circumstances change. The evaluation will involve consideration of factors such as the
maturity of the underlying investments of the fund; the credit rating of the fund; the
nature of the investments held by the fund (i.e. not subject to volatility); the extent of
diversification in the portfolio (which is expected to be very high); the investment policy
of the fund; and any mechanisms by the fund to guarantee returns (for example by
reference to short-term money market interest rates).
Investments are often held for purposes other than to act as a ready store of value that
can be quickly converted into cash when needed to meet short-term cash commitments.
It is therefore important, even where the criteria above are met, to understand why the
entity has invested in a particular money market fund. Where an investment otherwise
satisfies the criteria in paragraph 6 of IAS 7, but is not held by the entity for the purpose
of satisfying short-term cash commitments, it should not be classified as a cash equivalent.
3006 Chapter 36
Substantial judgement may be required in assessing whether an investment in money
market funds can be classified as a cash equivalent. Therefore appropriate disclosure is
essential. As noted at 3.1 above, entities are required to disclose the policies adopted in
determining the composition of cash equivalents and, where relevant, this should
include the policy applied and significant judgements made in classifying investments in
money market funds.
3.2.3
Investments with maturities greater than three months
The longer the term of the investment, the greater the risk that a change in market
conditions (such as interest rates) can have an effect on its value that is other than
insignificant. For this reason, IAS 7 excludes most equity investments from cash
equivalents and restricts the inclusion of other investments to those with a short
maturity of, say, three months or less from the date of their acquisition by the entity.
[IAS 7.7].
Similarly, an investment with a term on acquisition of, say, nine months is not
reclassified as a cash equivalent from the date on which there is less than three months
remaining to its maturity. If such reclassifications were permitted, the statement of cash
flows would have to reflect movements between investments and cash equivalents. This
would be misleading because no actual cash flows would have occurred.
The criteria explained above are guidelines, not rules, and a degree of common sense
should be used in their application. In the final analysis, cash equivalents are held for
the purpose of meeting short-term cash commitments and amounts should be included
in cash equivalents only if they can be regarded as being nearly as accessible as cash and
essentially as free from exposure to changes in value as cash.
For example, an entity might justify including in cash equivalents a fixed deposit with
an original term longer than three months if it effectively functions like a demand
deposit. Typically, a fixed deposit will carry a penalty charge for withdrawal prior to
maturity. A penalty will usually indicate that the investment is held for investment
purposes rather than the purpose of meeting short-term cash needs. However, some
fixed deposits still offer interest at a prevailing demand deposit rate in the event of
early withdrawal, with any penalty limited to the entity being required to forego the
incremental higher interest that it would have received if the deposit were held to
maturity. In this case, it may be arguable that there is effectively no significant penalty
for early withdrawal, as the entity receives at least the same return that it otherwise
would have in a demand deposit arrangement. Where an entity does assert that this
type of investment is held for meeting short-term cash needs and classifies the
investment as a cash equivalent, the accrual of interest receivable should be on a
consistent basis. In this example, the entity is asserting that it is likely to withdraw
the deposit should the need arise, and therefore should consider accruing interest
receivable at the demand deposit rate, as this reflects the extent to which the receipt
of revenue is probable.
3.2.4 Bank
overdrafts
Although bank borrowings are generally considered to be financing activities, there are
circumstances in which bank overdrafts repayable on demand are included as a
Statement of cash flows 3007
component of cash and cash equivalents. This is in cases where the use of short-term
overdrafts forms an integral part of an entity’s cash management practices. Evidence
supporting such an assertion would be that the bank balance often fluctuates from being
positive to overdrawn. [IAS 7.8].
The Interpretations Committee confirmed that where overdrafts do not often fluctuate
from being negative to positive, this is an indicator that the arrangement does not form
part of an entity’s cash management and, instead, represents a form of financing.2
3.3
Reconciliation with items in the statement of financial position
The amount shown alongside the caption in the statement of financial position for ‘cash
and cash equivalents’ will not always be a reliable guide for IAS 7 purposes. Many
entities present the components of cash and cash equivalents separately on the face of
the statement of financial position, such as ‘cash and bank balances’ and ‘short-term
bank deposits’. Additionally, some entities may include bank overdrafts in cash and cash
equivalents for cash flow purposes, but, if no legal right of set-off exists, will present
bank overdrafts separate from cash in the statement of financial position as financial
liabilities. [IAS 32.42].
The standard requires an entity to disclose the components of cash and cash equivalents
and to present a reconciliation to the statement of financial position, [IAS 7.45], which
means that any difference between ‘cash and cash equivalents’ for IAS 7 purposes and
presentation in the statement of financial position will be evident in the notes to the
financial statements.
Schiphol Group provides a reconciliation of the components of cash and cash
equivalents, which includes cash held for sale.
Extract 36.3: Royal Schiphol Group N.V. (2017)
Consolidated statement of cash flow for 2017 [extract]
(in thousands of euros)
2017
2016
Cash from continuing operations
170,370
238,691
Cash held for sale
–
12,076
170,370
250,767
3.4
Restrictions on the use of cash and cash equivalents
The amount of significant cash and cash equivalent balances that is not available for
use by the group should be disclosed, together with a commentary by management
to explain the circumstances of the restriction. [IAS 7.48]. Examples include cash and
cash equivalents held by a subsidiary operating under exchange controls or other
legal restrictions that prevent their general use by the parent or other subsidiaries.
[IAS 7.49].
The nature of the restriction must also be assessed to determine if the balance is
<
br /> ineligible for inclusion in cash equivalents because the restriction results in the
investment ceasing to be highly liquid or readily convertible. For example, where an
3008 Chapter 36
entity covenants to maintain a minimum level of cash or deposits as security for
certain short-term obligations, and provided that no amounts are required to be
designated for that specific purpose, such balances could still be regarded as cash
equivalents, albeit subject to restrictions, as part of a policy of managing resources to
meet short-term commitments.
However, an entity may be required formally to set aside cash, for example as a
result of a regulated minimum cash balance or by way of a deposit into an escrow
account, as part of a specific project or transaction, such as the acquisition or
construction of a property or as conditions of a bond issue. In such circumstances,
it is necessary to consider the terms and conditions relating to the account and the
conditions relating to both the entity’s and the counterparty’s access to the funds
within it to determine whether it is appropriate for the deposit to be classified in
cash equivalents.
In Extract 36.4 below, Lloyds Banking Group has various restricted cash balances. The
Bank is required to exclude from cash and cash equivalents the mandatory reserve
deposits held with local central banks because these amounts are not available to
finance the entity’s day-to-day operations. Conversely, certain balances held by its life
fund subsidiaries do still meet the definition of cash and cash equivalents, and the Group
is only required to disclose the restrictions thereon.
Extract 36.4: Lloyds Banking Group plc (2017)
Notes to the consolidated financial statements [extract]
Note 52:
Consolidated Cash Flow Statement [extract]
(D)
Analysis of cash and cash equivalents as shown in the balance sheet
2017
2016
2015
£m
£m
£m
Cash and balances at central banks
58,521
47,452 58,417
Less: mandatory reserve deposits1
(957)
(914)
(941)
57,564
46,538 57,476
Loans and advances to banks
6,611
26,902 25,117
Less: amounts with a maturity of three months or more
(3,193)
(11,052) (10,640)
3,418
15,850 14,477
Total cash and cash equivalents
60,982
62,388 71,953
1
Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these
deposits are not available to finance the Group’s day-to-day operations.
Included within cash and cash equivalents at 31 December 2017 is £2,322 million: (2016: £14,475 million;
2015: £13,545 million) held within the Group’s long-term insurance and investments businesses, which is not
immediately available for use in the business.
Similarly, in the following extract, InterContinental Hotels Group includes certain
amounts of restricted cash, which are pledged as collateral to insurance companies for
risks retained by the group, in loans and receivables within ‘Other financial assets’ on
the statement of financial position, rather than in cash and cash equivalents.
Statement of cash flows 3009
Extract 36.5: InterContinental Hotels Group PLC (2017)
Notes to the Group Financial Statements [extract]
15.
Other financial assets [extract]
Trade deposits and loans include deposits of $66m made to a hotel owner in connection with a portfolio of
management contracts. The deposits are non-interest-bearing and repayable at the end of the management contract
terms, and are therefore held at a discounted value of $28m (2016: $19m); the discount unwinds to the income
statement within ‘financial income’ over the period to repayment.
Restricted funds comprise cash ring-fenced to satisfy insurance claims.
The bank accounts pledged as security (£31m) are subject to a charge in favour of the members of the UK
unfunded pension arrangement (see note 25).
In the exposure draft ED/2014/6 – Disclosure Initiative – Proposed amendments to
IAS 7, issued in December 2014, the IASB noted that additional restrictions, such as
financial disincentives to utilising certain cash balances, or other considerations may be
relevant to understanding the liquidity of the entity, as they affect the decision to utilise
cash and cash equivalents. The example is given of tax liabilities that would arise on the
repatriation of foreign cash and cash equivalent balances. The exposure draft proposed
that where such matters exist, they should be disclosed. However, the IASB decided not
to take these proposals forward and use the work done to date to inform the post
implementation review of IFRS 12 – Disclosure of Interests in Other Entities.3
Nevertheless, entities might want to consider making additional disclosures where such
restrictions or disincentives exist.
4
CLASSIFICATION IN THE STATEMENT OF CASH FLOWS
The statement of cash flows reports inflows and outflows of cash and cash equivalents
during the period classified under:
• operating activities;
• investing activities; and
• financing activities. [IAS 7.10].
This classification is intended to allow users to assess the impact of these three types
of activity on the financial position of the entity and the amount of its cash and cash
equivalents. Whilst not stated explicitly in the standard, the presentation of
operating, investing and financing cash flows usually follows this sequence in
practice, and a total net cash flow for each standard heading should be shown.
Comparative figures are required for all items in the statement of cash flows and the
related notes. [IAS 1.38].
The components of cash flows are classified as operating, investing or financing
activities in a manner which is most appropriate to the business of the entity. [IAS 7.11].
For example, the purchase of investments is likely to be classified as an operating cash
flow for a financial institution, but as an investing cash flow for a manufacturer.
Additionally, a single transaction may comprise elements of differently classified cash
flows. For example, when repayments on a loan include both interest and capital, the
element reflecting the interest expense may be included in either operating activities or
3010 Chapter 36
financing activities (see 4.4.1 below) whereas the capital repayment must be classified
as a financing cash flow. [IAS 7.12].
The format of the statement of cash flows is illustrated in Extract 36.6. As permitted by
the standard, AstraZeneca has included interest paid under operating activities, interest
received under investing activities and dividends paid under financing activities.
Extract 36.6: AstraZeneca PLC (2017)
Consolidated Statement of Cash Flows
for the year ended 31 December
2017
2016 2015
Notes
$m
$m $m
Cash flows from
operating activities
Profit before tax
2,227
3,552 3,069
Finance income and expense
3
1,395
1,317 1,029
Share of after tax losses of associates and joint
ventures 10
55
33 16
Depreciation, amortisation and impairment
3,036
2,357 2,852
Decrease in trade and other receivables
83
1,610 152
Increase in inventories
(548)
(343) (315)
Increase/(decrease) in trade and other payables and
provisions
415
(341) 114
Gains on disposal of intangible assets
2
(1,518)
(1,301) (961)
Fair value movements on contingent consideration
arising from business combinations
18
109
(1,158) (432)
Non-cash and other movements
16
(524)
(492) (350)
Cash generated from operations
4,730
5,234 5,174
Interest paid
(698)
(677) (496)
Tax paid
(454)
(412) (1,354)
Net cash inflow from operating activities
3,578
4,145 3,324
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 596