International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 601
5.6.2
Segment cash flow disclosures
Disclosure of segmental cash flows is encouraged because it reveals the availability and
variability of cash flows in each segment and allows users to better understand the
relationship between the cash flows of the business as a whole and those of its
component parts. [IAS 7.52].
IAS 7 contains an example of the segmental disclosure advocated at 5.6 above.15
However, this example simply reports the operating, investing and financing cash flows
of its two segments with no reconciliation of the total to the statement of cash flows. In
practice it might be difficult to allocate financing cash flows across the entity’s
reportable segments, given that this is not how treasury functions tend to operate.
A.P. Møller – Mærsk provides an analysis of operating cash flows and capital
expenditure (part of its investing cash flows) by reportable segment. The entity does not
disclose financing cash flows by reportable segment (comparative information is
provided in the financial statements but is not reproduced here).
Extract 36.11: A.P. Møller – Mærsk A/S (2017)
Note 1 Segment information [extract]
Maersk
Total
Maersk
APM
Container
reportable
Line
Terminals Damco
Svitzer
Industry
segments
Cash flow from
operating activities
2,389
827
–101
179
75
3.369
Cash flow used for
capital expenditure
–6,142
–672
–4
–96
–20
–6,934
6
ADDITIONAL IAS 7 CONSIDERATIONS FOR GROUPS
IAS 7 does not distinguish between single entities and groups, and there are no specific
requirements as to how an entity should prepare a consolidated statement of cash flows.
In the absence of specific requirements, cash inflows and outflows would be treated in
Statement of cash flows 3031
the same way as income and expenses under IFRS 10 – Consolidated Financial
Statements. Applying these principles, the statement of cash flows presented in
consolidated financial statements should reflect only the flows of cash and cash
equivalents into and out of the group, i.e. consolidated cash flows are presented as those
of a single economic entity. [IFRS 10 Appendix A]. On the same basis, the cash flows of a
consolidated subsidiary should be included in the consolidated statement of cash flows
for the same period as its results are reported in the consolidated statement of
comprehensive income, i.e. from the date the group gains control until the date it loses
control. [IFRS 10.B88].
Cash flows that are internal to the group (such as payments and receipts for intra-group
sales, management charges, dividends, interest and financing arrangements) should be
eliminated. [IFRS 10.B86]. However, transactions with non-controlling interests as well as
with associates, joint ventures and unconsolidated subsidiaries would not be eliminated
and are discussed in greater detail below.
6.1
Preparing a consolidated statement of cash flows
In principle, the group statement of cash flows should be built up from those prepared
by individual subsidiaries with intra-group cash flows being eliminated as part of the
aggregation process. This would generally be the case for entities presenting operating
cash flows under the direct method, where information on gross cash receipts and
payments has been obtained from each group entity’s accounting records.
In practice, however, it may be possible to prepare a statement of cash flows at a more
consolidated level, by starting with the disclosures in the consolidated statement of
comprehensive income and statement of financial position and then applying the
adjustments reflected as part of the financial statements consolidation process, together
with information provided on external cash flows by individual subsidiaries. Thus, an
entity adopting the direct method could use this information to derive the value of the
major classes of gross cash receipts and gross cash payments. [IAS 7.19]. An entity
presenting operating cash flows under the indirect method would use this information
to calculate the values for movements in inventories, operating receivables and payables
and other non-cash items that appear in the reconciliation of consolidated profit or loss
to the group’s cash flow from operating activities. [IAS 7.20].
Cash flows from investing and financing activities could similarly be derived from a
reconciliation of the relevant headings in the consolidated statement of comprehensive
income to statement of financial position movements. However, for this to be possible,
subsidiaries would have to provide supplementary information (as part of internal group
reporting) to prevent gross cash flows from being netted off and to ensure that the cash
flows are shown under the correct classifications. In particular, detailed information
about receivables and payables would be essential to ensure that the movements in
operating, investing and financing receivables and payables are identified.
6.2
Transactions with non-controlling interests
Dividends paid to non-controlling interest holders in subsidiaries are included under
cash flows from financing activities or operating activities, in accordance with the
entity’s determined policy for dividends paid (see 4.4.1 above).
3032 Chapter 36
IFRS 10 requires entities to distinguish between transactions that give rise to a change
in control and those that do not, because a transaction when there is no change in
control is effectively one with the owners in their capacity as owners. [IFRS 10.BCZ168].
Changes in ownership interests in a subsidiary that do not result in a loss of control are
therefore accounted for as equity transactions, and the resulting cash flows are classified
in the same way as other transactions with owners. [IAS 7.42B]. Accordingly, IAS 7
requires that cash flows arising from changes in ownership interests in a subsidiary that
occur after control is obtained, but do not give rise to a loss of control are classified as
cash flows from financing activities. [IAS 7.42A].
6.3
Acquisitions and disposals
An entity should present separately within investing activities the aggregate cash flows
arising from obtaining or losing control of subsidiaries or other businesses. [IAS 7.39]. For
transactions involving obtaining or losing control of subsidiaries or other businesses
during the period, disclosure is also required, in aggregate, of each of the following:
(a) the total consideration paid or received;
(b) the portion of the consideration consisting of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or other businesses
over which control is obtained or lost; and
(d) the amount of the assets and liabilities, other than cash or cash equivalents, in the
subsidiaries or other businesses over which control is obtained or lost, sum
marised
by each major category. [IAS 7.40].
Cash flows arising from changes in ownership interests in a subsidiary that do not result
in a loss of control are classified as financing cash flows (see 6.2 above). [IAS 7.42A].
The aggregate amount of cash paid or received as consideration is reported in the
statement of cash flows net of cash and cash equivalents acquired or disposed of.
[IAS 7.42]. The cash flow effects of losing control are not deducted from those of gaining
control. [IAS 7.41]. This implies that entities should present one analysis for all
acquisitions and another for all disposals, such as that presented by Naspers, shown in
Extract 36.12 below.
Extract 36.12: Naspers Limited (2018)
Consolidated statement of cash flows [extract]
for the year ended 31 March 2018
31
March
2018
2017
US$’m
US$’m
Cash flows from investing activities [extract]
[...]
Acquisitions of subsidiaries and businesses, net of cash acquired
(16)
(140)
Disposals of subsidiaries and businesses
40
3 383
[...]
Notes to the consolidated annual financial statements [extract]
for the year ended 31 March 2018
35.
ACQUISITIONS OF SUBSIDIARIES AND BUSINESSES
Statement of cash flows 3033
31 March
2018
2017
US$’m
US$’m
Carrying values of assets and liabilities:
property, plant and equipment
13
1
other intangible assets
142
16
net current assets
115
2
deferred taxation
(40)
(5)
long-term liabilities
(14)
(1)
contingent liability
(4)
–
212
13
Non-controlling interests
(83)
(1)
Derecognition of equity-accounted investments
(102)
–
Remeasurement of previously held interest
(21)
–
Goodwill
124
244
Purchase consideration
130
256
Settled through the issuance of equity instruments of the group
–
(126)
Employment-linked prepayment
–
18
Amount to be settled in future
(1)
(3)
Net cash in subsidiaries and businesses acquired
(113)
(5)
Net cash outflow from acquisitions of subsidiaries and businesses
16
140
36.
DISPOSALS OF SUBSIDIARIES AND BUSINESSES
31 March
2018
2017
US$’m
US$’m
Carrying values of assets and liabilities:
property, plant and equipment
–
19
disposal groups classified as held for sale
225
–
goodwill
–
786
other intangible assets
–
84
net assets
10
17
deferred taxation
–
(13)
long-term liabilities
–
41
foreign currency translation reserve realised
110
224
345
1 158
Consideration transferred (1)
–
112
Distribution to owners(2)
(69)
–
Non-controlling interests
(94)
(17)
Existing control business combination reserve
–
(30)
Fair value of available-for-sale investment retained following
distribution to owners(2)
(29)
–
Gain on disposal
(143)
2 230
Selling price
10
3 453
Net cash in subsidiaries and businesses disposed of
30
(177)
Shares received as settlement
–
(468)
Loan settled
–
575
Net cash inflow from disposals of subsidiaries and businesses
40
3 383
(1) Relates to consideration transferred in the contribution of the group’s online travel businesses to MakeMyTrip Limited during the prior year.
(2) Relates to the distribution of the majority of the group’s interest in Novus Holdings Limited during September 2017 – refer to note 3 for further details.
3034 Chapter 36
6.3.1 Acquisition-related
costs
IFRS 3 – Business Combinations – requires acquisition-related costs (other than those
costs relating to the issue of equity or debt securities) to be recognised as an expense in
the period in which the costs are incurred and the services are received. [IFRS 3.53]. As
discussed at 4.2 above, the definition of investing activities in IAS 7, states that ‘only
expenditures that result in a recognised asset in the statement of financial position’ give
rise to investing cash flows. [IAS 7.16]. As a result, cash flows relating to acquisition costs
recognised as an expense would have to be classified within operating activities.
6.3.2
Deferred and other non-cash consideration
Not all acquisitions or disposals of businesses are satisfied in full by the exchange of
cash. Any non-cash consideration, such as shares issued by either party or amounts to
be paid or received by the entity at a later date, is not included in the amount presented
under investing activities. [IAS 7.43]. Instead, the non-cash element of the acquisition or
disposal is disclosed; and in acquisitions where the deferred element of the
consideration is regarded as the provision of finance by the vendor, its settlement is
classified as a financing cash flow. This is explained in more detail at 5.4 above.
6.3.3 Contingent
consideration
6.3.3.A Business
combinations
When a business combination agreement allows for adjustments to the cost of the
combination that are contingent on one or more future events, IFRS 3 requires the
acquirer to recognise the acquisition-date fair value of the contingent consideration,
[IFRS 3.39], and classify an obligation to pay the contingent consideration as a liability or
as equity in accordance with the provisions of IAS 32 – Financial Instruments:
Presentation. [IFRS 3.40]. Changes resulting from events after the acquisition date, such as
meeting a performance target, are not reflected by adjusting the recorded cost of the
business combination. Instead, any payment or receipt in excess of the carrying amount
of the related liability or asset is recognised in profit or loss. [IFRS 3.58].
The primary principle for the classification of cash flows should b
e the nature of the
activity giving rise to the cash flow, according to the definitions of operating, investing
and financing activities in the Standard. This might imply that all payments relating to a
business combination should be classified as investing cash flows. However, as
discussed at 4.2 above, the definition of investing activities states that only expenditures
that result in a recognised asset are eligible for classification as investing activities.
[IAS 7.16]. This raises the question of how an entity should classify cash payments for any
contingent consideration in excess of the amount that was recorded on the acquisition
date (and thereby included in the carrying value of the acquired assets including
goodwill). When the final value of the contingent consideration is dependent upon
meeting performance targets after the acquisition date, it could be considered that the
nature of activity giving rise to the incremental payment is the earning of revenues and
profits in the period after the business combination. Accordingly, cash payments in
excess of the acquisition-date fair value of the contingent consideration would be
classified as cash flows from operating activities.
Statement of cash flows 3035
In most circumstances, cash payments up to the amount recognised for the acquisition-
date fair value of the contingent consideration would be classified in investing activities,
on the basis that these are cash flows arising from obtaining or losing control of
subsidiaries. [IAS 7.39]. However, to the extent that an element of the contingent
consideration payment represents a provision of finance by the seller, it may qualify to
be included in financing activities (see 5.4.1 above). Judgement is required to determine
whether the terms of the arrangement indicate that any of the amount attributed to the
acquisition date fair value of the contingent consideration represents the provision of
finance by the vendor.