,000
Payment of dividends
(20,000)
Net cash used in financing activities
(158,000)
Net increase in cash
131,480
Cash at January 1, 2011
555,000
Cash at December 31, 201*
$686,480
*Note that the cash balance at December 31, 2011, must exclude bank overdrafts of $12,000.

16. Statement of cash flows example IFRS reconciling to net income
BDI
Statement of cash flows
For the year ended December 31, 2011
Operating activities
Net income
$195,780
Adjustments to reconcile net income to net cash provided by operating activities:
Interest revenue
$(5,000)
Dividend revenue
(4,500)
Depreciation expense
55,000
Loss on sale of land
5,000
Interest expense
23,000
Income taxes paid due to investing and financing activities
9,000
Decrease in accounts receivable
8,800
Increase in inventory
(14,400)
Increase in prepaid expenses
(3,000)
Decrease in accounts payable
(7,500)
Increase in accrued liabilities
4,800
Net cash provided by operating activities
$266,980

17. Statement of cash flows example IFRS reconciling to net income
Investing activities
Sale of land
$45,000
Receipt of interest
5,000
Receipt of dividends
4,500
Income taxes paid due to investing activities
(2,000)
Net cash provided by investing activities
$ 52,500
Financing activities
Borrowings – loan repayment
(150,000)
Payment of interest
(23,000)
Payment of dividends
(20,000)
Payment of income taxes
(7,000)
Net cash used in financing activities
(200,000)
Net increase in cash
119,480
Cash at January 1, 2011
555,000
Cash at December 31, 2011
$674,480

18. Disclosures
Additional disclosure differences not mentioned previously:
US GAAP
Prohibits disclosure of cash flows per share.
IFRS
Does not have restrictions on the disclosure of cash flows per share.