ias 7 - powerpoint€¦ · ias 7 - statement of cash flows july 2018. pwc definitions - continued...

CareerDeal – IFRS trainingIAS 7 - Statement of Cash Flows

PwC

Agenda

• Introduction and determination of cash equivalents

• Presentation of operating, investing and financing cash flows

• Practical application

• Presentation and disclosure

Slide 2

July 2018IAS 7 - Statement of cash flows

PwC

Introduction and determination of cash and cash equivalents

Slide 3


PwC

Introduction

• Objective is to provide 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

• Statement of cash flows classifies (historical) cash flows as those arising from:

- operating

- investing, and

- financing

Slide 4


PwC

Scope

• An entity must prepare a statement of cash flows in accordance with the requirements of this Standard

• It must present it as an integral part of its financial statements for each period for which financial statements are presented

Slide 5


PwC

Definitions

• Cash - cash on hand and demand deposits

• Cash equivalents - short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value

Slide 6


PwC

DefinitionsCash

• ‘Cash’ includes:

- cash in hand

- cash held in demand deposits

• No guidance is given in IAS 7 for the definition of a demand deposit

- these are generally accepted to be deposits with financial institutions that are repayable on demand and available within 24 hours, or one working day, without penalty, eg. a bank current account

Slide 7


PwC

DefinitionsCash equivalents

• ‘Cash equivalents are “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”

- cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes

- investments normally qualify as cash equivalents only when they have a short maturity of, say, three months or less from the date of acquisition

- where bank overdrafts are repayable on demand and form an integral part of an entity’s cash management, they are included as a component of cash and cash equivalents

Slide 8


PwC

Cash equivalentsExample 1

Q: Assuming a 31 December 2016 year end, is a term deposit starting on 1 December 2016 and maturing on 31 January 2017 a cash equivalent?

A: Yes. The term of this deposit is shorter than three months and therefore it is considered to be a cash equivalent

Slide 9


PwC


Q: Assuming a 31 December 2016 year end, is a term deposit starting on 1 December 2016 and maturing on 31 May 2017 a cash equivalent?

A: No. The term of this deposit is greater than three months and therefore it is not considered to be “readily convertible”

Slide 10


PwC


Q: Assuming a 31 December 2016 year end, is a term deposit starting on 1 August 2016 and maturing on 31 January 2017 a cash equivalent?

A: No. Despite the fact that the fixed deposit will be maturing within one month from the end of the reporting period, the term of this deposit (period from origin till maturity date) is greater than three months and at acquisition if is therefore not considered to “readily convertible”

Slide 11


PwC


Q: Assuming a 31 December 2016 year end, is a 5-year debt security with a maturity of 31 January 2017, a cash equivalent, assuming it was acquired on the secondary market on 1 November 2016?

A: Yes. At the date of acquisition, the term to maturity is of a period of no more than three months and therefore it is considered to be “readily convertible”

Slide 12


PwC

Definitions - continued

• Operating activities - the principal revenue-producing activities

• Investing activities - the acquisition and disposal of long-term assets and other investments not included in cash equivalents

• Financing activities - activities that result in changes in the size and composition of the contributed equity and borrowings of the entity

Slide 13


PwC

Operating activitiesCommon examples

• Receipts from the sale of goods and the rendering of services

• Receipts from royalties, fees, commissions and other revenue

• Payments to suppliers for goods and services

• Payments to and on behalf of employees

• Payments and refunds of income taxes (unless they can be specifically identified as financing or investing)

Slide 14


PwC

Investing activitiesCommon examples

• Payments to acquire/receipts from the sale of long-term assets (including PPE, intangibles and payments relating to capitalised development costs)

• Payments to acquire/receipts from the sale of equity or debt instruments of other entities (including purchases of investments in subsidiaries, associates and joint ventures)

• Advances and loans (including repayment) made to other parties

• Payments/receipts for derivatives

- except when the contracts are held for dealing or trading purposes, or

- the payments are classified as financing activities

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

Slide 15


PwC

Financing activitiesCommon examples

• Receipts from the issue of shares or other equity instruments

• Payments to acquire or redeem the entity's shares

• Receipts from the issue of debentures, loans, notes, bonds, mortgages and other short or long-term borrowings

• Repayments of amounts borrowed

• Capital element of finance lease repayments

Slide 16


PwC

Presentation of operating, investing and financing cash flows

Slide 17


PwC

Presentation of astatement of cash flows

• The statement of cash flows shall report cash flows during the period classified by:

- operating;

- investing; and

- financing activities

Slide 18


PwC

Reporting cash flows from operating activities

• Cash flows from operating activities must be reported by using either:

- the direct method

◦ whereby major classes of gross cash receipts and gross cash payments are disclosed

- the indirect method

◦ whereby profit or loss is adjusted for:

› the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments,

› items of income or expense associated with investing or financing cash flows

Slide 19


PwC

The direct method

Slide 20


PwC

The direct methodPractical considerations

• Direct method cash flows may be captured directly from a separate cash-based accounting system that records amounts paid or received in any transaction

- this result can also be achieved by using a ‘matrix’ for analysing cash flows, where each cash flow from operating activities is analysed by type of receipt/payment

Slide 21


PwC

The direct methodPractical considerations: matrix analysis

Receipts from Receipts from Payments to Wages and General Tax

Amount debtors cash sales suppliers salaries expenses payment

€ € € € € € €

Opening balance 20,000

Operating activities

Payments for materials (40,000) (40,000)

Rent costs (10,000) (10,000)

Receipts from customers 80,000 80,000

Salaries and wages (25,000) (25,000)

Travelling expenses (6,500) (6,500)

Directors' remuneration (20,000) (20,000)

Utilities (7,000) (7,000)

Telecommunication costs 5,000 5,000

Receipts from cash sales 35,000 35,000

Stationery expenses (3,000) (3,000)

Tax payment (15,000) (15,000)

Net cash movement (6,500) 80,000 35,000 (40,000) (45,000) (21,500) (15,000)

Closing balance 13,500

Slide 22


PwC

The direct methodPractical considerations: matrix analysis - continued



€ € € € € € €




Rent costs (10,000) (10,000)





Utilities (7,000) (7,000)




Tax payment (15,000) (15,000)



In this case, the cash movements from beginning to end of the period

amount to €6,500

Slide 23


PwC




€ € € € € € €




Rent costs (10,000) (10,000)





Utilities (7,000) (7,000)




Tax payment (15,000) (15,000)



The cash movements of €6,500 are analysed by

type of cash flow

Slide 24


PwC




€ € € € € € €




Rent costs (10,000) (10,000)





Utilities (7,000) (7,000)




Tax payment (15,000) (15,000)



Cash from operating activities would include:Cash receipts from customers 115,000Cash paid to suppliers and employees (106,500)Tax payments (15,000)

Slide 25


PwC

The direct method

Slide 26


PwC

The indirect method

Slide 27


PwC

The indirect methodPractical considerations

• The indirect method is built around the principle that operating profit for the period comprises operating activities that were:

- settled in cash

- not yet settled in cash, i.e. receivables, payables, accruals, etc.

- non-cash transactions, eg:

◦ depreciation

◦ write-offs and provisions for impairment

◦ profits or losses on disposal of PPE, etc

• Therefore, if operating profit is adjusted for non-cash transactions and for transactions that were not yet settled in cash, the result is cash flows from operating activities

Slide 28


PwC

The indirect methodPractical considerations - continued

Not yet

Amount Settled in cash settled in cash Non-cash

€ € € €

Revenue 100,000 80,000 20,000

Cost of sales (60,000) (45,000) (15,000)

Gross profit 40,000

Selling and distribution costs (7,000) (6,000) (1,000)

Administrative expenses (16,000) (10,000) (6,000)

Other gains 8,000 5,000 3,000

Operating profit 25,000 24,000 (2,000) 3,000

€24,000 of the operating profit was received in cash

Slide 29


PwC

The indirect methodPractical considerations - continued

Cash from operating activities would be presented as:Operating profit 25,000Adjustment for non-cash transactions (3,000)Movements in working capital 2,000

Not yet

Amount Settled in cash settled in cash Non-cash

€ € € €

Revenue 100,000 80,000 20,000

Cost of sales (60,000) (45,000) (15,000)

Gross profit 40,000

Selling and distribution costs (7,000) (6,000) (1,000)

Administrative expenses (16,000) (10,000) (6,000)

Other gains 8,000 5,000 3,000

Operating profit 25,000 24,000 (2,000) 3,000

Slide 30


PwC

The two methods compared

Direct method Indirect method

Slide 31


PwC

Reporting cash flows from investing and financing activities

• An entity shall report separately major classes of gross cash receipts and payments arising from investing and financing activities except to the extent that cash flows are reported on a net basis:

- cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and

- cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short

Slide 32


PwC

Reporting cash flows from investing and financing activitiesReporting cash flows on a net basis

• Examples of cash receipts and payments relating to customer:

- the acceptance and repayment of demand deposits of a bank;

- funds held for customers by an investment entity; and

- rent collected on behalf of, and paid over to, the owners of properties

• Examples of cash receipts and payments with quick turnover and short maturities:

- principal amounts relating to credit card customers;

- the purchase and sale of investments; and

- other short-term borrowings, for example, those which have a maturity period of three months or less

Slide 33


PwC

Presentation of cash flows from interest and dividends

• Cash flows from interest and dividends (received and paid) shall each be disclosed separately

• Each shall be classified in a consistent manner from period to period

Slide 34


PwC

Presentation of cash flows from taxes on income

• Cash flows arising from taxes shall be separately disclosed

• They must be classified as operating activities unless they can be identified with financing and investing activities

Slide 35


PwC

Investment in subsidiaries,associates and joint ventures

• When accounting for an investment in an associate or a subsidiary, an investor restricts its reporting in the statement of cash flows to the cash flows between itself and the investee, (eg. dividends or advances)

Slide 36


PwC

Acquisitions and disposals of subsidiaries and other business units

• The aggregate cash flows arising from acquisitions, and disposals, of subsidiaries or other business units must be presented separately and classified as investing activities

• Disclosure, in aggregate, of each of the following is necessary:

- the total consideration paid or received;

- the portion of the consideration consisting of cash and cash equivalents;

- the amount of cash and cash equivalents in the subsidiaries or other businesses over which control is obtained or lost; and

- the amount of the assets and liabilities other than cash or cash equivalents in the subsidiaries or other businesses over which control is obtained or lost, summarised by each major category

Slide 37


PwC

Acquisitions and disposals of subsidiaries and other business units - continued

Slide 38


PwC

Acquisitions and disposals of subsidiaries and other business units - continued

Slide 39


PwC

Foreign currency cash flows

• Cash flows arising from transactions in a foreign currency are recorded in an entity’s functional currency

- the exchange rate to be used is the exchange rate applicable at the date of the cash flow

- the cash flows of a foreign subsidiary are translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows

Slide 40


PwC

Non-cash transactions

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

- these transactions must however be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities

Slide 41


PwC

Components of cash and cash equivalents

• An entity must disclose the components of cash and cash equivalents

• It must also present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position

Slide 42


PwC

Other disclosuresRestrictions on cash and cash equivalents

• 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

- eg. cash held by a subsidiary in a foreign country where there are exchange controls in place

Slide 43


PwC

Practical application

Slide 44


PwC

Preparing a statement of cash flowsBasic principles

• The following items are needed in order to prepare a statement of cash flows:

- Statement of financial position

- Income statement

- Statement of changes in equity

- Notes supporting investing and financing activities, eg:

◦ PPE, investment property and intangible assets notes

◦ investments in subsidiaries, associates and joint ventures

◦ Borrowings

• If there is a casting error in any of the above the statement of cash flows will never agree!

Slide 45


PwC

The indirect methodBasic principles: 1

The movement in any line item (including cash and cash

equivalents) equals the aggregate of the movement in all the other

line items

Slide 46


PwC

The indirect methodBasic principles: 1 - continued

The movement of €10,000 in cash and cash equivalents is therefore equal to the sum of

all the other movements

Slide 47


PwC


A decrease in an asset’s balance

from the prior period (i.e. an

aggregated credit entry) will have

arisen from an aggregated debit

entry in other line items, eg. cash

A decrease in an asset’s balance from the prior period (i.e. an

aggregated credit entry) will have arisen from an aggregated debit

entry in other line items, eg. cash

Slide 48


PwC


Conversely, an increase in an

asset’s balance from the prior

period will have arisen from an

aggregated credit entry in other

line items, eg. cash

Conversely, an increase in an asset’s balance from the prior

period will have arisen from an aggregated credit entry in other

line items, eg. cash

Slide 49


PwC


• The same concept applies to liabilities, i.e.

- an increase in liabilities will have arisen from an aggregated debit entry against another line item, eg. cash

- a decrease in liabilities will have arisen from an aggregated credit entry against another line item, eg. cash

Slide 50


PwC


If a movement in a line item

arose from transaction that

doesn’t in any manner impact

profit for the year and cash,

then it will have no impact on

the statement of cash flows

If a movement in a line item arose from transaction that

doesn’t in any manner impact profit for the year and cash, then

it will have no impact on the statement of cash flows

Slide 51


PwC

The indirect methodCase study

• Company X has a December year end

• The following information is being provided:

- Statement of financial position as at 31 December 2010 and 2009

- Income statement and Statement of changes in equity for the year ended 31 December 2010

- Extracts from the notes to the financial statements

Slide 52


PwC

The indirect methodCase study - continued

Slide 53


PwC

The indirect methodProperty, plant and equipment: revaluation surplus

• The movement in PPE, amounting to €240,000, is analysed in the respective note to the financial statements

• For the purposes of the statement of cash flows, each type of movement is analysed separately and categorised appropriately in the statement

• The revaluation surplus of €70,000 affects neither accounting profit nor cash

• It is therefore ignored for the purposes of the statement, as is the equivalent movement in the reserve

Slide 54


PwC

The indirect methodProperty, plant and equipment: additions

• Additions are a result of cash outflows

• On the assumption that all additions were paid for in cash, the effect is an outflow of €543,000 from investing activities

Slide 55


PwC

The indirect methodProperty, plant and equipment: disposals

• Disposals in the note are stated at carrying amount, which is not necessarily equal to proceeds

- proceeds equal carrying amount plus/(less) profit/(loss) on disposal

- the results on disposal are a non-cash transaction and therefore adjusted against operating profit

Slide 56


PwC

The indirect methodProperty, plant and equipment: disposals

• Disposals as presented in the note are stated at carrying amount, which is not necessarily equal to proceeds

- proceeds equal carrying amount plus/(less) profit/(loss) on disposal

- the results on disposal are a non-cash transaction and therefore adjusted against operating profit

Slide 57


PwC

The indirect methodProperty, plant and equipment: depreciation and impairment

• Depreciation and impairment charges are non-cash transactions that are included in operating profit

- they are therefore adjusted against operating profit

Slide 58


PwC

The indirect methodProperty, plant and equipment: summary of movements

Slide 59


PwC

The indirect methodIntangible assets

• Although not included in the case study, the analysis of cash flows on investments in intangible assets is consistent with the analysis for property, plant and equipment

Slide 60


PwC

The indirect methodInvestment property

• The movement in investment property, amounting to €40,000, is analysed in the respective note to the financial statements

• This is a non-cash transaction

• Fair value gains are included in the income statement

• They are however not included in operating profit, and

• Operating profit should not therefore be adjusted for this non-cash transaction

• Additions and disposals would be treated in a similar manner to property, plant and equipment

Slide 61


PwC

The indirect methodInvestment property: summary of movements

Slide 62


PwC

The indirect methodAvailable-for-sale financial assets: fair value gains

• The movement in AFS financial assets, amounting to €25,000, is analysed in the respective note to the financial statements

• Similar to property, plant and equipment, the fair value gains of €12,000 affect neither accounting profit nor cash

− they are therefore ignored for the purposes of the statement, as is the equivalent movement in the reserve

Slide 63


PwC

The indirect methodAvailable-for-sale financial assets: additions

• Additions are a result of cash outflows

• On the assumption that all additions were paid for in cash, the effect is an outflow of €28,000 from investing activities

Slide 64


PwC

The indirect methodAvailable-for-sale financial assets: disposals

• AFS financial assets are always carried at FV

• On the assumption that the disposal transaction was an arm’s length transaction, the proceeds on disposal will equal FV

- they will therefore also equal carrying amount

Slide 65


PwC

The indirect methodAvailable-for-sale financial assets: summary of movements

Slide 66


PwC

The indirect methodInventories

• The movement in inventories, amounting to €127,000, is:

- a movement in working capital, and

- included in operating profit

• It is therefore adjusted against operating profit

• Being an decrease in an asset, i.e. it arose from an aggregate debit entry to operating profit, this movement is added back to operating profit

Slide 67


PwC

The indirect methodTrade and other receivables

• The movement in receivables, amounting to €80,000, is also:


- included in operating profit (indirectly through the inclusion of revenue in operating profit)


• However, Company X also recognised an increase in provision for impairment of receivables

Slide 68


PwC

The indirect methodTrade and other receivables - continued

• Being a non-cash transaction that directly impacts operating profit, the movement in the provision is added back to operating profit

- working capital movements exclude the movement in provision

Slide 69


PwC

The indirect methodTrade and other receivables: summary of movements

Slide 70


PwC

The indirect methodShare capital

• The movement in share capital, amounting to €183,000, is analysed in the Statement of changes in equity

• Assuming the proceeds were for cash, this inflow is presented as a financing transaction

Slide 71


PwC

The indirect methodRevaluation and other reserves

• The movements in reserves, amounting to €64,300, are analysed in the respective note to the financial statements

• Being non-cash transactions that do not impact operating profit, the movements are ignored for the purposes of the statement

Slide 72


PwC

The indirect methodRevaluation and other reserves: summary of movements

Slide 73


PwC

The indirect methodBorrowings

• The movement in borrowings, amounting to €88,000 (non-current plus current), is analysed in the respective note to the financial statements between movements in

- bank overdraft

- other borrowings

• The movement in the bank overdraft is ignored as this is a component of cash and cash equivalents

Slide 74


PwC

The indirect methodBorrowings - continued

• The movement in other borrowings are a result of proceeds on drawdowns, together with repayments

− these are presented in the Statement of cash flows as financing activities

Slide 75


PwC

The indirect methodDeferred tax

• The movements in deferred tax, amounting to €12,350, are analysed in the respective note to the financial statements

• Similar to the movements in reserves, being non-cash transactions that do not impact operating profit, the movements are ignored for the purposes of the statement

Slide 76


PwC

The indirect methodDeferred tax: summary of movements

Slide 77


PwC

The indirect methodTrade and other payables

• The movement in payables, amounting to €139,000, is:


- included in operating profit (indirectly through the inclusion of purchases and costs in operating profit)


• However, Company X also recognised an increase in accruals for interest

Slide 78


PwC

The indirect methodTrade and other payables

• Being a transaction not yet paid for in cash, the movement in the accrual is adjusted against the respective expense, i.e. interest

- working capital movements exclude the movement in accrual

Slide 79


PwC

The indirect methodTrade and other payables: summary of movements

The difference of €500 arises because of accrued interest

Interest paid comprises:

Interest expense 6,000

Interest accrued (as above) (500)

Interest paid 1,500

Slide 80


PwC

The indirect methodCurrent tax

• The movement in the current tax asset/liability is typically a result of two types of transactions:

− current tax expense for the period

− tax payments/refunds made during the period

• Based on the above information, the tax payments/refunds can be calculated with a simple analysis of the nominal ledger account

€

Opening balance (55,000)

Current tax expense (65,000)

Tax payments/refunds ???

Closing balance (65,000)

Based on the analysis, the tax payment was €55,000

Slide 81


PwC

The indirect methodCurrent tax - continued

• The movement in the current tax asset/liability is typically a result of two types of transactions:

− current tax expense for the period

− tax payments/refunds made during the period

• Based on the above information, the tax payments/refunds can be calculated with a simple analysis of the nominal ledger account

Slide 82


PwC

The indirect methodCurrent tax: summary of movements

Slide 83


PwC

The indirect methodRetained earnings

• The movement in retained earnings, amounting to €41,350, is analysed in the Statement of changes in equity

• In this case, the movement comprises:

- profit for the year

- dividend distribution

Slide 84


PwC

The indirect methodRetained earnings: dividend

• Assuming that the dividend was paid for in cash, this is presented as a cash flow from financing activities

Slide 85


PwC

The indirect methodRetained earnings: profit for the year

• The profit for the year, amounting to €141,350, comprises:

- operating profit

- investment and other related income

- finance costs

- tax expense

Slide 86


PwC

The indirect methodRetained earnings: operating profit

• Operating profit is included directly in the statement of cash flows:

Slide 87


PwC

The indirect methodRetained earnings: investment and other related income

• Investment and other related income is analysed in the respective note:

• Fair value gains on investment property and gains on disposal of AFS investments are non-cash transactions that are not included in operating profit

- thus, they are ignored when completing the statement

Slide 88


PwC

The indirect methodRetained earnings: investment and other related income -continued

• Investment and other related income is analysed in the respective note:

• Assuming that the dividend income has been received in cash, this is presented as a cash flow from operating or from investing activities

Slide 89


PwC

The indirect methodRetained earnings: finance costs

• Finance costs are analysed in the respective note:

• Bank interest is presented as an operating or financing cash flow

- it is however adjusted for the effect of movement in accrued interest

• Being a non-cash transaction, notional interest is ignored

Slide 90


PwC

The indirect methodRetained earnings: tax expense

• Tax expense is analysed in the respective note:

• Both current and deferred tax have been considered previously

Slide 91


PwC

The indirect methodThe statement of cash flows

Slide 92


PwC

The indirect method

• Any movement in a line item in the statement of financial position must either:

- offset a movement in another line item; or

- be presented in the Statement of cash flows; or

- a mixture of the above

Slide 93


www.pwcacademy.com.mt

This material has been prepared for general guidance on matters of interest only, and does not

constitute professional advice. You should not act upon the information contained in this

material without obtaining specific professional advice. No representation or warranty (express

or implied) is given as to the accuracy or completeness of the information contained in this

material, and, to the extent permitted by law, PricewaterhouseCoopers, its members,

employees and agents do not accept or assume any liability, responsibility or duty of care for

any consequences of you or anyone else acting, or refraining to act, in reliance on the

information contained in this material or for any decision based on it.

© 2015 PricewaterhouseCoopers. All rights reserved. PwC refers to the Malta member firm,

and may sometimes refer to the PwC network. Each member firm of which is a separate legal

entity. Please see www.pwc.com/structure for further details.

ias 7 - powerpoint€¦ · ias 7 - statement of cash flows july 2018. pwc definitions - continued...

Documents