Presentation of Cash Flow Statements IAS 7

Discontinued Operations

Overview

A discontinued operation is a component of an entity that either has been disposed of, or is classified as
held for sale, and

a. represents a separate major line of business or geographical area of operations,

b. is part of a single coordinated plan to dispose of a separate major line of business or

geographical area of operations or

c. is a subsidiary acquired exclusively with a view to resale.

Component of an entity

 A component of an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
 In other words, a component of an entity will have been a cash-generating unit or a group of
cash-generating units while being held for use.

Income Statement Presentation

An entity shall disclose a single amount in the statement of comprehensive income comprising the total
of:

a. the post-tax profit or loss of discontinued operations and

b. the post-tax gain or loss recognized on the measurement to fair value less costs to sell or
on the disposal of the assets or disposal group(s) constituting the discontinued
operation.
Income Statement Presentation
IAS 7 Presentation of Statement of Cash Flows

Overview

• requires an entity to present a statement of cash flows as an integral part of its primary financial
statements.

• Cash flows are classified and presented into

 operating activities

 investing activities

 financing activities

• with the latter two categories generally presented on a gross basis.

• IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial
statements covering periods beginning on or after 1 January 1994.

IAS 1 Presentation of Financial Statements

OVERALL CONSIDERATIONS

Fair presentation and compliance with IFRS

- Financial statements are required to be presented fairly as set out in the framework and in
accordance with IFRS and are required to comply with all requirements of IFRSs.

Going Concern

- Financial statements are required to be prepared on a going concern basis (unless entity is in
liquidation or has ceased trading or there is an indication that the entity is not a going concern).

Accrual basis of accounting

- Entities are required to use accrual basis of accounting except for cash flow information.

Presentation consistency

- An entity is required to retain presentation and classification from one period to the next.

Materiality and aggregation

- Each material class of similar assets and items of dissimilar nature or function is to be presented
separately.

Offsetting

- Offsetting of assets and liabilities or income and expenses are not permitted unless required by
other IFRSS.

Comparative information

- At least 1 year of comparative information (unless impractical).

COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements comprises:

 Statement of financial position

 Statement of profit or loss and comprehensive income for the period
 Statement of changes in equity
 Statement of cash flows
 Notes.
  All statements are required to be presented with equal prominence IFRSS.

STRUCTURE AND CONTENT

STATEMENT OF FINANCIAL POSITION

 Present current and non-current items separately; or

 Present items in order of liquidity.

Current Assets

 Expected to be realized in, or Expected to be settled in the is intended for sale or consumption in
the entity's normal operating cycle
 Held primarily for trading
 Expected to be realized within 12 months
 Cash or cash equivalents.

All other assets are required to be classified as non-current.

Current Liabilities

 Expected to be settled in the entity’s normal operating cycle.

 Held primarily for trading
 Due to be settled within 12 months
 The entity does not have the right at the end of the reporting period to defer settlement of the
liability for at least 12 months. (R)

All other liabilities are required to be classified as non-current.

 Information required to be presented on the face of the statement of financial position is

detailed in IAS 1.54
 Further information required to be presented on the face or in the notes is detailed in IAS 1.79-
80.

STATEMENT OF COMPREHENSIVE INCOME

 An entity presents all items of income and expense recognized in a period, either:
- In a single statement of comprehensive income
- In two statements: a statement displaying components of profit or loss (separate income
statement) and a second statement of other comprehensive income.

 Information required to be presented in the:

- Statement of comprehensive income is defined in IAS 1.82-87
- Profit or loss as defined in IAS 1.88
- Other comprehensive income in IAS 1.90-96
- Further information required to be presented on the face or in the notes to the Statement of
Comprehensive Income is detailed in IAS 1.97.

 Entities must choose between 'function of expense method' and 'nature of expense method' to
present expense items
 Line items within other comprehensive income are required to be categorized into two
categories:
- Those that could subsequently be reclassified to profit or loss
- Those that cannot be re-classified to profit or loss.

STATEMENT OF CHANGES IN EQUITY

Information required to be presented:

 Total comprehensive income for the period, showing separately attributable to owners or the
parent and non- controlling interest
  For each component of equity, the effects of retrospective application/restatement recognized in
accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
 The amounts of transactions with owners in their capacity as owners, showing separate
contributions by and distributions to owners
 For each component in equity a reconciliation between the carrying amount at the beginning
and end of the period, separately disclosing each change
 Amount of dividends recognized as distributions to owners during the period (can alternatively
be disclosed in the notes).
 Analysis of each item of OCI (alternatively to be disclosed in the notes).

STATEMENT OF CASH FLOWS

- Provides users of financial statements with cash flow information - refer to IAS 7 Statement of
Cash Flows.

IDENTIFICATION OF THE FINANCIAL STATEMENTS

Financial statements must be clearly identified and distinguished from other information in the same
published document, and must identify:

 The level of rounding Name of the reporting entity

 Whether the financial statements cover the individual entity or a group of entities
 The statement of financial position date (or the period covered)
 The presentation currency used.

NOTES TO THE FINANCIAL STATEMENTS

 Statement of compliance with IFRSS

 Material accounting policy information, estimates, assumptions, and judgments must be
disclosed (R)
 Additional information useful to users' understanding/decision-making making to be presented
 Information that enables users to evaluate the entity's objectives, policies, and processes for
managing capital.

THIRD STATEMENT OF FINANCIAL POSITION

A third statement of financial position required when an entity changes accounting policies, or makes
retrospective restatements or reclassifications:

 Opening statement is only required if impact is material

 Opening statement is presented as at the beginning of the immediately preceding comparative
period required by IAS 1 (e.g. if an entity has a reporting date of 31 December X2 statement of
financial position, this will be as at 1 January X1)
 Only include notes for the third period relating to the change.

REPORTING PERIOD

 Accounts presented at least annually

 If longer or shorter, entity must disclose that fact.
IAS 7 Statement of Cash Flows

COMPONENTS

Operating activities

- Main revenue producing activities of the entity and other activities that are not investing or
financing activities (including taxes paid/received, unless clearly attributable to investing or
financing activities).

Investing activities

- Activities that relate to the acquisition and disposal of long-term assets and other investments
that are not included in cash equivalents.

Financing activities

- Activities that cause changes to contributed equity and borrowings of an entity.

 Received or paid interest and dividends are disclosed separately and can be classified as
operating, investing or financing, based on their nature and as long as they are consistently
treated from period to period.

REPORTING CASH FLOWS FROM OPERATING ACTIVITIES

- Cash flows from operating activities can be reported using the direct or indirect method.

DIRECT METHOD

 Cash received from customers

 Cash paid to suppliers
 Cash paid to employees
 Cash paid for operating expenses
 Interest paid
 Taxes paid
 Dividends paid
 Net cash from operating activities.

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 flow.

DEFINITION: CASH AND CASH EQUIVALENTS

 Short term (where the original maturity is 3 months or less, irrespective of maturity timing post
balance date)
 Highly liquid investments
 Readily convertible to known amounts of cash
 Subject to insignificant risk of changes in value.

CONSIDERATIONS TO NOTE

 Non cash investing and financing activities must be disclosed separately

 Cash flows must be reported gross. Set-off is only permitted in very limited cases and additional
disclosures are required (refer to IAS 7.24 for examples relating to term deposits and loans)
 Foreign exchange transactions should be recorded at the rate at the date of the cash flow
  Acquisition and disposal of subsidiaries are investment activities and specific additional
disclosures are required
 Where the equity method is used for joint ventures and associates, the statement of cash flows
should only show cash flows between the investor and investee
 Disclose cash not available for use by the group
 Assets and liabilities denominated in a foreign currency generally include an element of
unrealised exchange difference at the reporting date
 Disclose the components of cash and cash equivalents and provide a reconciliation back to the
statement of financial position amount if required
 Non-cash investing and financing transactions are not included in the statement of cash flows
and should be disclosed elsewhere in the financial statements.
 Disclose changes in liabilities arising from financing activities, distinguishing between changes
from:
- financing cash flows;
- obtaining or losing control of subsidiaries and other businesses;
- the effect of changes in foreign exchange;
- fair value movements; and
- other changes.
 Cash payments made by lessees for the reduction of lease liability are financing activities.

IAS 7 Presentation of Statement of Cash Flows

History
Summary of IAS 7

Objective

• is to require the presentation of information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows, which classifies cash flows during
the period according to

1. operating,

2. investing, and

3. financing activities. [IAS 7.10]

Summary of IAS 7

Benefits

Provides information that enables users to evaluate the

• changes in net assets of an entity,

• its financial structure (including its liquidity and solvency) and

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

Useful in assessing the ability of the entity to

• generate cash and cash equivalents and

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

It also enhances the

• comparability of the reporting of operating performance by different entities because it

eliminates the effects of using different accounting treatments for the same transactions and
events.

Useful in checking

• The accuracy of past assessments of future cash flows and

• in examining the relationship between profitability and net cash flow and the impact of changing
prices.

Cash and Cash Equivalents

• cash on hand and demand deposits,

• short-term, highly liquid investments that are readily convertible to a known amount of cash,
and that are subject to an insignificant risk of changes in value.

• investment that normally meets the definition of a cash equivalent when it has a maturity of
three months or less from the date of acquisition.

• Equity investments are normally excluded, unless they are in substance a cash equivalent

 preferred shares acquired within three months of their specified redemption date.

• Bank overdrafts which are repayable on demand, and which form an integral part of an entity's
cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8].
Presentation of the Statement of Cash Flows IAS 7

Operating Activities

• are the main revenue-producing activities of the entity that are not investing or
financing activities, so operating cash flows include cash received from customers and
cash paid to suppliers and employees [IAS 7.14]

Investing Activities

• are the acquisition and disposal of long-term assets and other in-vestments that are not
considered to be cash equivalents [IAS 7.6]

Financing Activities

• are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]

• interest and dividends received and paid may be classified as operating, investing, or financing
cash flows, provided that they are classified consistently from period to period [IAS 7.31]

• cash flows arising from taxes on income are normally classified as operating, unless they can be
specifically identified with financing or investing activities [IAS 7.35]

Operating Activities Cash Flows

• Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.

• they generally result from the transactions and other events that enter into the determination of
profit or loss.

• An entity shall report cash flows from operating activities using either:

• the direct method, or

• the indirect method

Operating Activities Cash Flows Direct Method

• The major class of gross cash receipts and gross cash payments.

 cash receipts from the sale of goods and the rendering of services;

 cash receipts from royalties, fees, commissions and other revenue;

 cash payments to suppliers for goods and services;

 cash payments to and on behalf of employees;

 cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities; and

 cash receipts and payments from contracts held for dealing or trading purposes.

 cash payments to manufacture or acquire assets held for rental to others and
subsequently held for sale as described in paragraph 68A of IAS 16 Property, Plant and
Equipment

 cash flows arising from the purchase and sale of dealing or trading securities.

 cash advances and loans made by financial institutions since they relate to the main
revenue-producing activity of that entity.

 The direct method of presentation is encouraged, but the indirect method is acceptable
[IAS 7.18]
 The operating cash flows section of the statement of cash flows under the direct method
would appear something like this:
Operating Cash Flows Indirect Method

• The indirect method adjusts net 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, unrealized foreign

currency, gains and losses, and undistributed profits of associates

 all other items for which the cash effects are investing or financing cash flows

The operating cash flows section of the statement of cash flows under the indirect method would appear
something like this:
Statement of Cash Flows

Cash Flows Investing Activities

• are those centered in support of the operations

• These are important because the cash flows represent the extent to which expenditures have
been made for resources intended to generate future income and cash flows.

• Only expenditures that result in a recognized asset in the statement of financial position are
eligible for classification as investing activities

Cash flows arising from investing activities are

• cash payments to acquire property, plant and equipment, intangibles and other long-term assets

• cash receipts from sales of property, plant and equipment intangibles and other long-term assets

• cash payments to acquire equity or debt instruments of other entities and interests in joint
ventures (other than trading)

• cash receipts from sales of equity or debt instruments of other entities and interests in joint
ventures (other than trading)

• cash advances and loans made to other parties (other than advances and loans made by a
financial institution)

• cash receipts from the repayment of advances and loans made to other parties (other than
advances and loans of a financial institution)

• Cash receipts and payments for futures contracts, forward contracts, option contracts and swap
contract (other than trading)
Cash Flows Financing Activities

• Are useful in predicting claims on future cash flows by providers of capital to the entity

• Examples of cash flows arising from financing activities are:

 cash proceeds from issuing shares or other equity instruments

 cash payments to owners to acquire or redeem the

 cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short
term or long-term borrowings

 cash repayments of amounts borrowed

 cash payments by a lessee for the reduction of the outstanding liability relating to a
lease

Interest and Dividends

• shall each be disclosed separately.

• shall be classified in a consistent manner from period to period as either operating, investing or
financing activities

• The total amount of interest paid during a period is disclosed in the statement of cash flows
whether it has been recognized as an expense in profit or loss or capitalized in accordance with
IAS 23 Borrowing Costs

• Interest paid and interest and dividends received are usually classified as operating cash flows
for a financial institution

• However, there is no consensus on the classification of these cash flows for other entities. (IAS 7
par. 33)

• Interest paid and interest and dividends received may be classified as operating cash flows
because they enter into the determination of profit or loss.

• Alternatively, interest paid, and interest and dividends received may be classified as financing
cash flows and investing cash flows respectively, because they are costs of obtaining financial
resources or returns on investments.

• Dividends paid may be classified as a financing cash flow because they are a cost of obtaining
financial resources.

• Alternatively, dividends paid may be classified as a component of cash flows from operating
activities in order to assist users to determine the ability of an entity to pay dividends out of
operating cash flows

Taxes on Income

• Cash flows arising from taxes on income shall be separately disclosed and shall be classified as
cash flows from operating activities unless they can be specifically identified with financing and
investing activities

Non-cash Transaction

• Investing and financing transactions that do not require the use of cash or cash equivalents shall
be excluded from a statement of cash flows.

• Such transactions shall be disclosed elsewhere in the financial statements in a way that provides
all the relevant information about these investing and financing activities

• Examples of non-cash transactions are:

  the acquisition of assets either by assuming directly related liabilities or by means of a
lease

 the acquisition of an entity by means of an equity issue

 the conversion of debt to equity

Cash Flows Investing and Financing Activities

• investing and financing transactions which do not require the use of cash should be excluded
from the statement of cash flows, but they should be separately disclosed elsewhere in the
financial statements [IAS 7.43]

• entities shall provide disclosures that enable users of financial statements to evaluate changes in
liabilities arising from financing activities [IAS 7.44A-44E]

• an entity shall disclose information about its supplier finance arrangements that enables users of
financial statements to assess the effects of those arrangements on the entity’s liabilities and
cash flows and on the entity’s exposure to liquidity risk [IAS 7.44F]

• the components of cash and cash equivalents should be disclosed, and a reconciliation
presented to amounts reported in the statement of financial position [IAS 7.45]

• the amount of cash and cash equivalents held by the entity that is not available for use by the
group should be disclosed, together with a commentary by management [IAS 7.48]

Foreign Currency

 Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate between the
functional currency and the foreign currency at the date of the cash flow.
 The cash flows of a foreign subsidiary shall be translated at the exchange rates between the
functional currency and the foreign currency at the dates of the cash flows.

Changes in Ownership Interests

Changes in ownership interests in subsidiaries and other businesses

• The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall be presented separately and classified as investing activities.

Cash Flows

Changes in liabilities arising from financing activities

• An entity shall provide disclosures that enable users of financial statements to evaluate changes
in liabilities arising from financing activities, including both changes arising from cash flows and
non-cash changes.
Components of cash and cash equivalents

• An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts in its statement of cash flows with the equivalent items reported
in the statement of financial position.

Other disclosures

• 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 group.