ias 7 - statement of cash flows. academic resource center statement of cash flows page 2 executive...

IAS 7 - Statement of cash flows

Academic Resource Center

Statement of cash flows

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.



Content, format and classification

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

Operating, investing and financing activities are specifically defined.

Similar, except for some differences explained on a later slide.

IFRSUS GAAP

Both the direct and indirect method of presenting cash flows from operations are allowed.

Similar

SimilarEntities must disclose their policy for determining which items are cash equivalents.

Similar



Content, format and classificationInterest and dividends

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.

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.



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

Cash flow classification

Transaction IFRS US GAAP

Interest paid Operating or financing Operating

Interest received Operating or investing Operating

Dividends paid Operating or financing Financing

Dividends received Operating or investing Operating



Content, format and classificationIncome taxes

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.

US GAAP

► Requires that income taxes paid be classified as an operating cash flow.

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.



Content, format and classificationIndirect method

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.

US GAAP

► When using the indirect method of presenting operating cash flows, the reconciliation from income to cash flows must begin with net income.



Content, format and classificationDirect method

IFRS

► This reconciliation is not required.

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.

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.



Content, format and classificationComponents of cash and cash equivalents

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.

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.



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.



Example 1 (continued):Balance sheet accounts:


As of January 1, 2011

As of December 31, 2011

Cash $ 555,000 $ 674,480

Accounts receivable 157,800 149,000

Inventory 254,600 269,000

Prepaid expenses 59,000 62,000

Equipment 875,000 875,000

Accumulated depreciation (120,000) (175,000)

Land 500,000 450,000

Total assets $2,281,400 $2,304,480

As of January 1, 2011

As of December 31, 2011

Accounts payable $ 95,000 $ 87,500

Accrued liabilities 45,000 49,800

Notes payable 1,200,000 1,050,000

Common stock 400,000 400,000

Retained earnings 541,400 717,180

Total liabilities and equity $2,281,400 $2,304,480



Example 1 (continued):Income statement balances:


For the year ended December 31, 2011

Sales $1,300,500

Interest revenue 5,000

Dividend revenue 4,500

Cost of goods sold (750,500)

Salary expense (125,500)

Depreciation expense (55,000)

Other operating expenses (49,800)

Loss on sale of land (5,000)

Interest expense (23,000)

Income tax expense (105,420)

Net income $ 195,780




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.



Example 1 solution:

Statement of cash flows exampleUS GAAP

BDIStatement of cash flows


Operating activities

Net income $195,780

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense $55,000

Loss on sale of land 5,000

Decrease in accounts receivable 8,800

Increase in inventory (14,400)

Increase in prepaid expenses (3,000)

Decrease in accounts payable (7,500)

Increase in accrued liabilities 4,800

Net cash provided by operating activities 244,480



*Note that the cash balance at December 31, 2011, must exclude bank overdrafts of $12,000.

Statement of cash flows exampleUS GAAP

Investing activities

Sale of land $45,000

Net cash provided by investing activities $ 45,000

Financing activities

Borrowings – loan repayments (150,000)

Borrowings – bank overdraft 12,000

Payment of dividends (20,000)

Net cash used in financing activities (158,000)

Net increase in cash 131,480

Cash at January 1, 2011 555,000

Cash at December 31, 201* $686,480

Example 1 solution (continued):



Statement of cash flows exampleIFRS reconciling to net income

BDIStatement of cash flows


Operating activities

Net income $195,780

Adjustments to reconcile net income to net cash provided by operating activities:

Interest revenue $(5,000)

Dividend revenue (4,500)

Depreciation expense 55,000

Loss on sale of land 5,000

Interest expense 23,000

Income taxes paid due to investing and financing activities 9,000

Decrease in accounts receivable 8,800

Increase in inventory (14,400)

Increase in prepaid expenses (3,000)

Decrease in accounts payable (7,500)

Increase in accrued liabilities 4,800

Net cash provided by operating activities $266,980



Statement of cash flows exampleIFRS reconciling to net income

Investing activities

Sale of land $45,000

Receipt of interest 5,000

Receipt of dividends 4,500

Income taxes paid due to investing activities (2,000)

Net cash provided by investing activities $ 52,500

Financing activities

Borrowings – loan repayment (150,000)

Payment of interest (23,000)

Payment of dividends (20,000)

Payment of income taxes (7,000)

Net cash used in financing activities (200,000)

Net increase in cash 119,480

Cash at January 1, 2011 555,000

Cash at December 31, 2011 $674,480



Disclosures

IFRS

► Does not have restrictions on the disclosure of cash flows per share.

US GAAP

► Prohibits disclosure of cash flows per share.

Additional disclosure differences not mentioned previously:

ias 7 - statement of cash flows. academic resource center statement of cash flows page 2 executive...

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