1. Statement of cash flows

2. Academic Resource Center Statement of cash flows Page 2 Typical coverage of US GAAP ► Purpose and scope ► Content, format and classification ► Preparation

3. Academic Resource Center Statement of cash flows Page 3 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.

4. Academic Resource Center Statement of cash flows Page 4 Primary pronouncements US GAAP ► ASC 230, Statement of Cash Flows IFRS ► IAS 7, Statement of Cash Flows

5. Academic Resource Center Statement of cash flows Page 5 Progress on convergence ► In October 2008, the IASB and the FASB issued a joint Discussion Paper (DP), Preliminary Views on Financial Statement Presentation. The objective of the Boards‘ joint project was to create a standard that requires entities to organize financial statements in a manner that clearly communicates an integrated financial picture of the entity. There was a staff draft (SD) of an exposure draft issued on this topic on July 1, 2010. ► The Boards had tentatively proposed presenting cash flows using the direct method.

6. Academic Resource Center Statement of cash flows Page 6 Purpose and scope According to ASC 230-10-10-1, “the primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period.” Cash and cash equivalents are defined. Similar IFRSUS GAAP

7. Academic Resource Center Statement of cash flows Page 7 Purpose and scope IFRS ► IAS 7 applies to all enterprises for each period for which financial statements are presented. US GAAP ► ASC 230-10-15-4 exempts defined benefit plans and other plans with similar characteristics that present similar financial information, along with certain investment companies, from the scope.

8. Academic Resource Center Statement of cash flows Page 8 Content, format and classification Cash flows are presented in three classifications: operating, investing and financing activities. 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 Operating, investing and financing activities are specifically defined. Similar, except for some differences explained on a later slide. IFRS US GAAP 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

9. Academic Resource Center Statement of cash flows Page 9 Content, format and classification Bank overdrafts IFRS ► Overdrafts that are payable on demand are included as cash and cash equivalents if considered to be an integral part of an enterprise’s cash management. Bank borrowings (which are considered a financing activity) are distinguished from bank overdrafts by asserting that, in the case of overdrafts, the balance fluctuates from positive to overdrawn and should be shown as a component of cash and cash equivalents. US GAAP ► Does not address bank overdrafts although they are typically considered to be liabilities and are included in the financing section of the statement of cash flows. Convergence: The staff draft issued July 1, 2010 specifies that bank overdrafts should be presented in the debt category of the financing section of the statement of financial position.

10. Academic Resource Center Statement of cash flows Page 10 Content, format and classification Interest and dividends 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. 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.

11. Academic Resource Center Statement of cash flows Page 11 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: Content, format and classification Interest and dividends Cash flow classification TransactionIFRSUS GAAP Interest paid Operating or financingOperating Interest receivedOperating or investingOperating Dividends paidOperating or financingFinancing Dividends receivedOperating or investingOperating

12. Academic Resource Center Statement of cash flows Page 12 Content, format and classification Income taxes 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. US GAAP ► Requires that income taxes paid be classified as an operating cash flow. 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.

13. Academic Resource Center Statement of cash flows Page 13 Content, format and classification Indirect method 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. US GAAP ► When using the indirect method of presenting operating cash flows, the reconciliation from income to cash flows must begin with net income.

14. Academic Resource Center Statement of cash flows Page 14 Content, format and classification Direct method IFRS ► This reconciliation is not required. US GAAP ► ASC 230-10-45-30 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 2009 used the indirect method of presenting operating cash flows. 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.

15. Academic Resource Center Statement of cash flows Page 15 Content, format and classification Components of cash and cash equivalents 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. 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.

16. Academic Resource Center Statement of cash flows Page 16 Example 1: Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year ended December 31, 2011. 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. Statement of cash flows example 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.

17. Academic Resource Center Statement of cash flows Page 17 Example 1 (continued): Balance sheet accounts: Statement of cash flows example As of January 1, 2011 As of December 31, 2011 Cash$ 555,000$ 674,480 Accounts receivable157,800149,000 Inventory254,600269,000 Prepaid expenses59,00062,000 Equipment875,000 Accumulated depreciation (120,000)(175,000) Land 500,000 450,000 Total assets$2,281,400$2,304,480 As of January 1, 2011 As of December 31, 2011 Accounts payable$ 95,000$ 87,500 Accrued liabilities45,00049,800 Notes payable1,200,0001,050,000 Common stock400,000 Retained earnings 541,400 717,180 Total liabilities and equity $2,281,400$2,304,480

18. Academic Resource Center Statement of cash flows Page 18 Example 1 (continued): Income statement balances: Statement of cash flows example For the year ended December 31, 2011 Sales$1,300,500 Interest revenue 5,000 Dividend revenue4,500 Cost of goods sold(750,500) Salary expense(125,500) Depreciation expense(55,000) Other operating expenses(49,800) Loss on sale of land(5,000) Interest expense(23,000) Income tax expense (105,420) Net income$ 195,780

19. Academic Resource Center Statement of cash flows Page 19 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.

20. Academic Resource Center Statement of cash flows Page 20 Example 1 solution: Statement of cash flows example US GAAP 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 land5,000 Decrease in accounts receivable8,800 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 activities244,480

21. Academic Resource Center Statement of cash flows Page 21 *Note that the cash balance at December 31, 2011, must exclude bank overdrafts of $12,000. Statement of cash flows example US GAAP Investing activities Sale of land$45,000 Net cash provided by investing activities$ 45,000 Financing activities Borrowings – loan repayments(150,000) Borrowings – bank overdraft12,000 Payment of dividends(20,000) Net cash used in financing activities(158,000) Net increase in cash131,480 Cash at January 1, 2011555,000 Cash at December 31, 201*$686,480 Example 1 solution (continued):

22. Academic Resource Center Statement of cash flows Page 22 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 expense55,000 Loss on sale of land5,000 Interest expense23,000 Income taxes paid due to investing and financing activities9,000 Decrease in accounts receivable8,800 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

23. Academic Resource Center Statement of cash flows Page 23 Statement of cash flows example IFRS reconciling to net income Investing activities Sale of land$45,000 Receipt of interest5,000 Receipt of dividends 4,500 Income taxes paid due to investing activities(2,000) Net cash provided by investing activities$ 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 cash119,480 Cash at January 1, 2011555,000 Cash at December 31, 2011$674,480

24. Academic Resource Center Statement of cash flows Page 24 Statement of cash flows example IFRS reconciling to operating income BDI Statement of cash flows For the year ended December 31, 2011 Operating activities Operating income*$319,700 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation expense$55,000 Income taxes paid(96,420) Decrease in accounts receivable8,800 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 * Components of operating income include sales, cost of goods sold, salary expense, depreciation expense and other operating expenses.

25. Academic Resource Center Statement of cash flows Page 25 Statement of cash flows example IFRS reconciling to operating income Investing activities Sale of land$45,000 Receipt of interest5,000 Receipt of dividends4,500 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 cash119,480 Cash at January 1, 2011555,000 Cash at December 31, 2011$674,480

26. Academic Resource Center Statement of cash flows Page 26 Preparation Since the statement of cash flows under both US GAAP and IFRS contains the same three classifications, preparation is generally similar. Similar IFRSUS GAAP

27. Academic Resource Center Statement of cash flows Page 27 Disclosures IFRS ► Does not have restrictions on the disclosure of cash flows per share. US GAAP ► Prohibits disclosure of cash flows per share. Additional disclosure differences not mentioned previously:

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