2. Classify historic cash flows during a
period into operating, investing and
financing activities
Basis to assess ability to generate cash
Assess needs to utilise cash
Assess timing and certainty of generation
of cash
2
IAS 7 4/1/2009
3. 3
All entities must present a
cash flow statement as part
of financial statements for
each period for which
financial statements are
prepared under IFRS
IAS 7 4/1/2009
4. Evaluate
how net assets have changed
›
financial structure, liquidity and solvency
›
ability to affect amounts, timing and certainty of cash flows
›
ability to adapt to changing circumstances and opportunities
›
ability to generate cash
›
accuracy of past assessments
›
relationship between profit and cash flow
›
impact of changing prices
›
Develop models to assess and compare present value of
future cash flows of different entities (in order to perform
business or project valuations)
Enhance comparability of operating performance
Eliminates effects of differences in accounting treatment
between entities
4
IAS 7 4/1/2009
5. Cash: Cash on hand and demand deposits
Cash equivalents: Short-term liquid investments readily
convertible to known amounts of cash with insignificant risk of
changes in value
3 months or less to mature
›
Short term preference shares with definite redemption date
›
Fluctuating bank overdrafts
›
Exclude movements between cash and cash equivalents as cash
›
management is not an operating, investing or financing activity
Cash flows: Inflows and outflows of cash and cash equivalents
Operating activities : Principal revenue-producing activities and
other activities that are not investing or financing
Investing activities : Acquisition and disposal of long term assets
and other investments not included in cash equivalents
Financing activities : Changes in the size and composition of
contributed equity and borrowings of the entity
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IAS 7 4/1/2009
6. Operating activities primarily contribute to profit or
loss
› Indicate if operations generate enough cash to repay
loans, maintain operations, pay dividends and invest
without external sources of cash
Includes:
Receipts from turnover and other income
›
Cash paid to suppliers and employees
›
Insurance payments and receipts
›
Tax payments and receipts
›
Trade or dealing payments and receipts
›
Securities and loans held for sale
›
Cash advances and loans made by financial institutions
›
Excludes profit or loss on sale of property, plant and
equipment
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IAS 7 4/1/2009
7. Expenditure to generate future income and
cash flows
Includes:
Payments to buy long term assets
›
Development costs
›
Receipts from sale of long term assets
›
Payments and receipts from intangible assets
›
Payments and receipts for debt or equity instruments
›
in other entities, if not held for dealing or trading
› Futures contracts, forward contracts, option
contracts and swap contracts not held for dealing
and trading
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IAS 7 4/1/2009
8. Financing activities include
› Proceeds from issuing shares and equity
instruments
Payments to acquire or redeem shares
›
Proceeds from
›
debentures, loans, notes, bond, mortgages
and other borrowings
Cash repayments on borrowings
›
Cash repayments on finance leases
›
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IAS 7 4/1/2009
9. Direct method: disclose major Indirect method: adjust profit or
classes of gross cash receipts and loss for :-
payments Non-cash transactions
›
Direct method encouraged by IAS Accruals and deferrals
›
7 Income or expenses with
›
Obtain information from: Investing or financing cash flows
Adjust profit or loss for effects of:
Underlying accounting records
›
e.g. bank statements or general Changes in inventories
›
ledger
Changes in receivables
›
Adjust income statement for
›
Changes in payables
›
Changes in inventories
Non-cash items
›
Changes in receivables
Depreciation
Changes in payables
Provisions
Non cash items
Deferred tax
Investing cash flows
Unrealised foreign currency gains
Financing cash flows
& losses
Undistributed profits of associates
and minority interests
Investing cash flows
›
Financing cash flows
›
9
IAS 7 4/1/2009
10. ALTERNATIVE TREATMENT UNDER
INDIRECT METHOD:
› Net cash flow from operating activities is
presented by:
Revenues
Expenses
Changes in inventories
Changes in receivables
Changes in payables
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IAS 7 4/1/2009
11. Present major classes of gross cash payments and receipts
separately but the following may be presented on a net
basis:
› Payments and receipts on behalf of customers for the activities
of the customer
Demand deposits at banks
Investment funds
Rents for property owners
› Payments and receipts for items with quick turnover of large
amounts and short maturities
Credit card customers
Purchase and sale of investments
Short term borrowings with maturity of 3 months or less
› Cash flows from activities of financial institutions
Deposits with fixed maturity dates
Placement and withdrawal of deposits
Loans to customers and repayments of loans
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IAS 7 4/1/2009
12. Treatment consistent with IAS 21
Permits exchange rates approximate to actual
rate e.g. weighted average rate for a period
Unrealised gains and losses arising on
translation are reported separately in the
statement to reconcile cash and cash
equivalents at the beginning and end of the
period
Convert to reporting currency at date of cash
flow
› Transactions in foreign currency
› Cash flows of foreign subsidiary (use of rate at
balance sheet date not allowed)
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IAS 7 4/1/2009
13. Cash flows from interest and dividends
received and paid are
› Disclosed separately
Whether interest is expensed or capitalised
› Classified in a consistent manner from period
to period as
Operating (e.g. for financial institutions)
Investing (cost or returns on investments)
Financing activities (cost of obtaining finance)
There is no consensus for entities other than
financial institutions
13
IAS 7 4/1/2009
14. Disclose cash flows separately under
operating activities
If specifically identified with financing or
investing activities, classify as
appropriate (usually difficult to identify as
cash flows of tax and transactions arise in
different periods)
When tax cash flows are allocated over
more than one class, the total amount of
taxes paid is disclosed
14
IAS 7 4/1/2009
15. Only report cash flows between the entity
and investee e.g. dividends and advances
Joint ventures
› Proportionate consolidation method:
proportionate share of jointly controlled cash
flows are reported in consolidated CFS
› Equity method: disclose cash flows representing
investment in the entity, distributions and other
payments and receipts between entity and
jointly controlled entity
15
IAS 7 4/1/2009
16. Present aggregate cash flows of the following in
separate line items and classify as investing activities
› Cash flow effect of disposals versus acquisitions (not
deducted from each other)
› Cash paid or received as purchase or sale consideration
net of cash and cash equivalents acquired or disposed of
Disclose
› Total purchase and disposal consideration
› Cash and cash equivalent portion of total consideration
› Cash and cash equivalents in the business unit acquired or
disposed of
› Other assets and liabilities in the subsidiary acquired or
disposed of, summarised by each major category
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IAS 7 4/1/2009
17. Exclude non cash investing and
financing transactions from cash flow
statement e.g.
› Assets purchased with loans or finance
leases
› Acquisition of shares in another entity
› Conversion of debt to equity
17
IAS 7 4/1/2009
18. Reconcile cash and cash equivalents in
the cash flow statement with cash and
cash equivalents in the balance sheet
Disclose the accounting policy to
determine cash and cash equivalents
Report changes in accounting policy in
accordance with IAS 8
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IAS 7 4/1/2009
19. Significant cash and cash equivalent balances
held but not available for use by the group
› E.G. cash held by a subsidiary in a country with
exchange controls
Information about financial position and
liquidity of an entity
› Undrawn borrowing facilities and restrictions on use
› Cash flows of joint ventures reported using
proportionate consolidation
› Cash flows that increase operating capacity vs cash
flows that maintain operating capacity
› Segmental cash flows by industry and geographical
segment
19
IAS 7 4/1/2009
20. All IFRS financial statements must contain a
cash flow statement
Cash flows are presented using the direct
method or the indirect method
Non-cash transactions are excluded
Cash flows are classed as operating
activities, investing activities or financing
activities
Cash flows are reconciled to movements of
cash and cash equivalents in the balance
sheet
Accounting policy and major restrictions on
cash flow are disclosed
20
IAS 7 4/1/2009
21. Cash flows from operating activities
Cash receipts from customers
›
Cash paid to suppliers and employees
›
Cash generated from operations
›
Interest paid
›
Income taxes paid
›
Cash flows from investing activities
Acquisition of subsidiary net of cash acquired
›
Purchase of property, plant and equipment
›
Proceeds from sale of equipment
›
Interest received
›
Dividends received
›
Cash flows from financing activities
Proceeds from issue of share capital
›
Proceeds from long-term borrowings
›
Payment of finance lease liabilities
›
Dividends paid
›
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
21
IAS 7 4/1/2009
22. Cash flows from operating activities
Profit before taxation
›
Adjustments for:
›
Depreciation
Foreign exchange loss
Investment income
Interest expense
(Increase)/decrease in trade and other receivables
(Increase)/decrease in inventories
Increase/(decrease) in trade payables
Interest paid
Income taxes paid
Cash flows from investing activities
Acquisition of subsidiary net of cash acquired
›
Purchase of property, plant and equipment
›
Proceeds from sale of equipment
›
Interest received
›
Dividends received
›
Cash flows from financing activities
Proceeds from issue of share capital
›
Proceeds from long-term borrowings
›
Payment of finance lease liabilities
›
Dividends paid
›
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
22
IAS 7 4/1/2009
