Accordingly, cash flows arising from transactions in a foreign currency should be
reported in an entity’s functional currency in the statement of cash flows by applying
the exchange rate in effect at the date of the cash flow. [IAS 7.25]. Similarly, the cash flows
of a foreign subsidiary should be translated using the exchange rates prevailing at the
dates of the cash flows. [IAS 7.26].
For practical reasons, an entity can apply a rate that approximates the actual rate on the
date of the cash flow (such as a weighted average for a period) but, like IAS 21,
translation using the exchange rate as at the end of the reporting period is not permitted.
[IAS 7.27]. The requirements for entities falling within the scope of IAS 29 – Financial
Reporting in Hyperinflationary Economies – are discussed in Chapter 16.
Unrealised gains and losses arising from exchange rate movements on foreign currency
cash and cash equivalents are not cash flows. However, it is necessary to include these
exchange differences in the statement of cash flows in order to reconcile the movement
in cash and cash equivalents at the beginning and end of the period. The effect of
exchange rate movements on cash and cash equivalents is presented as a single amount
at the foot of the statement of cash flows, separately from operating, investing and
financing cash flows and includes the differences, if any, had those cash flows been
reported at end of period exchange rates. [IAS 7.28]. An example of this is illustrated in
Extract 36.6 at 4 above.
5.3.1
Entities applying the direct method
When an entity enters into a transaction denominated in a foreign currency, there are
no consequences for the statement of cash flows until payments are received or made.
The receipts and payments will be recorded in the entity’s accounting records at the
exchange rate prevailing at the date of payment and these amounts should be reflected
in the statement of cash flows. [IAS 7.25].
The consolidated statement of cash flows prepared under the direct method uses the
foreign currency financial statements of each foreign subsidiary as the starting point.
This means that cash flows are measured first in the functional currency of the
subsidiary and then retranslated into the currency in which the consolidated financial
statements are presented.
3026 Chapter 36
5.3.2
Entities applying the indirect method
Under the indirect method, profit or loss is adjusted for the effects of transactions of a
non-cash nature, any deferrals of operating cash receipts or payments and income or
expenses associated with investing or financing cash flows. [IAS 7.18]. Exchange differences
will be included in profit or loss when the settled amount differs from the amount
recorded at the date of the transaction. Likewise, if the transaction remains unsettled at
the reporting date, exchange differences will also be taken to profit or loss on the
retranslation of the unsettled monetary items at closing rates. Entities must therefore
determine what adjustments should be made to ensure that foreign currency items are
only included in the statement of cash flows to the extent that cash flows have occurred.
5.3.2.A
Foreign currency operating transactions settled in the period
Where the exchange differences relate to operating items such as sales or purchases of
inventory by an entity, no further adjustments need to be made when the indirect
method of calculating the cash flow from operating activities is used. For example, if a
sale transaction and cash settlement take place in the same period, the operating profit
will include both the amount recorded at the date of sale and the amount of the
exchange difference on settlement, the combination of which gives the amount of the
actual cash flow.
5.3.2.B Unsettled
foreign currency operating transactions
Similarly, where an exchange difference has been recognised on an unsettled balance
relating to operating activities no reconciling item is needed. This is because the
movement in the related receivable or payable included in the reconciliation to
operating profit will incorporate the exchange gain or loss. Adjusting profit for the
movement on the receivable or payable will eliminate the effect of movements in
exchange rates since the date of the transaction.
5.3.2.C
Determining the value of non-operating cash flows
Any exchange difference arising on a settled transaction relating to non-operating cash
flows will give rise to an adjustment between reported profit and the cash flow from
operating activities.
For example, the foreign currency purchase of property, plant and equipment would be
recorded initially at the rate prevailing on the date of the transaction. The difference on
payment of the foreign currency payable would be taken to the statement of comprehensive
income as an exchange gain or loss. If left unadjusted in the statement of cash flows, the
investing cash flow for the asset purchase would be recorded at the historical rate, rather
than at the exchange rate prevailing at the date of settlement. This difference needs to be
taken into account in calculating the cash flow to be shown under the relevant classification,
in this case investing cash flows, which would otherwise be recorded at the amount shown
in the note of the movements in property, plant and equipment.
5.3.2.D
The indirect method and foreign subsidiaries
Entities should take care when applying the indirect method at the ‘more consolidated
level’ as described at 6.1 below when there are foreign subsidiaries. If the translated
financial statements are used, exchange differences will be included in the movements
Statement of cash flows 3027
between the opening and closing group balance sheets. For example, an increase in
inventories held by a US subsidiary from $240 to $270 during the year will be reported
as an unchanged amount of £150 if the opening exchange rate of £1=$1.60 becomes
£1=$1.80 by the year-end. In these circumstances an entity should take the functional
currency financial statements of the foreign subsidiary as the starting point. The $30
increase in inventories can then be translated at the average exchange rate.
5.4
Non-cash transactions and transactions on deferred terms
Non-cash transactions only ever appear in a statement of cash flows as adjustments to
profit or loss for the period when using the indirect method of presenting cash flows
from operating activities as discussed at 4.1.2 above. Investing and financing transactions
that do not involve cash or cash equivalents are always excluded from the statement of
cash flows. Disclosure is required elsewhere in the financial statements in order to
provide all relevant information about these investing and financing activities. [IAS 7.43].
Examples of such non-cash transactions include the conversion of debt to equity;
acquiring assets by assuming directly related liabilities or by means of a lease; and issuing
equity as consideration for the acquisition of another entity. [IAS 7.44]. Similarly, asset
exchange transactions and the issue of bonus shares out of retained earnings are
disclosed as non-cash transactions. Extract 36.9 below shows the disclosures made by
China Mobile Limited.
Extract 36.9: China Mobile Limited (2017)
Consolidated Statement of Cash Flows
for the year ended 31 December 2017 [extract]
Significant non-cash transactions
The Group recorded payables of RMB100,584,000,000 (2016: RMB103,940,000,000) to equipment suppliers as
at 31 December 2017 for additions of construction in progress during the year then ended.
5.4.1
Asset purchases on deferred terms
The purchase of assets on deferred terms can be a complicated area because it may not
be clear whether the associated cash flows should be classified under investing
activities, as capital expenditure, or within financing activities, as the repayment of
borrowings. In the US, FASB ASC Topic 230 – Statement of Cash Flows – takes the line
that generally only advance payments, the down payment or other amounts paid at or
near to the time of purchase of property, plant and equipment and other productive
assets are investing cash flows; and, incurring directly related debt to the seller is a
financing transaction with subsequent payments of principal on that debt classified as
financing cash flows.13 This treatment also appears to be implicit in IAS 7.
Where an entity acquires an asset under a lease, the acquisition of the asset is clearly a
non-cash transaction, [IAS 7.44], and the payments to reduce the outstanding liability
relating to a lease are clearly financing cash flows. [IAS 7.17]. Because payments of deferred
amounts do not result in recognition of an asset, but rather a reduction of a liability, they
would not meet the definition of investing cash flows. However, the Interpretations
Committee and the IASB have affirmed in 2013 their position that in determining the
3028 Chapter 36
classification of cash flows, the nature of the activity is still the primary principle to be
considered.14 Accordingly, the classification of the payment comes down to a judgement
as to whether its nature relates to the acquisition of an asset or the repayment of a liability.
In our view, in cases where financing is provided by the seller of the asset, the
acquisition and financing should be treated as a non-cash transaction and disclosed
accordingly. Subsequent payments to the seller are then included in financing cash
flows. Nevertheless, if the period between acquisition and payment is not significant,
the existence of credit terms should not be interpreted as changing the nature of the
cash payment from investing to financing. The period between acquisition and payment
would be regarded as significant if it gave rise to a significant financing component under
IFRS 15 (see Chapter 28 at 6.5), [IFRS 15.60-65]. Therefore, the settlement of a short-term
payable for the purchase of an asset is an investing cash flow, whereas payments to
reduce the liability relating to a lease or other finance provided by the seller for the
purchase of an asset should be included in financing cash flows.
5.4.2
Asset disposals on deferred terms
It follows that the derecognition of property, plant and equipment by the lessor under a
lease or another arrangement determined to be the provision of finance by the vendor
would be disclosed as a non-cash transaction. Receipts to reduce the receivable from the
purchaser would be investing cash flows, but described as the repayment of advances and
loans rather than the proceeds on sale of property, plant and equipment. [IAS 7.16].
It should be noted that, just as in the case of the factoring of trade receivables (see 4.4.4
above), the proceeds received by the seller in a sale and leaseback transaction are
classified as a financing cash flow if the related asset is not derecognised.
5.5
Changes in liabilities arising from financing activities
In January 2016, the IASB amended IAS 7 to require disclosures that enable users of
financial statements to evaluate changes in liabilities arising from financing activities,
including both changes arising from cash flows and non-cash changes. [IAS 7.44A]. This
amendment was in response to feedback from users, who highlighted that
understanding an entity’s cash flows is critical to their analysis and that there is a need
for improved disclosures about an entity’s debt, including changes in debt during the
reporting period. [IAS 7.BC9]. Liabilities arising from financing activities are liabilities for
which cash flows were, or future cash flows will be, classified in the statement of cash
flows as cash flows from financing activities (see 4.3 above). In addition, financial asset
related cash flows which will be included in cash flows from financing activities (such
as assets that hedge liabilities arising from financing activities), should also be included
in the scope of this disclosure. [IAS 7.44C].
The following changes should be disclosed to explain the movements in these instruments:
(a) changes from financing cash flows;
(b) changes arising from obtaining or losing control of subsidiaries or other businesses;
(c) the effect of changes in foreign exchange rates;
(d) changes in fair values; and
(e) other
changes.
[IAS 7.44B].
Statement of cash flows 3029
The standard suggests that these disclosures could be presented in the form of a
reconciliation of the opening and closing balances in the statement of financial position
for liabilities arising from financing activities. Where such a reconciliation is presented,
sufficient information should be provided to enable the link of items included in the
reconciliation to the statement of financial position and the statement of cash flows.
[IAS 7.44D]. If an entity provides the disclosure required by paragraph 44A in combination
with disclosures of changes in other assets and liabilities, it should disclose the changes
in liabilities arising from financing activities separately from changes in those other
assets and liabilities. [IAS 7.44E].
Example 36.2 below illustrates how an entity might satisfy the requirement to
reconcile liabilities arising from financing activities. The cash flows shown in the
example should reconcile to the net of the financing cash inflows and outflows in the
statement of cash flows.
Example 36.2: Reconciliation of liabilities arising from financing activities
20X1
Cash flows
Non-cash changes
20X2
Exchange
Acquisition New
leases
differences
Bank loans
1,040
250
200
–
25
1,515
Lease liabilities
–
(90)
–
900
10
820
Financing liabilities
1,040
160 200 900 35 2,335
5.6 Voluntary
disclosures
IAS 7 encourages the disclosure of additional cash flow related information that may
help users better understand the financial position of the entity, including a commentary
by management, as follows:
(a) the amount of undrawn borrowing f
acilities that may be available for future
operating activities and to settle capital commitments, indicating any restrictions
on the use of these facilities;
(b) the aggregate amount of cash flows that represent increases in operating capacity
separately from those cash flows that are required to maintain operating capacity
(see 5.6.1 below); and
(c) the amount of the cash flows arising from the operating, investing and financing
activities of each reportable segment (as defined in IFRS 8 – Operating Segments)
(see 5.6.2 below). [IAS 7.50].
5.6.1
Cash flows to increase and maintain operating capacity
IAS 7 does not contain any guidance as to how to distinguish cash flows for expansion
from cash flows for maintenance in relation to the voluntary disclosure referred to
under (b) above. The standard merely states that this information is useful in helping the
user to determine whether the entity is investing adequately in the maintenance of its
operating capacity or whether it may be sacrificing future profitability for the sake of
current liquidity and distributions to owners. [IAS 7.51].
3030 Chapter 36
Hongkong Land Holdings distinguishes renovations expenditure from developments
capital expenditure in its analysis of investing cash flows.
Extract 36.10: Hongkong Land Holdings Ltd (2017)
Consolidated Cash Flow Statement [extract]
for the year ended 31st December 2017
2017
2016
US$m
US$m
Investing activities
Major renovations expenditure
(108.2)
(91.3)
Developments capital expenditure
(105.5)
(148.2)
Acquisition of a subsidiary
(42.6)
–
Investments in and advances to associates and joint ventures
(670.5)
(1.4)
Payment of deposit for a joint venture
(20.1)
(4.2)
Cash flows from investing activities
(946.9)
(245.1)
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 600