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Structure of cash flow statement
The following three main headings should be used
for all cash flow statements [IAS7.10]:
| a) |
operating cash flows; |
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| b) |
investing cash flows; and |
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| c) |
financing cash flows. |
The level of detail within each category should
reflect the nature of the entity's operations. Comparatives
should be given to the cash flow statement for each
year presented in the financial statements [IAS1R.36].
The nature of an entity's business will determine
the classification of cash flows between the three
headings [IAS7.10-11]. A cash flow that relates
to an entity's investing activities will be classified
as such. Financing cash flows are similarly identified.
All remaining cash flows will be classified as operating.
Although IFRS allow a reasonable amount of discretion
with respect to classification, the classification
an entity adopts should be followed consistently.
Where appropriate, the cash flows of a transaction
should be divided into their constituent parts according
to their nature and the respective elements included
within operating, investing and financing [IAS7.12] .
The resulting cash flow total for the period is
the movement in the balance of cash and cash equivalents
from the start of the period to the end . If the total for cash and cash equivalents
presented cannot be traced directly to the balance
sheet, a reconciliation must be presented in the
notes to the financial statements [IAS7.45].
Operating cash flows
Operating cash flows comprise all cash flows during
the period that do not qualify as either investing
cash flows or financing cash flows.
Operating cash flows may be prepared from the entity's
accounting records under the direct method .
Alternatively, the entity can calculate the
cash flows indirectly by adjusting the net profit
or loss for the period for non-cash items and for
investing and financing items [IAS7.18] .
The preferred method is the direct method, because
the information provided is more useful [IAS7.19].
However, the indirect method is more commonly used.
Interest paid is often classified as an operating
activity, even though it arises on a financing balance.
Interest costs must be covered by cash flows from
operations and is included in determination of net
income/expense. There is support for it to be classified
as an operating cash flow.
Investing cash flows
Investing activities include cash payments to acquire
PPE and other long-term assets [IAS7.16(a)]. Investing
activities also include cash payments and cash receipts
relating to acquisition and disposal of debt and
equity interests in other entities and interests
in joint ventures (except for these relating to
dealing or trading activity) [IAS7.16(c)]. Loans
or advances made to other parties are classified
as investing activities
[IAS7.16(f)] .
Interest received and dividends received should
each be classified separately and are normally classified
as investing activities [IAS7.31].
Financing cash flows
Financing cash flows include cash flows relating
to obtaining, servicing and redeeming sources of
finance. Those sources of finance can include loans,
debentures and share capital [IAS7.17(a)-(e)].
Dividends paid should be classified separately
and are usually included in financing cash flows
[IAS7.31] .
Classification by financial institutions
Activities a financial institution carries out
in its ordinary course of business will be classified
as operating activities, even though for other entities
the same activity would likely be classified as
investing or financing.
Loans and advances a financial institution makes
should be classified as operating, as should the
interest paid and received on those balances. Likewise,
dividends received should be classified as operating
cash flows [IAS7.15].
Classification of other cash flows
Classification of tax cash flows
Tax cash flows are normally classified as operating
cash flows. However, where specific cash flows can
be identified with either investing activities or
financing activities, then it is appropriate to
classify that element of the tax cash flows as investing
or financing respectively [IAS7.10].
Where the tax cash flows are included in investing
or financing categories, disclosure of the total
tax cash flows should also be given [IAS7.36].
Netting of cash flows
Generally cash flows should be shown gross. The
primary exceptions are when [IAS7.22]:
| a) |
cash receipts and payments are made on
behalf of a customer and therefore represent
the customer's transactions and not the reporting
entity's ; or |
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| b) |
cash receipts and payments are in respect
of items for which the turnover is quick,
the amounts are large and the maturities are
short .
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The opportunities for reporting cash flows on a
net basis will usually arise only in a bank or similar
financial institution
[IAS7.24].
The derivation of operating cash flows by use of
the indirect method also results in some netting
of cash flows.
Foreign currency cash flows
Foreign currency cash flows should be translated
into the functional currency at the rate of exchange
on the date of the transaction [IAS7.25]. This is
consistent with the translation of the transaction
for inclusion in the income statement .
A foreign subsidiary's cash flows should also be
translated at the exchange rates relevant to the
underlying transactions [IAS7.26]. However, a rate
that approximates the actual rate, for example a
weighted average rate, may be used, consistent with
the guidance in IAS 21.
The period-end rate cannot be used to translate
foreign currency cash flows [IAS7.27]. However,
residual balances arising as a result of a foreign
currency transaction will be included in the balance
sheet at the period-end rate. Consequently, a reconciling
difference will arise between the changes in cash
and cash equivalents reported in the cash flow statement
and the equivalent amounts obtained from the balance
sheet. This reconciling difference is not a cash
flow but is reported separately in the cash flow
statement [IAS7.28].
Treatment of overdrafts
A bank overdraft may be used as part of an entity's
day-to-day cash management tools rather than as
financing arrangements. Normally, such overdraft
accounts will regularly fluctuate between a positive
and a negative balance. The overdraft balance should
be included in the balance of cash and cash equivalents
where overdrafts are used for such cash management
purposes [IAS7.8]. In all
other circumstances, an overdraft balance is treated
as part of the entity's financing.
Classification of short-term investments
Investments with an original maturity of less than
three months should not be considered a cash equivalent
if there is any doubt that the obligated entity
will fully redeem the security at maturity [IAS7.7]
.
Not all investments that meet the definition of
cash equivalents are required to be treated as such.
The nature of the transaction should be considered
in determining the classification
. The policy for determining which
items are treated as cash equivalents should be
consistently applied and disclosed [IAS7.45].
Other matters
Acquisitions and disposals
The cash flows in respect of each major acquisition
or disposal should be separately disclosed and classified
as an investing cash flow [IAS7.39]. The amount
reported is net of any cash included in the entity
acquired or disposed of [IAS7.42].
The amount of cash in the entities acquired or
disposed of should be disclosed in the notes. This
can be given in aggregate. The value of the consideration
given or received should also be disclosed in the
notes, together with the proportion represented
by cash [IAS7.40].
Subsidiaries' cash flows are consolidated into
the cash flow statement from the date of acquisition.
The cash flows of other investments accounted for
using the equity method or the cost-dividend method
are recognised as dividend income [IAS7.37].
Discontinuing operations
The net cash flows relating to discontinuing operations
should be disclosed, generally in a note (Disposal groups and discontinued operations).
The cash flows should be classified between operating,
investing and financing [IFRS5.33(c)].
Barter and other non-cash transactions
The cash flow statement should not include transactions
that do not include the transfer of cash [IAS7.43].
The same applies to the non-cash element of consideration,
for example, in a barter transaction.
However, relevant information concerning non-cash
transactions should be disclosed in the notes [IAS7.43].
The information should be classified between operating,
investing and financing transactions [IAS7.43]
.
Classification of cash flows relating to
hedging instruments
Cash flows relating to financial instruments such
as futures and forwards are generally classified
as operating [IAS7.16(g)]. However, the cash flows
of financial instruments that are appropriately
designated as hedges should be classified with the
cash flows of the underlying transaction being hedged
.
Segmental analysis
Entities are encouraged, but not required, to give
a summary analysis of cash flows by segment .
This would be at the level of operating, investing
and financing cash flows [IAS7.52].
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