PwC

Requirements of the Standard IAS 7• An entity shall prepare a statement of cash flows (SCF) in

accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.

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Some benefits of Cash Flow Information

• Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents

• Enables users to develop models to assess and compare the present value of the future cash flows of different entities

• It provides information that enables users to evaluate the changes in net assets of an entity

• Its financial structure (including its liquidity and solvency)

• Its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities

• Enhances the comparability of the reporting of operating performance by different entities

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Definitions of terms in the standard• Cash comprises cash on hand and demand deposits• Cash equivalents are short-term, highly liquid investments that are

readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value

• Cash flows are inflows and outflows of cash and cash equivalents• Operating activities are the principal revenue-producing activities of

the entity and other activities that are not investing or financing activities

• Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents

• Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity

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IAS 7Cash Flow Statement• Need to report movements in cash and cash equivalents• Cash = cash in hand, on demand deposits• Cash equivalents = short-term, highly liquid investments. Readily convertible

into cash.

• Show movement in cash and cash equivalents defined as:• Operating• Investing• Financing

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PwC

IAS 7 Cash Flow Statement• Operating cash flows = Those relating to activities that are not investing

or financing

• Investing cash flows = Those relating to the acquisition and disposal of long term assets and other investments, excluding cash and cash equivalents

• Financing cash flows = Those that result in the size and composition of contributed capital and borrowing

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IAS 7 Cash Flow Statement• Cash flows that can be reported across any of the headings:• Interest paid/ received• Equity dividends paid• Dividends received

• Must show gross receipts and payments across each of the three headings• May net off cash flows where:• Relate to the same customer• The inflow and outflow occur within a short period of time

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IAS 7 Operating activitiesCash flows from operating activities• Can present on direct or indirect basis

• Direct = identifying all receipts and payments that are operating in nature, disclosing the major categories of these, e.g.:• Payments to suppliers;• Receipts from customers;• Payments to employees; and• Other operating payments and operating receipts

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IAS 7Indirect method• Indirect = adjust statement of financial performance results to report

operating cash flows

• Adjust for non cash items, e.g. Depreciation, gains/ losses on sale of non current assets

• Working capital accruals

• Non operating items (e.g. Interest payable, where this is not disclosed as an operating cash flow)

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IAS 7 Investing activitiesCash flows from investing activities• Typically would include:• Cash paid to acquire, or a receipt from the sale of, an item of property, plant or

equipment;• Cash paid to acquire, or a receipt from the sale of, an intangible asset such as a

brand or trademark;• Cash paid to acquire, or a receipt from the sale of, a separate entity;• Cash paid to acquire, or a receipt from the sale of, an equity or debt instrument

in another entity, such as a joint venture; and• Cash given as an advance or loan to another entity, or the repayment of such

items.

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IAS 7 Investing activities• Where cash flows arise from the sale or purchase of a controlled entity

or other operating unit, these cash flows should be separately identified.• Need to show:• The total purchase or disposal consideration, separately identifying the

proportion that is discharged by cash and cash equivalents;• The amount of cash and cash equivalents that is included in the entity being

purchased or sold; and• A summary of the assets and liabilities, other than cash and cash equivalents, of

the entity acquired or disposed of.

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IAS 7 Financing activitiesCash flows from financing activities• Typically would include:• Cash proceeds received from issuing debt instruments, such as debentures,

bonds or long-term borrowings;• Cash paid to repay debt instruments; and• The capital element in finance lease payments made during the period.

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Cash and Cash Equivalents • Cash equivalents are held for the purpose of meeting short-

term cash commitments• It must:

• Be readily convertible to a known amount of cash • Be subject to an insignificant risk of changes in

value• Have a short maturity of, say, three months or

less from the date of acquisition12

2015

PwC

Non-Cash Transactions • IAS 7 requires that noncash investing and financing activities should

be excluded from the cash flow statements and reported “elsewhere” in the financial statements, where all relevant information about these activities is disclosed.

• This requirement is interpreted as the necessity to disclose noncash activities in the footnotes to financial statements instead of including them in the CFS.

• Common examples of noncash activities are• Conversion of debt (convertible debentures) to equity• Issuance of share capital to acquire property, plant and equipment

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PwC

Reporting Cash Flows from Operating Activities

• Use either:• The direct method; or• The indirect method• Entities are encouraged to report cash flows from

operating activities using the direct method.

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PwC

The Direct Method • Information about major classes of gross cash receipts and gross

cash payments may be obtained either:

• From the accounting records of the entity

• By adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the statement of comprehensive income for:• Changes during the period in inventories and operating receivables and

payables• Other non-cash items• Other items for which the cash effects are investing or financing cash flows.

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The Indirect Method • The net cash flow from operating activities is determined

by adjusting profit or loss for the effects of:• Changes during the period in inventories and operating

receivables and payables• Non-cash items such as depreciation, provisions, deferred taxes,

unrealised foreign currency gains and losses, and undistributed profits of associates• All other items for which the cash effects are investing or

financing cash flows.

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Acquisitions and Disposals of Subsidiaries and other Business Units IAS 7 recognises that an entity may acquire or dispose subsidiaries or

other business units during the year and thus requires that the aggregate cash flows from acquisitions and from disposals of subsidiaries or other business units should be presented separately as part of the investing activities section of the CFS.

IAS 7 has also prescribed these disclosures in respect to both acquisitions and disposals:◦ The total consideration included.◦ The portion thereof discharged by cash and cash equivalents.◦ The amount of cash and cash equivalents in the subsidiary or business

unit acquired or disposed.◦ The amount of assets and liabilities (other than cash and cash

equivalents) acquired or disposed, summarised by major category.

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Components of Cash and Cash Equivalents

• Disclose:

• Components of cash and cash equivalents

• The policy which it adopts in determining the composition of cash and cash equivalents

• The effect of any change in the policy for determining components of cash and cash equivalents

• A commentary by management of the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.

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Other Disclosures • Disclosure of the following together with a commentary is

encouraged:• The amount of undrawn borrowing facilities that may be available

for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities

• The aggregate amounts of the cash flows from each of operating, investing and financing activities related to interests in joint ventures reported using proportionate consolidation

• The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity

• The amount of the cash flows arising from the operating, investing and financing activities of each reportable segment.

192015

202015

Format of Cash Flow 1- operating activities  $m   $m

Cash flows from operating activities

Profit before taxation 3,390   

Adjustments for:

Depreciation 450   

Loss on disposal of property, plant and equipment 100   

Investment income (500)   

Interest expense 300   

3,740Increase in trade and other receivables (500)

   Decrease in inventories 1,050

   Decrease in trade payables (1,740)

   

Cash generated from operations 2,550    Interest paid (270)

   Income taxes paid (900)

   

Net cash from operating activities     1,380

212015

Cash flows from investing activities

Purchase of property, plant and equipment (900)   

Proceeds from sale of equipment 20   

Interest received 200   

Dividends received 200   

Net cash used in investing activities     (480)

Format of Cash Flow 2- investing activities

222015

Format of Cash Flow 2- investing activities

Cash flows from financing activitiesProceeds from issue of share capital 250

   Proceeds from long-term borrowings 250

   Payment of finance lease liabilities (90)

   Dividends paid* (1,200)    

Net cash used in financing activities     (790)

Net increase in cash and cash equivalents    110

Cash and cash equivalents at beginning of period (Note)    120

Cash and cash equivalents at end of period (Note)

    230