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The World of Cash Flows

Daniel ReynoldsNancy Wang

ACCT 5392, Spring 2012

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Our Report Includes

• Overview of Cash Flow Statement• Relevant accounting standards• Survey results for:

• Operating Activities section• Classification of Dividends and Interest

• Conclusions

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Overview ofCash Flow Statement

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Cash Flow Statement

• One of the basic financial statements under both• IFRS• US GAAP

• Provides information about historical changes in cash and cash equivalents

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Cash Flow Statement

• Classifies cash flows during a period as either to/from• Operating activities (Ops)• Investing activities (Inv)• Financing activities (Fin)

• Based on the nature of the activities that provide or consume cash

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Cash Flow Statement

• Sometimes titled• Cash Flow Statement• Cash Flows Statement• Statement of Cash Flow• Statement of Cash Flows

• We'll use Cash Flow Statement in this report

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Cash and Cash Equivalents

• Cash includes• Cash on hand• Demand deposits

• Cash equivalents include• Short-term, highly liquid investments

• We'll use the term Cash in this report

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Relevant Accounting Standards

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Relevant Accounting Standards

• US GAAP• First required by SFAS 95 in 1987• Now codified as ASC Subtopic 230

• IFRS• First required by IAS 7 in 1994

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US GAAP - IFRS Similarities• Classifications are the same

• Operating (Ops)• Investing (Inv)• Financing (Fin)

• Operating activities can be reported using• Direct Method, or• Indirect method

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US GAAP - IFRS Differences• Bank overdrafts• Income taxes• Multiple

component transactions

• Interest• Paid• Received

• Dividends• Paid• Received

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IAS 7 Paragraphs 18-20

• Report cash flows from operating activities

• Allow use of either• Direct Method• Indirect Method

• Encourage use of Direct Method

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IAS 7 Paragraphs 31-34• Interest and Dividends• Requires disclosures

• Amounts Received• Amounts Paid

• Provides classification options• Operating (Ops)• Investing (Inv)• Financing (Fin)

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Survey ResultsOperating Activities Section

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Survey Scope

• Annual (2010/2011) financial statements

• Forty-one (41) companies• Fourteen (14) different countries• Three GAAPS

• IFRS• US GAAP• PRC GAAP

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Two Methods• Direct Method

• Gross cash receipts• Gross cash payments

• Indirect Method• Net profit/loss is adjusted for

• Non-cash items• Accruals/deferrals

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GAAP Comparison

Same as IFRS

PRC GAAP must be presented using direct method

May use either direct method or indirect method.

Presentation of cash flows from operating activities

US GAAPPRC GAAPIAS/IFRSTopic

Same as IFRS

PRC GAAP must be presented using direct method

May use either direct method or indirect method.

Presentation of cash flows from operating activities

US GAAPPRC GAAPIAS/IFRSTopic

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Research Result

• Even though both IFRS 7 and ASC 230-10-45-25 indicate that companies are "encouraged" to use the Direct Method

• IFRS estimates that between 80% and 90% of companies globally use the Indirect Method

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Banking

xUS GAAPUnited StatesJPMorgan Chase

xIFRSAustraliaWestpac Banking

Group

xIFRSSwitzerlandUBS

xIFRSUnited KingdomHSBC Holdings

IndirectDirectGAAPCountryCompany

xUS GAAPUnited StatesJPMorgan Chase

xIFRSAustraliaWestpac Banking

Group

xIFRSSwitzerlandUBS

xIFRSUnited KingdomHSBC Holdings

IndirectDirectGAAPCountryCompany

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Direct Method - IFRS

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Energy and Natural Resources

xIFRSFranceTotalxIFRSNorwayStatoilxIFRSNetherlandsRoyal Dutch ShellxIFRSBrazilPetrobrasxxPRC GAAP & IFRSChinaPetroChina

xPRC GAAPChinaSinopec-China

IndirectDirectGAAPCountryCompany

xIFRSFranceTotalxIFRSNorwayStatoilxIFRSNetherlandsRoyal Dutch ShellxIFRSBrazilPetrobrasxxPRC GAAP & IFRSChinaPetroChina

xPRC GAAPChinaSinopec-China

IndirectDirectGAAPCountryCompany

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Direct Method - PRC GAAP

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Indirect Method - IFRS

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Telecommunications

Company Country GAAP Direct IndirectDeutsche Telekom Germany IFRS xFrance Telecom France IFRS xVodafone United Kingdom IFRS x

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Automobile Manufacturing

Company Country GAAP Direct IndirectBMW Group Germany IFRS xFiat Italy IFRS xFord Motor United States US GAAP xHonda Motor Japan US GAAP xToyota Motor Japan US GAAP x

Why choose “Indirect Method”?

• Reconciled Cash Flows & Net Income - accrual-based accounting net income actual cash flows from operating activities• Linked Financial Statements - income statement the balance sheet• Disclosed Non-cash Transactions - factors of net income not sources of cash flows

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Reasons for Direct Method• Easier to compute

• Does not require complex calculations• It is straightforward

• No extraneous details• Summarizes expenses• Easier for investor and business owners to

follow• Better predictive ability

• Provides best basis for investors to predict future cash flows and earnings potential

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Conclusion: Direct versus Indirect Method

• Most companies use the Indirect Method to report Operating Cash Flows

• Research areas:• Banking, Energy, Telecommunications,

Automobile• Research result:

• The Direct Method is common in certain industries - Utilities, Banks and other financial companies

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Survey ResultsDividends and Interest

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Classification Options

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Classification Options

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Research Approach

• Scope• Thirty (30) companies• Twelve (12) countries• Six (6) economic sectors

• Analyze disclosures• Cash Flow Statement• Notes to Financial Statements

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Disclosures Placement

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Results: Automobile

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Results: Automobile

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Results: Automobile

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Results: Automobile

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Results: Automobile

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Results: Banking

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Results: Banking

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Results: Banking

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Results: Banking

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Results: Consumer Products

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Results: Consumer Products

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Results: Consumer Products

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Results: Consumer Products

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Results: Energy/Natural Resources

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Results: Energy/Natural Resources

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Results: Energy/Natural Resources

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Results: Energy/Natural Resources

Example: PetroChina

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Results: Insurance

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Results: Insurance

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Results: Insurance

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Results: Insurance

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Results: Telecommunications

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Results: Telecommunications

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Results: Telecommunications

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Results: Telecommunications

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Results: Telecommunications

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Classification Summary

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Conclusion• IFRS allows for diversity of

classification practice• Great diversity exists for

• Interest Received• Interest Paid• Dividends Received

• No diversity exists for• Dividends Paid

The World of Cash Flows

Questions or Comments