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Information to be presented in the statement of cash flows
Extract from FRS102: Section 7.3 and Section 7.10A-7.10E
7.3 An entity shall present a statement of cash flows that presents cash flows for a reporting period classified by operating activities, investing activities and financing activities.
Extract from FRS102: Section 7.10A-7.10E
7.10A Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short
7.10B Examples of cash receipts and payments referred to in paragraph 7.10A(a) are:
(a) the acceptance and repayment of demand deposits of a bank;
(b) funds held for customers by an investment entity; and
(c) rents collected on behalf of, and paid over to, the owners of properties.
7.10C Examples of cash receipts and payments referred to in paragraph 7.10A(b) are advances made for, and the repayment of:
(a) principal amounts relating to credit card customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, for example, those which have a maturity period of three months or less.
7.10D Financial institutions may report cash flows described in paragraph 34.33 on a net basis.
7.10E A financial institution that undertakes the business of effecting or carrying out insurance contracts, other than mutual life assurance companies scoped out of this section in paragraph 7.1A(a), should include the cash flows of their long-term business only to the extent of cash transferred and available to meet the obligations of the company or group as a whole.
OmniPro comment
The three categories in which cash flows should be presented on the cash flow statement are under:
- Operating activities
- Investing activities
- Financing activities
Operating activities
Extract from FRS102: Section 7.4 and Section 7.7-7.9
7.4 Operating activities are the principal revenue-producing activities of the entity.
Therefore, cash flows from operating activities generally result from the transactions and other events and conditions that enter into the determination of profit or loss.
Examples of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash payments or refunds of income tax, unless they can be specifically identified with financing and investing activities;
(f) cash receipts and payments from investments, loans and other contracts held for dealing or trading purposes, which are similar to inventory acquired specifically for resale; and
(g) cash advances and loans made to other parties by financial institutions.
Some transactions, such as the sale of an item of plant by a manufacturing entity, may give rise to a gain or loss that is included in profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.
7.7 An entity shall present cash flows from operating activities using either:
(a) the indirect method, whereby profit or loss is adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows; or
(b) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed.
Indirect method
7.8 Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred tax, accrued income (expenses) not yet received (paid) in cash, unrealised foreign currency gains and losses, undistributed profits of associates, and non-controlling interests; and
(c) all other items for which the cash effects relate to investing or financing.
Direct method
7.9 Under the direct method, net cash flow from operating activities is presented by disclosing information about major classes of gross cash receipts and gross cash payments. Such information may be obtained either:
(a) from the accounting records of the entity; or
(b) by adjusting sales, cost of sales and other items in the statement of comprehensive income (or the income statement, if presented) for:
(i) changes during the period in inventories and operating receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing cash flows
OmniPro comment
Section 7.7(a) makes it clear that profit or loss is the starting point for the reconciliation to the net cash flow from operating activities. ‘Profit or loss’ is defined in Appendix I of FRS 102 as ‘the total of income less expenses, excluding the components of other comprehensive income’. In effect this is the profit after tax in the profit and loss account.
Section 7 does not specify where the reconciliation of the profit after tax to the cash flow from operating activities should be presented. Therefore, entities have a choice to show this on the face of the cash flow or include it in the notes to the financial statements.
When determining whether an item falls into operating or investing activities will depend on the business the entity is operating in. For example, purchase a land for a property developer who develops the land and sells houses, the purchase of this would fall into operating activities however if this was purchased by a frozen food company for its own use or to rent it for rental purposes as a one off purchase it would be classed as an investing activity.
Operating cash flows can be reported using either the direct or indirect method.
Direct method
The direct method reports the major classes of gross operating cash receipts and gross operating cash payments. These are then aggregated to arrive at the net operating cash flow of the entity. The gross operating receipts and payments can be obtained by adjusting operating profit and loss account items for non-cash items, changes in working capital and other items that relate to investing and financing cash flows. This method may be harder to apply than the indirect method if the accounting systems do not gather this data. See below the example of the direct method:
Example 2: Cash flows from operating activities – Direct Method
|
Cash flows from operating activities |
|
2015 |
2014 |
|
|
|
CU |
CU |
|
|
|
|
|
|
Receipts from customers |
|
XXX |
XXX |
|
Payments to suppliers and employees |
|
(XXX) |
(XXX) |
|
Interest received |
|
XXX |
XXX |
|
Dividends received |
|
(XXX) |
(XXX) |
|
Finance costs paid |
|
XXX |
XXX |
|
Income taxes paid/refunded |
|
(XXX) |
XXX |
|
Net cash inflow from operating activities |
|
XXX |
XXX |
Indirect method
See below an example of the indirect method with regard to calculating the net cash flow from operating activities. It gives the same result but is laid out differently:
Example 2a: Cash flows from operating activities – Indirect Method
|
Reconciliation of profit to net cash inflow from operating activities |
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Profit after taxation |
XXX |
XXX |
|
Adjustments for: |
|
|
|
Taxation expense/(income) |
XXX |
(XXX) |
|
Finance expense |
XXX |
XXX |
|
Interest income |
(XXX) |
(XXX) |
|
Operating profit |
XXX |
XXX |
|
Depreciation on property, plant and equipment |
XXX |
XXX |
|
Amortisation of capital grant |
(XXX) |
(XXX) |
|
Decrease in debtors |
XXX |
XXX |
|
Decrease in creditors |
(XXX) |
(XXX) |
|
Loss on disposal of subsidiary |
XXX |
– |
|
Decrease in inventory |
XXX |
XXX |
|
(Profit)/loss on disposal of fixed assets |
(XXX) |
XXX |
|
Amortisation of goodwill and intangibles |
XXX |
(XXX) |
|
Loss/(profit) on disposal of investments |
XXX |
(XXX) |
|
Provision of impairment on property, plant and equipment |
XXX |
XXX |
|
Reversal of prior year impairment on investments |
(XXX) |
(XXX) |
|
(Increase)/decrease in fair value of investment property |
(XXX) |
XXX |
|
Unrealised foreign exchange (gain)/loss on non-operating activities |
(XXX) |
XXX |
|
Non-controlling interest |
(XXX) |
(XXX) |
|
Pension contributions (less than)/more than amount charged |
(XXX) |
XXX |
|
Undistributed profits of associates |
(XXX) |
(XXX) |
|
Gain on pension scheme – non cash item |
(XXX) |
(XXX) |
|
Net cash inflow from operating activities |
XXX |
XXX |
Investing activities
Extract from FRS102: Section 7.5 and Section 7.10
7.5 Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples of cash flows arising from investing activities are:
(a) cash payments to acquire property, plant and equipment (including self-constructed property, plant and equipment), intangible assets and other long-term assets. These payments include those relating to capitalized development costs and self-constructed property, plant and equipment;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments classified as cash equivalents or held for dealing or trading);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments classified as cash equivalents or held for dealing or trading);
(e) cash advances and loans made to other parties (except those made by financial institutions – see paragraph 7.4(g));
(f) cash receipts from the repayment of advances and loans made to other parties;
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts, except when the contracts are held for dealing or trading, or the payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts, except when the contracts are held for dealing or trading, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge (see Section 12 Other Financial Instruments Issues), an entity shall classify the cash flows of the contract in the same manner as the cash flows of the item being hedged.
7.10 An entity shall present separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that net presentation is permitted by paragraphs 7.10A to 7.10E. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities.
OmniPro comment
Some examples other than those mentioned above would include:
- cash payments/proceeds arising from acquisition/disposal of subsidiaries and associates
- cash payments/proceeds on purchase/disposal of investments
- cash payments/proceeds on acquisition/disposal of fixed assets (excluding assets purchased on finance lease).
- Dividend received
- Interest received
The cash flows with regard to investing activities should reflect the actual cash flows in the year. Therefore for example additions in the fixed asset note may include fixed assets acquired under hire purchase/finance lease which did not result in a cash outflow, therefore the payments to acquire property, plant and equipment would be reduced to reflect the actual cash paid.
It may also be that some items have not been paid and the amount owed is therefore included in creditors, in this case the additions figure should only show the cash paid i.e. it should deduct any amount included in creditors at the end of the current year but addback the amount included in creditor for fixed assets in the prior year.
Example 3: Need to show only cash paid in the cash flow
Company A has purchased CU50,000 of fixed asset on finance lease. In this case the cash flow should show nil cash payments for fixed assets instead, this cash outflow should be netted against the movement on finance leases and hire purchase on the face of the cash flow.
Example 4: Fixed asset not paid at year end
Company A purchased CU50,000 of property, plant and equipment on credit which was included in creditors at year end. In the cash flow the actual amount to be shown as fixed asset additions is nil and the movement in trade creditors should be decreased by the CU50,000 in the reconciliation of profit to net cash inflow from operating activities.
Example 5: Fixed asset not paid at year end
If we take example 4 and assume in the prior year a fixed asset was purchased for CU40,000 but was not paid for at the end of that year. In this years cash flow statement it should show the CU40,000 in the line ‘purchases of property, plant and equipment’ and movement in creditors should be reduced by the net CU10,000 (i.e. CU50,000-CU40,000 being the movement in accruals year on year).
When determining whether an item falls into operating or investing activities will depend on the business the entity is operating in. For example purchase a land for a property developer who develops the land and sells houses, the purchase of this would fall into operating activities however if this was purchased by a frozen food company for its own use or to rent it for rental purposes as a one off purchase it would be classed as an investing activity.
Financing activities
Extract from FRS102: Section 7.6 and Section 7.10
7.6 Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of an entity. Examples of cash flows arising from financing activities are:
(a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the entity’s shares;
(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings;
(d) cash repayments of amounts borrowed; and
(e) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.
7.10 An entity shall present separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that net presentation is permitted by paragraphs 7.10A to 7.10E. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities.
OmniPro comment
See cash flow below for examples of financing activities on top of the examples given in Section 7.6 above. Some examples would include:
- Loan repayments
- Leasing payments
- Equity dividends paid
- Dividend paid to non-controlling interests
- Proceeds on share issue
New loan or debentures issued.
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