International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 595
6.4.2
Cash flows of joint operations ........................................................ 3036
Statement of cash flows 2999
6.4.3
Cash flows in investment entities ................................................... 3036
6.5
Cash flows in separate financial statements ................................................. 3037
6.5.1
Cash flows of subsidiaries, associates and joint ventures .......... 3037
6.5.2 Group
treasury
arrangements
.........................................................
3037
7 ADDITIONAL IAS 7 CONSIDERATIONS FOR FINANCIAL
INSTITUTIONS ............................................................................................. 3038
7.1
Operating cash flows ......................................................................................... 3038
7.2
Reporting cash flows on a net basis ............................................................... 3039
8 REQUIREMENTS OF OTHER STANDARDS .................................................. 3039
8.1
Cash flows of discontinued operations ......................................................... 3039
8.2
Cash flows arising from insurance contracts................................................ 3040
8.3
Cash flows arising from the exploration of mineral resources .................. 3041
8.4
Cash flows arising from interests in subsidiaries, joint ventures and
associates .............................................................................................................. 3041
List of examples
Example 36.1:
Cash flows from derivatives not qualifying for hedge
accounting ........................................................................................... 3022
Example 36.2:
Reconciliation of liabilities arising from financing activities .... 3029
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3001
Chapter 36
Statement of cash flows
1 INTRODUCTION
A statement of cash flows provides useful information about an entity’s activities in
generating cash to repay debt, distribute dividends, or reinvest to maintain or expand
operating capacity; about its financing activities, both debt and equity; and about its
investing or spending of cash. This information, when combined with information in the
rest of the financial statements, is useful in assessing factors that may affect the entity’s
liquidity, financial flexibility, profitability, and risk.
IAS 7 – Statement of Cash Flows – specifies how entities report information about the
historical changes in cash and cash equivalents and has a relatively flexible approach, which
allows it to be applied by all entities regardless of their business activities, including financial
institutions. This flexibility can be seen, for example, in the way entities can determine their
own policy for the classification of interest and dividend cash flows, provided they are
separately disclosed and this is applied consistently from period to period (see 4.4.1 below).
It can also accommodate the need of entities to provide additional information specific to
their circumstances and indeed encourages additional disclosures. In addition, IAS 7 is based
on a relatively straightforward principle, that only transactions which require the use of cash
or cash equivalents should be included in the statement of cash flows (see 5.4 below).
1.1
Terms used in IAS 7
The following terms are used in IAS 7 with the meanings specified: [IAS 7.6]
Cash comprises cash on hand and demand deposits.
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 flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the entity and
other activities that are not investing or financing activities.
Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
Financing activities are activities that result in changes in the size and composition of
the contributed equity and borrowings of the entity.
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2
OBJECTIVE AND SCOPE OF IAS 7
2.1 Objective
The objective of IAS 7 is to require entities to provide information about historical
changes in cash and cash equivalents in a statement which classifies cash flows during
the period from operating, investing and financing activities. The standard aims to give
users of financial statements a basis to evaluate the entity’s ability to generate cash and
cash equivalents and its needs to utilise those cash flows. [IAS 7 Objective]. The historical
cash flow information is often used as an indicator of the amount, timing and certainty
of future cash flows. It is also useful in examining the relationship between profitability
and net cash flow and the impact of changing prices. [IAS 7.5].
2.2 Scope
IAS 7 applies to all entities, regardless of size, operations, ownership structure or
industry, and therefore includes wholly owned subsidiaries and banks, insurance
entities and other financial institutions. There are no exemptions from the standard.
Users of an entity’s financial statements are interested in how the entity generates and
uses cash and cash equivalents regardless of the nature of the entity’s activities and
irrespective of whether cash can be viewed as the product of the entity, as may be the
case with a financial institution. All entities need cash to conduct their operations, to
pay their obligations, and to provide returns to their investors. Accordingly, all entities
are required to present a statement of cash flows. [IAS 7.3]. A statement of cash flows is
required to make up a complete set of any financial statements in accordance with IFRS.
[IAS 1.10]. Therefore, the parent entity’s cash flow statements should be presented even
if the separate financial statements are presented together with consolidated financial
statements which include a consolidated statement of cash flows.
3
CASH AND CASH EQUIVALENTS
Since the objective of a statement of cash flows is to provide an analysis of changes in
cash and cash equivalents, the definitions of cash and cash equivalents at 1.1 above are
essential to its presentation. It is also important to understand the reporting entity’s cash
management policies, especially when considering whether balances that are not
obviously cash on hand and demand deposits should be classified as cash equivalents,
as the standard states that cash equivalents are held for the purpose of meeting short-
term cash commitments rather than for investment or other purposes. [IAS 7.7]. Cash
management includes the investment of cash in excess of immediate needs into cash
equivalents, [IAS 7.9], such as short-term investments. For investments to qualify as a cash
equivalent, they must be:
• short term;
• highly liquid;
• readily convertible into known a
mounts of cash; and
• subject to insignificant risk of changes in value. [IAS 7.6].
However, the purpose for which the investments are held must also be considered
and this is a matter of facts and circumstances. Where investments meet the four
Statement of cash flows 3003
criteria above, but are not held by the entity for the purpose of meeting short term
cash commitments, they should not be classified as cash equivalents.
A statement of cash flows under IAS 7 excludes movements between cash on hand and
cash equivalents because these are components of an entity’s cash management, rather
than part of its operating, investing and financing activities. [IAS 7.9]. However, as shown
below, the definition of cash equivalents can cause some difficulty in practice.
3.1
Policy for determining components of cash equivalents
Because an entity’s cash management policies are an important factor in determining
cash equivalents, not all investments that appear to satisfy the definition at 1.1 above are
required to be classified as such. However, regardless of an entity’s cash management
policies and practices, an investment can only be classified within cash equivalents if all
of the criteria in the definition are satisfied (see 3.2 below).
In view of the variety of cash management practices and banking arrangements around
the world, entities are required to disclose the policy adopted in determining the
composition of cash and cash equivalents. [IAS 7.46].
VTech Holdings disclosed its policy to include short-term investments and bank
overdrafts as components of cash equivalents.
Extract 36.1: VTech Holdings Limited (2017)
Notes to the Financial Statements [extract]
Principal Accounting Policies [extract]
R
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand, demand deposits with banks and other financial institutions, short-
term highly liquid investments that are readily convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value and which have a maturity of three months or less at acquisition. Bank overdrafts
that are repayable on demand and form an integral part of the Group’s cash management are also included as a
component of cash and cash equivalents for the purpose of the statement of cash flows.
Lufthansa disclosed not only the required policy for determining cash and cash
equivalents (as defined in IAS 7) but also elected to disclose all the assets used by the
entity to manage its liquidity.
Extract 36.2: Deutsche Lufthansa AG (2017)
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT [extract]
40 Notes to cash flow from operating, investing and financing activities [extract]
The cash flow statement shows how cash and cash equivalents have changed over the reporting period at the
Lufthansa Group. In accordance with IAS 7, cash flows are divided into cash flows from operating activities, from
investing activities and from financing activities. The cash and cash equivalents shown in the cash flow statement
comprise the balance sheet items bank balances and cash-in-hand, without fixed-term deposits with terms of three to
twelve months, amounting to EUR 179m (previous year: EUR 118m). The amount of liquidity in the broader sense
is reached by adding securities that can be liquidated at short notice.
The effect of any changes in the policy for determining components of cash and cash
equivalents, for example, a change in the classification of financial instruments
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previously considered to be part of an entity’s investment portfolio, should be reported
under IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.
[IAS 7.47]. An example of this might be the decision to move from a 90 day threshold to a
60 day threshold when assessing the maturity of investments which can be classified as
cash equivalents. This would require comparatives to be restated and additional
disclosures given, including the reasons for the change in policy.
On the contrary, if an entity changes the purpose for which it holds certain investments,
for example a deposit which was previously held for short term cash management is
now held in order to generate an investment return, this would be considered a change
in facts and circumstances, which would be accounted for prospectively. In these
circumstances, the reclassification out of cash and cash equivalents would appear as a
reconciling item in the cash flow statement.
3.2
Components of cash and cash equivalents
3.2.1
Demand deposits and short-term investments
In defining ‘cash’, IAS 7 does not explain what is meant by ‘demand deposits’,
perhaps because the term is commonly understood as amounts that can be
withdrawn on demand, without prior notice being required or a penalty being
charged (for example, by an additional fee or forfeiture of interest). In any event,
the distinction is largely irrelevant because amounts not classified as demand
deposits may qualify as cash equivalents and end up being treated in the same way.
Thus, whether or not an amount meets the definition of a cash equivalent may
become the more important determination.
Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes. For an investment to qualify as a cash
equivalent it must be readily convertible to a known amount of cash and be subject to
an insignificant risk of changes in value. Normally only an investment with a short
maturity of, say, three months or less from the date of acquisition qualifies as a cash
equivalent. Equity investments are excluded unless they are cash equivalents in
substance. IAS 7 provides an example of such an instrument, being redeemable
preference shares acquired within a short period of their maturity and with a specified
redemption date. [IAS 7.7].
When the standard refers to a ‘known amount of cash’ it means that the amount should
be known or determinable at the date on which the investment is acquired.
Accordingly, traded commodities, such as gold bullion, would not be eligible for
inclusion in cash equivalents because the proceeds to be realised from such an
investment is determined at the date of disposal rather than being known or
determinable when the investment is made.
3.2.2
Money market funds
Entities commonly invest in money market-type funds such as an open-ended mutual
fund that invests in money market instruments like certificates of deposit, commercial
paper, treasury bills, bankers’ acceptances and repurchase agreements Although there
are different types of money market funds, they generally aim to provide investors
Statement of cash flows 3005
with low-risk, low-return investment while preserving the value of the assets and
maintaining a high level of liquidity. The question then arises as to whether
investments in such funds can be classified as cash equivalents. As noted below,
entities may consider the underlying investments of the fund when assessing the
significance of the risk of changes in value, however when determining whether
classification as a cash
equivalent is appropriate, the unit of account is the investment
in the money market fund itself.
In order to meet the definition of a cash equivalent, an investment must be short term;
highly liquid; readily convertible to a known amount of cash; and subject to
insignificant risk of changes in value. IAS 7 considers a maturity date of three months
or less from the date of acquisition to be short-term in the context of maturity,
however money market funds generally do not have a legal maturity date. Instead, if
the investments are puttable and can be sold back to the fund at any time, they may
meet the short term criterion.
Typically, investments in money market funds are redeemed directly with the fund,
therefore in assessing liquidity of the investment, focus should be on the liquidity of the
fund itself. In making this assessment, entities should consider the nature of any
redemption restrictions in place as these may prevent the redemption of the investment
in the short term. Alternatively, if a money market fund investment is quoted in an active
market, it might be regarded as highly liquid on that basis.
The short-term and highly liquid investment must also be readily convertible into
known amounts of cash which are subject to an insignificant risk of changes in value.
[IAS 7.6]. The Interpretations Committee considered the issue in July 2009 and confirmed
that the amount of cash that will be received must be known at the time of the initial
investment. Accordingly, investments in shares or units of money market funds cannot
be considered as cash equivalents simply because they are convertible at any time at
the then market price in an active market.
The Interpretations Committee also confirmed that an entity would have to satisfy itself
that any investment was subject to an insignificant risk of change in value for it to be
classified as a cash equivalent.1 In assessing whether the change in value of an
investment in a money market fund can be regarded as insignificant, an entity has to
conclude that the range of possible returns is very small. This evaluation is first made at
the time of acquiring the investment and reassessment is required if the facts and