GROUP STATEMENTS OF CASH FLOWS

CONTENTS

 Group statements of cash flows

1. Definitions and format
2. Consolidated statements of cash flows
3. Analysis and interpretation of group statements of cash flow
Definitions and format
DEFINITIONS

A consolidated statement of cash flows explains the movement in a group’s cash and cash equivalents
balance during a period. IAS 7 Statement of Cash Flows is the relevant standard to apply.
1. Cash: Comprises cash on hand and demand deposits.
2. Cash equivalents: Are short-term, highly liquid investments that are readily convertible into known
amounts of cash and are subject to an insignificant risk of changes in value.
3. Cash flows: Are inflows and outflows of cash and cash equivalents.
FORMAT

 The format of a consolidated statement of cash flows is consistent with that for a single entity. Both
the direct and indirect methods of preparing the group statements of cash flows are acceptable. (IAS 7:
para. 18).
CONSOLIDATED STATEMENT OF CASH FLOWS

 A group's statement of cash flows should only deal Cash out P

with flows of cash external to the group. Cash flows
that are internal to the group should be eliminated
(IAS 7: para. 37).
S1 S2
Cash in
ADDITIONAL CONSIDERATIONS FOR A GROUP STATEMENT OF
CASH FLOWS INCLUDE:

 Dividends paid to the non-controlling interests

 Dividends received from associates and joint ventures
 Cash flows on acquisition or disposal of associates and joint ventures
 Removing the group share of the profit or loss of associates and joint ventures from group profit
before tax in the 'cash flows from operating activities' section (indirect method only)
 Cash flows on acquisition or disposal of subsidiaries
 The effect of assets and liabilities of subsidiaries acquired or disposed of on the calculation of working
capital adjustments and cash flows
 Impairment losses on goodwill
DIVIDENDS PAID TO NON-CONTROLLING INTERESTS

 The consolidated statement of cash flows. The dividend paid to the non-controlling interests (NCI) during the
reporting period can be calculated from the NCI figures in the consolidated financial statements:

Non-controlling interests
$'000
Opening balance (b/d) X
NCI share of total comprehensive income X
Acquisition of subsidiary (NCI at fair value or share of net assets) X
Disposal of subsidiary (X)
Non-cash (eg exchange loss on foreign operation) (X)
Dividends paid to NCI (balancing figure (β)) (X)
Closing balance (c/d) X
DIVIDENDS RECEIVED FROM ASSOCIATES AND JOINT VENTURES

 Dividends received from associates or joint ventures can be calculated from the investment in associate or
investment joint venture figures in the consolidated financial statements.

Investment in associate/joint venture

$'000
Opening balance (b/d) X
Group share of associate's/joint venture's profit for the year X
Group share of associate's/joint venture's OCI X
Acquisition of associate/joint venture X
Disposal of associate/joint venture (X)
Non-cash items (eg exchange loss on associate/joint venture) (X)
Cash (dividends received from associate/joint venture) β (X)
Closing balance (c/d) X
ACQUISITIONS AND DISPOSALS OF ASSOCIATES AND JOINT
VENTURES

 When an associate or joint venture is purchased or sold, the cash paid to acquire the shares or the
cash received from selling the shares must be recorded in the 'cash flows from investing activities'
section.
ADJUSTMENT REQUIRED UNDER INDIRECT METHOD FOR
ASSOCIATES AND JOINT VENTURES

 Under the indirect method of preparing a group statement of cash flows, the group share of the
associate's/joint venture's profit or loss for the year must be removed from the group profit before
tax figure as an adjustment in the 'cash flows from operating activities' section.
CASH FLOWS ON ACQUISITION OR DISPOSAL OF A SUBSIDIARY

 There are two cash flows associated with the acquisition or disposal of a subsidiary:

Group

P Cash (1)

New subsidiary

S1 S2
Cash (2) (1) The cash paid to buy the shares (for an
acquisition) or the cash received from selling
the shares (for a disposal)
(2) The cash or overdraft balance consolidated for
the first time (for an acquisition) or
deconsolidated (for a disposal)
CASH FLOWS ON ACQUISITION OR DISPOSAL OF A SUBSIDIARY
 These two cash flows should be netted off and shown as a single line in the consolidated statement of cash flows
under 'cash flows from investing activities' (IAS 7: paras. 39, 42).
THE EFFECT ON ASSETS AND LIABILITIES IF SUBSIDIARIES ARE
ACQUIRED OR DISPOSED OF

 When calculating cash flows (eg as balancing figures) in asset and liability workings, the workings need
to be adjusted for assets and liabilities acquired (or disposed of) as a result of the acquisition (or
disposal) of a subsidiary.

 This is dealt with simply by showing the increase or decrease due to the acquisition or disposal on a
separate line in each affected working, as follows.
THE EFFECT ON ASSETS AND LIABILITIES IF SUBSIDIARIES ARE
ACQUIRED OR DISPOSED OF
IMPAIRMENT LOSSES UNDER THE INDIRECT METHOD

 Impairment losses (for example on goodwill, investment in associate or investment in joint venture),
like depreciation and amortisation, are accounting expenses rather than cash outflows and therefore
must be added back to profit before tax when calculating cash generated from operations.
ANALYSIS AND INTERPRETATION OF GROUP STATEMENTS OF CASH
FLOW

 In the exam, you are expected to go beyond the preparation of extracts from group statements of
cash flows and be able to discuss and interpret the information they contain.
 It is advisable to break the statement of cash flows down into its component parts (operating,
investing and financing activities) and consider the reasons for movements and the business
implications of significant cash flows.
 You should always consider the perspective of the user when analysing cash flow information.
AREAS TO CONSIDER
CASH FLOWS FROM OPERATING ACTIVITIES

 Is there a cash inflow or outflow? This gives an indication of how good the entity is at turning profit into cash.
 Is the operation profit or loss making? If a profit is made, but no cash is generated, has profit been manipulated?
Or is this due to a movement in working capital?
 Depreciation – is there a likely increase or decrease of depreciation in the future? Has property, plant and
equipment (PPE) been purchased or sold in the year (see 'investing activities’)?
 Is there any profit or loss on the sale of PPE? Why has the entity sold PPE?
 Is there a gain or loss on investments and any investment income? Are investments
 generating a strong return? Does the entity have weak or strong treasury management?
 Are there increases or decreases in trade receivables, inventories and trade payables? Does this show weak or
strong management of working capital?
 Has any interest been paid in the year? Have any borrowings been repaid or taken out in the year (see 'financing
activities')
CASH FLOWS FROM OPERATING ACTIVITIES
 Different stakeholders may have alternate views on a company's working capital position. A supplier who provides goods on
credit will be concerned that poor working capital management may indicate credit risk and so may impose strict credit terms
on the company. A bank or other lender may, however, see an opportunity to provide the company with a loan or overdraft to
help with any working capital deficits.

 Consider the impact of acquiring a subsidiary in a different industry and what might be normal in that industry. A group that
operates in the retail sector, which typically does not offer credit to customers, may acquire a wholesale subsidiary which will
have a higher receivables balance.

 Consolidated cash flow information is often not that meaningful to creditors, who are interested in the ability to pay its debts
of the individual company which owes them money. One of the group companies could be insolvent or have a declining working
capital position, but that cannot be seen from the consolidated statement of cash flows. The degree to which the consolidated
statement of cash flows gives a faithful representation of the cash position of the individual group companies depends on the
degree of deviation of the individual statements of cash flow from the group statement.
CASH FLOWS FROM INVESTING ACTIVITIES

 Is there a cash inflow or outflow? Generally, a cash outflow from investing activities implies a growing
business.
 Are there any acquisitions of PPE and/or investments in the year? How were they funded (operating
or financing)? What could be the impact of this in the future (eg increased operational capacity)?
 Are there any disposals of PPE and/or investments in the year? Were they at a profit or loss (see
'operating activities')? Why were they sold? Impact on future? Has PPE been sold to manipulate cash
flows around the year end? Has old PPE been replaced with new?
 Have any interest or dividends been received? Assess the return on investment and treasury
management.
CASH FLOWS FROM INVESTING ACTIVITIES

 The employees of the company or group will be encouraged by cash outflows from investing activities
as this indicates job security and potentially expanded operations going forward. As noted above, the
consolidated statement of cash flows may not reveal important information regarding the underlying
individual company position.

 The cash flows on acquisitions or disposals of subsidiaries will be included in this section of the
statement of cash flows.You should ensure that the balance included is consistent with your
expectations based on other information in the question.
CASH FLOWS FROM FINANCING ACTIVITIES

 Is there a cash inflow or outflow?

 Has new finance been raised in the year? Debt or equity? Why has it been raised? What are the future
implications? Lenders will be interested in this as they will be able to assess whether finance has been obtained
from alternative sources and what the implications of this are on covenants, security of finance and the group's
risk profile. Eg if new finance used for working capital management that could indicate liquidity issues. Again
though, the individual statement of cash flow of the company to which it has provided finance is likely to be more
useful.
 Has any finance been repaid in the year? How has the entity afforded to repay it? Eg if cash is used to pay off a
lease or loan, it will have a positive impact on future profit and cash flows.
 Have any dividends been paid in the year? What proportion of profit before tax has been paid out compared to
the proportion reinvested? Assess the generosity of the directors' dividend policy
RATIO ANALYSIS