1. Requirements of the Standard IAS 7
An entity shall prepare a statement of cash flows (SCF) in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.
2015

2. 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
2015

3. 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
2015

4. 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.
2015

5. 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.
2015

6. 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)
2015

7. 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
2015

8. IAS 7Indirect 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.
2015

9. 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.
2015

10. 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.
2015

11. 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
2015

12. 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
2015

13. 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
2015

14. 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.
2015

15. 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.
2015

16. 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.
2015

17. 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.
2015

18. 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.
2015

19. 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.
2015

20. 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
2015

21. 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)
2015

22. Cash flows from financing activities
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
2015