IAS 7 - Statement of cash flows

1. IAS 7 - Statement of cash flows

2. Executive summary • In general, the requirements under IFRS and US GAAP are quite similar. • There are some differences with regard to classification among operating, investing and financing activities. The most notable of these are the differences in interest and dividends paid and received: • Under IFRS, interest and dividends paid can be classified either as operating or financing cash flows. Interest and dividends received can be classified either as operating or investing cash flows. • Under US GAAP, interest paid, interest received and dividends received are all classified as operating cash flows. Dividends paid are classified as financing cash flows.

3. Content, format and classification US GAAP IFRS Similar Cash flows are presented in three classifications: operating, investing and financing activities. The totals from the three activities (operating, investing, financing) are summed and this balance is reconciled with the beginning and ending cash (and cash equivalents) balances. Similar Similar, except for some differences explained on a later slide. Operating, investing and financing activities are specifically defined. Both the direct and indirect method of presenting cash flows from operations are allowed. Similar Similar Entities must disclose their policy for determining which items are cash equivalents.

4. Content, format and classificationInterest and dividends US GAAP • Requires that interest paid and interest and dividends received be classified as operating cash flows. Dividends paid are a financing cash flow because they are considered a cost of obtaining resources. IFRS • Permits an entity: (a) to classify interest and dividends paid or received as operating cash flows; or (b) to classify interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. However, interest and dividends must be classified in a consistent manner from period to period.

5. In practice, there may be little practical significance to this difference because IAS 7 requires separate disclosure of interest paid and received and of dividends paid and received. Summary of treatment of interest and dividends: Content, format and classificationInterest and dividends

6. Content, format and classificationIncome taxes US GAAP • Requires that income taxes paid be classified as an operating cash flow. IFRS • Requires that cash payments or refunds of income taxes be classified as operating activities unless they can be specifically identified with financing or investing activities. In that case, the tax cash flows may be classified as financing or investing activities, as appropriate. • Statements would not necessarily result in a loss of comparability with US GAAP since IFRS requires disclosure of the total amount of income taxes paid. Convergence: The staff draft issued July 1, 2010, specifies income taxes would be a separate section of the balance sheet, the statement of comprehensive income and the statement of cash flows.

7. Content, format and classificationIndirect method US GAAP • When using the indirect method of presenting operating cash flows, the reconciliation from income to cash flows must begin with net income. IFRS • The particular income line item that must begin the reconciliation is not specified. Thus, an entity could begin the reconciliation under IFRS with operating income.

8. Content, format and classificationDirect method US GAAP • ASC 230-10-45-30 requires that an entity using the direct method of reporting net cash flows from operating activities must provide (in a separate schedule) a reconciliation of net income to net cash flows from operating activities. • This has little practical significance, however, because few enterprises in the United States use the direct method. The AICPA Accounting Trends and Techniques – 2010 reports that 495 companies of the 500 surveyed in 2009 used the indirect method of presenting operating cash flows. IFRS • This reconciliation is not required. Convergence:The Boards had tentatively proposed presenting cash flows using the direct method (including operating cash flows) and requiring the presentation of an indirect reconciliation of operating income to operating cash flows in the notes to financial statements. In the Staff Paper presented to the combined Boards at their March 2011 meeting, based on outreach to preparers and users of cash flow statements, there was little support for the direct method. The Boards made no formal decisions at this meeting regarding the technical aspects or timing of future discussions on this project.

9. Content, format and classificationComponents of cash and cash equivalents US GAAP • No required disclosure of the components of cash and cash equivalents. • Requires that the cash and cash equivalents line item in the statement of cash flows equals the cash and cash equivalents in the statement of financial position. IFRS • Required disclosure of the components of cash and cash equivalents. • The total cash and cash equivalents presented in the statement of cash flows does not need to agree to a single line item in the statement of financial position. • Entities must disclose a reconciliation of the components of cash and cash equivalents to the amounts presented on the statement of financial position. • Thus, while users of a statement of cash flows prepared might not be able to trace changes in cash and cash equivalents directly between the statement of financial position and the statement of cash flows, this difference from US GAAP has little practical significance.

10. Example 1: Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year ended December 31, 2011. BDI wants to see what the statement would look like using US GAAP as well as IFRS. On the next slides are the balance sheet and statement of income account balances, and some additional information. Statement of cash flows example Prepare the following: • A statement of cash flows using US GAAP. • A statement of cash flows using IFRS with net income for the reconciliation of income to operating cash flows. • A statement of cash flows using IFRS with operating income for the reconciliation of income to operating cash flows.

11. Example 1 (continued): Balance sheet accounts: Statement of cash flows example

12. Example 1 (continued): Income statement balances: Statement of cash flows example

13. Statement of cash flows example Example 1 (continued): Other information: • The following account balances are all zero at both the beginning and end of the year: interest payable, interest receivable, dividends payable, dividends receivable and income taxes payable. • BDI does not include any interest or dividend cash flows in the operating section of the statement of cash flows when it prepares its statement under IFRS. • BDI uses the indirect method for the operating section for both US GAAP and IFRS. • As of December 31, 2011, BDI has one bank account balance that is overdrawn. The overdraft amount is $12,000. BDI has not yet moved this from its cash account into the liabilities section of its balance sheet. Overdrafts are an integral part of BDI’s cash management. • BDI paid dividends of $20,000 during 2011. • BDI paid income taxes of $7,000 that were attributable to financing activities. It paid income taxes of $2,000, all attributable to investing activities. • BDI sold land this year with a cost basis of $50,000. It reported a $5,000 loss on the sale.

14. Example 1 solution: Statement of cash flows exampleUS GAAP

15. *Note that the cash balance at December 31, 2011, must exclude bank overdrafts of $12,000. Statement of cash flows exampleUS GAAP Example 1 solution (continued):

16. Statement of cash flows exampleIFRS reconciling to net income

17. Statement of cash flows exampleIFRS reconciling to net income

18. Disclosures Additional disclosure differences not mentioned previously: US GAAP • Prohibits disclosure of cash flows per share. IFRS • Does not have restrictions on the disclosure of cash flows per share.