Statement of Cash Flows

Statement of Cash Flows FRS 107/ IAS 7

Overview Significance of Stat of Cash Flows: • Investors, creditors and other capital providers main aim to get cash out of their invest • Info abt receipts and paymts importance to users of f/s • These info by reporting cash inflows and outflows

IAS 7 SCOPE C/Flows Stat • To be prepared in accordance with the requirement of std • Presented as integral part of entity’s mandatory f/stat for each period the f/s provided

Purpose of Stat of Cash Flows • To present info abt historical changes in cash and cash equivalents related to activities of • OPERATING, • INVESTING • FINANCING • Assists users of a/c : • Evaluate ability generate cash and cash equivalents and its timing and certainty • Evaluate financial structure (liquidity and solvency) and meeting of obligations (pay dividends, loans) • Understand difference bet P&L and net cash flow from operatg activities • Provide reliable and relevant comparison of operatg perform of different entities as unaffected by diff actg choices and judgemnt of accrual actg • Develop model to assess the PV of Future Cash Flows of diff entities FOCUS OF STAT OF CASH FLOW

Para 6 of IAS 7 Cash ~ Cash on hand and demand on deposits Eg: Cash on hand, Cash at bank Cash Equivalents ~ Eg • Short term, highly liquid investments • readily convertible to known amts of cash and with insignificant risk of changes in value • Para 7: Held for purpose of meeting short term cash commitments and not for invest. Purpose • Invest qualify as cash equivalent if has short maturity (3 months or <) • Equity investment NOT qualified UNLESSpreferred shares acquired shortly b4 their specified maturity date. • Eg: Short term money market securities and 90 day term deposits

Other Info Abt Cash Flow Activities • Bank borrowings • Ordinarily financing activities • EXCEPT Bank overdraft repayable on demand and integral part of an entity’s cash mgt…may fluctuate from being overdrawn and positive • Transfer from cash at bank to a 90 day term deposit not reported in Stat of C/Flows because report changes in aggregate cash and cash equivalents

Classifying Cash Flow Activities • Operating Activities • Revenue producing activities • Other activities that are not investing or financing activities (2) Investing Activities • Acquisition and disposal of long term assets • Other investments which are not cash-equivalents related • Financing Activities • Equity and Borrowings related activities

ExampleOperating Activities (1) Cash Inflows: • Sale of goods • Rendering of services • Royalties, fees commissions • Interests received (may be investing) • Dividends received (may be investing) (2) Cash Outflows : • Suppliers of goods and services • Employees (Salary, compensation package) • Govt income tax and other tax • Lenders for interests (may be financing)

ExampleInvesting Activities • Cash Inflows • Sale of property, plant and equipment • Sale of Intangibles • Sale of shares and debt instruments and other entities (when co r holders of finl instruments) • Repayment of loans by other parties (2) Cash Outflows • Acquire PPE • Acquire Intangibles • Acquire Shares & Debt Instruments of Other Entities • Lend Money to Other Entities

ExampleFinancing Activities • Cash Inflows • Issuing shares and Other equity instruments • Issuing debentures, unsecured notes and other borrowings • Cash Outflows • Buy back shares • Repay debentures, unsecured notes and other borrowings • Pay dividends to shareholders (may be operating)

CLASSIFICATION?Interests and Dividends : Received and Paid • No specific req by IAS 7 on their classification • Para 31: Respective cash flows • (i) Disclosed separately • (ii) Classified in consistent manner from period to period (operating, investing or financing activities) • Para 33: Respective cash flows usually classified as operating c/flows for finl inst. but no consensus on other types of entities This is bec respective c/flows classified as: • Operating c/flows as it’s considered part of P&L determination • Financing/Investing c/flows as it’s considered costs of financing or return on investments

Classifying Taxes on Income Para 35 • Income Tax paid disclosed separately in Stat of Cash Flows • Classified as Operating Cash Flows UNLESScan be specifically identified with investing or financing actvy. Para 36 • Taxes paid usually classified as c/flows from operatg activities • BECAUSE…Eventhough the tax can be readily identified to relate to investg and financg, the related tax flows often impracticable to identify and may arise in different period from the c/flows of underlyg transaction

FormatStatement of Cash Flows • The 3 cash flows activities: • FIRST, Operatg Cash Flows • SECOND, Investg Cash Flows • THREE, Fincg Cash Flows • The resultant: Net Increase or Decrease in cash or cash equivalents -- Movements in cash and cash equivalents ; Matching beginng with closing bal

Reporting Cash Flows from: Operating Activities • Para 18: It may be reported using TWO Methods • DIRECT METHOD – Disclosed and presented major classes of gross cash receipts and gross payments Format Stat of Cash Flows 9Feb2010.doc • INDIRECT METHOD – Profit and loss figure adjusted against transaction of (i) non-cash nature deferrals or accruals of past or future receipts or payments (ii) Income or expense associated with investing and financing cash flows Format Stat of Cash Flows 9Feb2010.doc

Reporting cash flows from investing and financing • Para 21 • SEPARATE REPORTING of major classes of gross receipts and gross payments arising from investing and financing activities • Except certain cash flows that may be reported on net basis

Reporting Cash Flows On Net Basis Para 22: Cash flows arising from followgopertg, investg and fincg REPORTED ON NET BASIS: • Cash receipts & paymts on behalf of customers when c/flows reflect activities of customer than entity • Examples (i) acceptance and repaymt of bank’s demand deposits, (ii) (ii) funds held by customers by an investment entity; (iii) rent collected onbehalf of and paid over to owners of property • Cash receipts & payt for items which theturnover is quick, amts large and short maturities • Examples (i) Principal amts relatg to credit card customers (ii) Purchase and sale of investments (iii) Other short term borrowings (with maturity period 3 mths and <)

Ilustration of Para 22(b) Entity to offset cash received for 90-days bills against the repayment on maturity such that only the net movement in the level of borrowing is reported. On the other hand if it’s 180 day bills (not short term as more than 3 mths) have to report related cash receipts and payments on a gross basis separately

Continue… Para 24 C/flows arising from following activities of finl inst may be reported on net basis: • Cash receipts & payt for the acceptance and repaymt of deposits with fixed maturity date • Placement of deposits and withdrawal of deposits from other finl inst • Cash advances and loans made to customers and the repayment of those advances and loans

Non Cash Transactions • Not all investg and financing transactions involve current c/f eventhough it may impact financial structure • Para 43: • Investing and financing activities that DON’T require cash or cash equivalents excluded from Stat of Cash Flows. Info abt them to be reported elsewhere in the f/s that provides relevant info about repsective activities EXAMPLES • Acqn of assets by means of finance lease or taking other liabilities • Acq of assets or entity by equity issue • Conversion of debt to equity and preference shares to ord shares • Refinancing of long term debts • Payment of dividend via share reinvestment scheme

Group Cash Flow Statements • Same as preparing the single company cash flow statements • Presented by viewng cash flow of a group as a single economic entity • Aggregated cash inflows and outflow of companies consolidated in grp a/c (Treat as if the economic entity has undertaken those activities giving rise to cash flows) • ADDITION to items only applicable in grp cash flow stat include: • (1) Minority interests • (2) Investments accounted under equity method • (3) Acq and disposals of subsidiaries and other bus units • (4) Exchange gains and losses arising from translation of foreign operations

Continue MI: • Alloctn profit to Mi no effect on c/flows • Affect only dividend paid to MI – to reflect in financing activities together with dividend paid to s/holders of parent Associates and Joint Ventures: • Reflect only c/flows bet the parent and investee • Under indirect method of operatg c/flow deduct share of profit as non-cash reconciling items • Dividend received treat as operating or investg c/flows • Cash advances (given to investee) and subsequent repayment classified as investing c/flow activities • Cash advances (from investee) and subsequent repayment classified as financing c/flow activities

Foreign currency cash flows • FRS 121 • C/flow from transactions denominated in foreign currency or foreign operations recorded : • Translate the amt using exchange rate at date of c/flow stat. • FRS 121 allows used of average rate or weighted average rate • Exchange gains and losses may be realised or unrealised. Exchange Differences • Realised – Paid and received- settled in cash - part and parcel of actual cash flows • Unrealised – • NOT cash flows ; • IF relate to cash and cash equivalents, • reconcile to respective beginning and closing bal , • reported separately in Cash flow stat from operatg, investg and fincg activities

Statement of Cash Flows