Statement of Cash Flows IAS 7 Wiecek and Young IFRS Primer Chapter 3 Statement of Cash Flows      2 Related standards IAS 7 Current GAAP comparisons Looking ahead End-of-chapter practice Related Standards    3 FAS 95 Statement of cash flows FAS 102 Statement of cash flows— exemption of certain enterprises and classification of cash flows from certain securities acquired for resale FAS 104 Statement of cash flows—net reporting of certain cash receipts and cash payments and classification of cash flows from hedging transactions Related Standards  4 IAS 1 Presentation of financial statements IAS 7 - Overview        5 Objective and scope Cash flows Reporting operating cash flows Reporting investing cash flows Reporting financing cash flows Specific items Disclosures IAS 7 – Objective and Scope   6 IAS 7 objective: to provide a statement to help investors assess the prospects for future cash flows, and to confirm or change their past expectations Statement provides historical information on the entity’s operating, investing and financing cash flows and how its cash balances have changed in the period as a result IAS 7 – Cash Flows   7 Cash and cash equivalents: Cash on hand and on deposit and “shortterm, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value” Can include bank overdrafts if part of cash management activities and balance fluctuates between positive and negative amounts IAS 7 – Reporting Operating Cash Flows   8 Operating activities are the principal revenue-producing activities; and those that are not investing or financing activities Operating cash flows are important: surplus cash flows needed to invest in increased capacity, pay debt when due, and provide a return to shareholders IAS 7 – Reporting Operating Cash Flows Operating cash flows: a) Cash received from customers for the sale of goods and provision of services, or on account of royalties, fees, or commissions b) Cash payments to suppliers for goods and services provided; and to and on behalf of employees for their services c) Cash received from or paid for financial instruments held specifically for dealing or trading purposes 9 IAS 7 – Reporting Operating Cash Flows Two methods:  Direct method  Indirect method  10 Either allowed although preference for direct method IAS 7 – Reporting Operating Cash Flows  11 Direct method IAS 7 – Reporting Operating Cash Flows  12 Indirect method…same entity? IAS 7 – Reporting Operating Cash Flows Common adjustments to convert profit or loss to cash from operations:  Changes in working capital accounts  Elimination of non-cash items  Elimination of investing and financing items 13 IAS 7 – Reporting Operating Cash Flows What is used…direct method or indirect? KPMG : The Application of IFRS: Choices in Practice – International Financial Reporting Standards, December 2006 http://www.kpmg.co.uk/pubs/304574_ifrg.pdf : see page 10 of 44 14 IAS 7 – Reporting Investing Cash Flows Investing activities: “the acquisition and disposal of long-term assets and other investments not included in cash equivalents” Importance: Is the entity maintaining its capacity and increasing the potential for increased operating cash flows in the future? 15 IAS 7 – Reporting Investing Cash Flows Examples:       16 Cash payments to acquire property, plant, and equipment; intangibles; and other long-term assets, including capitalized development costs Cash receipts from the disposal of items in (a) Cash payments to acquire debt and equity instruments of other entities or interests in joint ventures; excluding investments held for trading or in cash equivalents Cash receipts from the disposal of items in (c) Cash advances and loans to other parties and their cash repayments Cash payments for and receipts from futures, forwards, options and swaps unless they are held for trading or are classified as financing flows. IAS 7 – Reporting Investing Cash Flows  17 Example – Wienerberger AG, Austria IAS 7 – Reporting Financing Cash Flows Financing activities: “result in changes in the size and composition of the contributed equity and borrowings of the entity” Importance: Financing cash flows change the capital structure of the firm and affect the relative interests of those with claims to future cash flows of the entity 18 IAS 7 – Reporting Financing Cash Flows  19 Example – Wienerberger AG, Austria IAS 7 – Specific Items     20 No netting of inflows and outflows Interest and dividends received and interest and dividends paid – choice of operating, investing or financing flows as appropriate Income tax cash flows – generally operating flows Non-cash transactions – not included in statement; disclosed instead IAS 7 – Specific Items    21 Cash flows between an entity and its subsidiaries, associates and joint ventures reported only if accounted for by the cost or equity method Acquisition/loss of control of subsidiary – investing cash flow Exchange rate changes on foreign cash balances – reconciling item at bottom of statement IAS 7 - Disclosures      22 Operating, investing, financing flows Change in cash and cash equivalents Components of cash and cash equivalents Reconciliation of change to amounts on statement of financial position Explanation of significant cash balances not available for use Current GAAP Comparisons  Pages 20 and 21 of 164 of http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOv erview(2008).pdf 23 Looking Ahead      24 Part of Phase B of Financial Statement Presentation project Likely to link related items on each financial statement; e.g., business items (operating and investing) and financing items May move to explain change in cash only – exclude cash equivalents May require use of direct method on statement with reconciliation to profit or loss in the notes Phase B discussion paper issued in late 2008 End-of-Chapter Practice 25 End-of-Chapter Practice 26 End-of-Chapter Practice 3-3 Companies are affected by a number of events and transactions, some of which have an effect on their cash and cash equivalents, and some which do not. Following are some examples of such events and transactions: 1. Annual payment of $100 on a finance lease obligation, $2 of which is interest 2. Acquisition of a 4100, 3%, 90-day government treasury bill 3. Payment of $25 to a pension fund trustee 4. Cash received on the maturity of the treasury bill in item 2 above 5. Annual payment of $100 on an operating lease for sales office space 6. Receipt of $10 on the sublease of excess sales office space 7. Acquisition of the company’s treasury shares at a cost of $75 8. Conversion of convertible debt into common shares 9. Payment of $30 of a portion of long-term debt reported in current liabilities along with $3 of interest 10. Costs incurred to repair a customer’s product under warranty—inventory supplies used $1; labor paid $4 Instructions For each item listed above (a) identify the effect on the company’s cash and cash equivalents; and (b) indicate how the transaction or event will be reported on the company’s statement of cash flows, if at all, and if any special disclosures are required. 27 End-of-Chapter Practice 28 End-of-Chapter Practice 3-5 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards. Instructions Access the website(s) identified on the inside back cover of this book, and prepare a concise summary of the differences that are flagged throughout the chapter. 29 Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright is unlawful. 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