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Principal transition adjustments
(1) Cash and cash equivalence
A key difference between old GAAP and FRS 102 is that FRS 102 defines cash and cash equivalents as “cash on hand and demand deposits and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value” whereas cash was defined in FRS 1 as “cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand. Cash equivalents are investments that have a short term maturity of 3 months or less. Under old GAAP cash equivalents were categorised under liquid resources and not as cash. Therefore on transition entities will need to reclassify such balances on the cash flow statement such that these are shown as cash and cash equivalents.
(2) Cash flow exemption for qualifying entities
Section 7 provides an exemption from preparing cash flow statements for entities who are considered qualifying entities. A qualifying entity is an entity which is consolidated into publically available consolidated financial statements that give a true and fair view. Therefore where the entity is a subsidiary and consolidated within the consolidated financial statements no cash flow is required to be prepared.
Under old GAAP, an exemption was only provided to subsidiaries that were 90% owned and that entity was included in consolidated financial statements that are publically available and gave a true and fair view.
On transition, an entity that was previously required to prepare a cash flow as it was less than 90% owned but it is still a subsidiary (i.e. >50% owned) and consolidated financial statements for the parent company is publicly available in which its results are consolidated then no cash flow statement is required to be prepared.
(3) Small companies in the Republic of Ireland prior to the date the EU Directive 2013/34 is enacted or UK entities who have not early adopted the amendments made in September 2015 to FRS 102 are required to prepare a cash flow statement
Under old GAAP FRS 1 allowed an exemption for small companies from preparing cash flow statements. As the 2013/34 EU directive has not been enacted in Ireland at this time, a cash flow statement will be required for small entities under FRS 102 up until the date this directive is enacted.
NOTE: UK entities who apply the small company legislation set out in S1 2015/980 can avail of the small entities exemption contained in S1.A of FRS 102.
(4) Different classification in the cash flow between old GAAP and FRS 102
Old GAAP required cash flows to be separated into the following categories:
- acquisitions and disposals;
- equity dividend paid;
- capital investment and financing investment;
- management of liquid resources;
- operating activities;
- Returns on investment and servicing of finance; and
- Financing activities.
FRS 102 only provides three categories, namely; investing activities, financing activities and operating activities. Therefore on transition entities will need to revisit the cash flow statement to ascertain where the cash flows fall into under FRS 102. Refer to the example cash flow above for guidance.
Other disclosures
Extract from FRS102: Section 7.21
7.21 An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the entity. Cash and cash equivalents held by an entity may not be available for use by the entity because of, among other reasons, foreign exchange controls or legal restrictions.
OmniPro comment
See example disclosure in relation to the above:
Example 16: Restricted funds disclosure
The company holds CUXXX in an escrow bank account for future funds to be paid on the purchase of XXXX. These funds may be payable to the previous owner if certain financial targets are archived in the next two years which were agreed at the time of the purchase.
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