statement of cash flows-international accounting standard (ias) 7

8/12/2019 Statement of Cash Flows-International Accounting Standard (IAS) 7

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IAS 7 - Statement of


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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, inve

financing activities. The most notable of these are the differences in interest anpaid and received:

Under IFRS, interest and dividends paid can be classified either as operating or finaInterest and dividends received can be classified either as operating or investing cas

Under US GAAP, interest paid, interest received and dividends received are all classcash flows. Dividends paid are classified as financing cash flows.


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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 isreconciled with the beginning and ending cash (andcash equivalents) balances.

Simil

Operating, investing and financing activities arespecifically defined.

Similar, except for soexplained on a later

IFRSUS GAAP

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

Simil

SimilEntities must disclose their policy for determiningwhich items are cash equivalents.

Simil


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Content, format and classificationInterest and dividends

IFRS Permits an entity: (a) to clas

and dividends paid or receivoperating cash flows; or (b)interest and dividends paid cash flows and interest andreceived as investing cash

However, interest and dividclassified in a consistent maperiod to period.

US GAAP Requires that interest paid and interest

and dividends received be classified asoperating cash flows. Dividends paid area financing cash flow because they areconsidered a cost of obtaining resources.


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In practice, there may be little practical significance to this difference because IASseparate disclosure of interest paid and received and of dividends paid and receiv

Summary of treatment of interest and dividends:

Content, format and classificationInterest and dividends

Cash flow classification

Transaction IFRS US GAAP

Interest paid Operating orfinancing Operating

Interest received Operating orinvesting OperatingDividends paid Operating or financing Financing

Dividends received Operating orinvesting Operating




Content, format and classificationIncome taxes

IFRS Requires that cash payments or refunds of

be classified as operating activities unless specifically identified with financing or inveIn that case, the tax cash flows may be clafinancing or investing activities, as appropr

Statements would not necessarily result in comparability with US GAAP since IFRS redisclosure of the total amount of income ta

US GAAP Requires that income taxes

paid be classified as anoperating cash flow.

Convergence:The staff draft issued July 1, 2010, specifies income taxes would section of the balance sheet, the statement of comprehensive income and the staflows.




Content, format and classificationIndirect method

IFRS The particular income line it

begin the reconciliation is nThus, an entity could begin reconciliation under IFRS wincome.

US GAAP When using the indirect method of

presenting operating cash flows, thereconciliation from income to cash flowsmust begin with net income.




Content, format and classificationDirect method

I

US GAAP

ASC 230-10-45-30 requires that an entity using the direct method ofreporting net cash flows from operating activities must provide (in aseparate schedule) a reconciliation of net income to net cash flows fromoperating activities.

This has little practical significance, however, because few enterprises inthe United States use the direct method. TheAICPA Accounting Trends

and Techniques

2010reports that 495 companies of the 500 surveyed in2009 used the indirect method of presenting operating cash flows.

Convergence:The Boards had tentatively proposed presenting cash flows using the direct method (includinand requiring the presentation of an indirect reconciliation of operating income to operating cash flows in the notes tIn the Staff Paper presented to the combined Boards at their March 2011 meeting, based on outreach to preparers astatements, there was little support for the direct method. The Boards made no formal decisions at this meeting regaaspects 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

equivalents.

The total cash and cash equivalents presented cash flows does not need to agree to a single linstatement of financial position.

Entities must disclose a reconciliation of the comcash equivalents to the amounts presented on thfinancial position.

Thus, while users of a statement of cash flows pable to trace changes in cash and cash equivalethe statement of financial position and the statemthis difference from US GAAP has little practical

US GAAP No required disclosure of the

components of cash and cashequivalents.

Requires that the cash and cashequivalents line item in thestatement of cash flows equals

the cash and cash equivalents inthe statement of financialposition.




Example 1:

Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year e

December 31, 2011. BDI wants to see what the statement would look like using Uwell as IFRS. On the next slides are the balance sheet and statement of income abalances, 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 thereconciliation of income to operating cash flows.

A statement of cash flows using IFRS with operating income forthe 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

Accumulateddepreciation

(120,000) (175,000)

Land 500,000 450,000

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

As of

January 1, 201

Accounts payable $ 95,0

Accrued liabilities 45,0

Notes payable 1,200,0

Common stock 400,0

Retainedearnings

541,4

Total liabilitiesand equity

$2,281,4


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Example 1 (continued):Income statement balances:


For the year endedDecember 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


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Example 1 (continued):

Other information:

The following account balances are all zero at both the beginning and end of the year: 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 thecash 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 is $12,000. BDI has not yet moved this from its cash account into the liabilities sectionsheet. Overdrafts are an integral part of BDIs 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 in$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 s


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Example 1 solution:

Statement of cash flows exampleUS GAAP

BDIStatement of cash flows

For the year ended December 31, 2011

Operating activities

Net income

Adjustments to reconcile net income to net cashprovided by operating activities:

Depreciation expense $55,000

Loss on sale of land 5,000

Decrease in accounts receivable 8,800Increase 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


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Academic Resource CenterStatement of cash flows

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

Statement of cash flows exampleUS GAAP

Investing activities

Sale of land $45,000

Net cash provided by investing activities

Financing activities

Borrowingsloan repayments (150,000)

Borrowingsbank overdraft 12,000

Payment of dividends (20,000)

Net cash used in financing activities

Net increase in cash

Cash at January 1, 2011

Cash at December 31, 201*

Example 1 solution (continued):


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Statement of cash flows exampleIFRS reconciling to net income

BDIStatement of cash flows

For the year ended December 31, 2011

Operating activities

Net income

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

Interest revenue $(

Dividend revenue (4

Depreciation expense 5

Loss on sale of land

Interest expense 2

Income taxes paid due to investing and financing activities Decrease in accounts receivable

Increase in inventory (14

Increase in prepaid expenses (

Decrease in accounts payable (

Increase in accrued liabilities 4

Net cash provided by operating activities

S f f


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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

Financing activities

Borrowingsloan 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

Net increase in cash

Cash at January 1, 2011

Cash at December 31, 2011

Di l


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Disclosures

IFRS

Does not have restrictions odisclosure of cash flows pe

US GAAP

Prohibits disclosure of cash flows pershare.

Additional disclosure differences not mentioned previously:

statement of cash flows-international accounting standard (ias) 7

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