Presentation of the Cash Flow Statement

Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation.

The objective of this Standard (IAS 7 - Statement of Cash Flows) is to require the provision 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 from operating, investing and financing activities.

IAS 7 requires that a cash flow statement should be classified into four components : (1) operating activities, (2) investing activities, (3) financing activities, and (4) cash and cash equivalents.

Due care must be taken to include transactions under the appropriate category. Whatever classification chosen has to be applied in a consistent manner from year to year. Example : if "interest received" is presented as cash flow from investing activities in year 1, the same classification should be followed from year to year, even though IAS 7 allows "interest received" to be presented either as a cash flow from operating activities or a cash flow from investing activities.

A single transaction may include cash flows that are classified partly as one type of activity and partly as another category. Example : cash payment made toward repayment of a bank loan has two components : the repayment of principal portion of the loan, which is classified as a financing activity, and repayment of the interest which is classified as an operating activity.

Operating Activities

Cash flows from operating activities are mainly derived from principle revenue-generating activities of the entity. This is a critical indicator of the financial strength of an entity because it is an important source of internal finance. Financial statement users usually look at cash flows from operating activities as a gauge of an entity's ability to maintain its operating capability and support other activities, such as servicing debt and repaying of borrowings, paying dividends to shareholders, and making investments without recourse to external funding.

Investing Activities

Investing activities include the purchase and disposal of property, plant and equipment and other long-term assets, such as investment property. They also include purchase and sale of debt and equity and debt instruments of other entities that are not considered cash equivalents or held for dealing or trading purposes.

Investing activities also include cash advances and collections on loans made to other entities. This however, does not include loans and advances made by banks and other financial institutions to their customers that would be classified as "operating activities" as they are cash flows from these entities' principal revenue-producing activities.

Financing Activities

Financing activities include obtaining resources from and returning resources to the owners. Also included in this category is obtaining resources through borrowings (short term or long term) and repayments of the amounts borrowed.

Non Cash Transactions

IAS 7 requires that noncash investing and financing activities should be excluded from the cash flow statement 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 cash flow statement.

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 (IAS 7 Par. 43).

Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an entity. The exclusion of non-cash transactions from the statement of cash flows is consistent with the objective of a statement of cash flows as these items do not involve cash flows in the current period. Examples of non-cash transactions are : (a) the acquisition of assets either by assuming directly related liabilities or by means of a finance lease, (b) the acquisition of an entity by means of an equity issue, and (c) the conversion of debt to equity (IAS 7 Par. 44).

(Source : IFRS Practical Implementation Guide and Workbook - 2nd Edition, Abbas Ali Mirza, Magnus Orrell, Graham J. Holt and IFRS 2009 Bound Volume)

Exposure draft of Conceptual Framework for Financial Reporting

This was an email alert from eIFRS on March 11, 2010 :

The International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) today published for public comment an exposure draft on the reporting entity concept.

The proposals form part of a joint project to develop a common and improved conceptual framework that provides the basis for developing future accounting standards.

Comments on the exposure draft are invited by 16 July 2010.

Access the document online:

• To access the exposure draft "Conceptual Framework for Financial Reporting: The Reporting Entity" visit the "Open to comment" section on www.iasb.org.
• If you are an eIFRS/Comprehensive subscriber, you can view the document in the "Latest Additions" section of the secure eIFRS online area.
  (you will be required to provide your login details).

Print copies of the document:

Printed copies can be purchased from the IASC Foundation's online shop at: http://buy.iasb.org

Comprehensive subscribers will receive their printed copies soon.

More information:

• Read the press release
• Visit the project page

Measurement of Revenue

IAS 18, par. 9 states that revenue shall be measured at the Fair Value of the consideration received or receivable.

The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity (par. 10).

Further, par. 11 of IAS 18 states that in most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable.

For example, an entity may provide interest free credit to the buyer or accept a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest.

The imputed rate of interest is the more clearly determinable of either :

1. the prevailing rate for a similar instrument of an issuer with a similar credit rating; or
2. a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.

The difference between the fair value and the nominal amount of the consideration is recognized as interest revenue in accordance with par. 29 and 30 and in accordance with IAS 39.

When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfil demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred (par. 12).

IASC Foundation publishes second batch of training material for the IFRS for SMEs

This was an email alert from eFIRS on March 3, 2010 :

The International Accounting Standards Committee (IASC) Foundation published today the second batch of training material for the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs).

Access the training material online:

The free-to-download training material can be accessed here.

More information:

• Read the press release
• Access the IFRS for SME pages to learn more about the standard

NEW - IFRS for SMEs Alert:
The IASC Foundation has introduced an IFRS for SMEs email alert to allow interested parties to keep up to date on developments related to the standard.

• To receive news relating to the IFRS for SMEs, register your interest here.