Statement of Cash Flows IAS 7

2 Statement of Cash Flows Related standardsRelated standards IAS 7IAS 7 Current GAAP comparisonsCurrent GAAP comparisons Looking aheadLooking ahead End-of-chapter practiceEnd-of-chapter practice

3 Related Standards HB 1540 Cash flow statementsHB 1540 Cash flow statements HB 1651 Foreign currency translationHB 1651 Foreign currency translation

4 Related Standards FAS 95 Statement of cash flowsFAS 95 Statement of cash flows FAS 102 Statement of cash flows—exemption of certain enterprises and classification of cash flows from certain securities acquired for resaleFAS 102 Statement of cash flows—exemption of certain enterprises and classification of cash flows from certain securities acquired for resale FAS 104 Statement of cash flows—net reporting of certain cash receipts and cash payments and classification of cash flows from hedging transactionsFAS 104 Statement of cash flows—net reporting of certain cash receipts and cash payments and classification of cash flows from hedging transactions

5 Related Standards IAS 1 Presentation of financial statementsIAS 1 Presentation of financial statements

6 IAS 7 - Overview Objective and scopeObjective and scope Cash flowsCash flows Reporting operating cash flowsReporting operating cash flows Reporting investing cash flowsReporting investing cash flows Reporting financing cash flowsReporting financing cash flows Specific itemsSpecific items DisclosuresDisclosures

7 IAS 7 – Objective and Scope IAS 7 objective: to provide a statement to help investors assess the prospects for future cash flows, and to confirm or change their past expectationsIAS 7 objective: to provide a statement to help investors assess the prospects for future cash flows, and to confirm or change their past expectations Statement provides historical information on the entity’s operating, investing and financing cash flows and how its cash balances have changed in the period as a resultStatement provides historical information on the entity’s operating, investing and financing cash flows and how its cash balances have changed in the period as a result

8 IAS 7 – Cash Flows Cash and cash equivalents:Cash and cash equivalents: Cash on hand and on deposit and “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” Can include bank overdrafts if part of cash management activities and balance fluctuates between positive and negative amountsCan include bank overdrafts if part of cash management activities and balance fluctuates between positive and negative amounts

9 IAS 7 – Reporting Operating Cash Flows Operating activities are the principal revenue- producing activities; and those that are not investing or financing activitiesOperating activities are the principal revenue- producing activities; and those that are not investing or financing activities Operating cash flows are important: surplus cash flows needed to invest in increased capacity, pay debt when due, and provide a return to shareholdersOperating cash flows are important: surplus cash flows needed to invest in increased capacity, pay debt when due, and provide a return to shareholders

10 IAS 7 – Reporting Operating Cash Flows Operating cash flows: a)Cash received from customers for the sale of goods and provision of services, or on account of royalties, fees, or commissions b)Cash payments to suppliers for goods and services provided; and to and on behalf of employees for their services c)Cash received from or paid for financial instruments held specifically for dealing or trading purposes

11 IAS 7 – Reporting Operating Cash Flows Two methods: Direct methodDirect method Indirect methodIndirect method Either allowed although preference for direct methodEither allowed although preference for direct method

12 IAS 7 – Reporting Operating Cash Flows Direct methodDirect method

13 IAS 7 – Reporting Operating Cash Flows Indirect method…same entity?Indirect method…same entity?

14 IAS 7 – Reporting Operating Cash Flows Common adjustments to convert profit or loss to cash from operations: Changes in working capital accountsChanges in working capital accounts Elimination of non-cash itemsElimination of non-cash items Elimination of investing and financing itemsElimination of investing and financing items

15 IAS 7 – Reporting Operating Cash Flows What is used…direct method or indirect? KPMG : The Application of IFRS: Choices in Practice – International Financial in Practice – International Financial Reporting Standards, December Reporting Standards, December

16 IAS 7 – Reporting Investing Cash Flows Investing activities: “the acquisition and disposal of long-term assets and other investments not included in cash equivalents” Importance: Is the entity maintaining its capacity and increasing the potential for increased operating cash flows in the future?

17 IAS 7 – Reporting Investing Cash Flows Examples: Cash payments to acquire property, plant, and equipment; intangibles; and other long-term assets, including capitalized development costsCash payments to acquire property, plant, and equipment; intangibles; and other long-term assets, including capitalized development costs Cash receipts from the disposal of items in (a)Cash receipts from the disposal of items in (a) Cash payments to acquire debt and equity instruments of other entities or interests in joint ventures; excluding investments held for trading or in cash equivalentsCash payments to acquire debt and equity instruments of other entities or interests in joint ventures; excluding investments held for trading or in cash equivalents Cash receipts from the disposal of items in (c)Cash receipts from the disposal of items in (c) Cash advances and loans to other parties and their cash repaymentsCash advances and loans to other parties and their cash repayments Cash payments for and receipts from futures, forwards, options and swaps unless they are held for trading or are classified as financing flows.Cash payments for and receipts from futures, forwards, options and swaps unless they are held for trading or are classified as financing flows.

18 IAS 7 – Reporting Investing Cash Flows Example – Wienerberger AG, AustriaExample – Wienerberger AG, Austria

19 IAS 7 – Reporting Financing Cash Flows Financing activities: “result in changes in the size and composition of the contributed equity and borrowings of the entity” Importance: Financing cash flows change the capital structure of the firm and affect the relative interests of those with claims to future cash flows of the entity

20 IAS 7 – Reporting Financing Cash Flows Example – Wienerberger AG, AustriaExample – Wienerberger AG, Austria

21 IAS 7 – Specific Items No netting of inflows and outflowsNo netting of inflows and outflows Interest and dividends received and interest and dividends paid – choice of operating, investing or financing flows as appropriateInterest and dividends received and interest and dividends paid – choice of operating, investing or financing flows as appropriate Income tax cash flows – generally operating flowsIncome tax cash flows – generally operating flows Non-cash transactions – not included in statement; disclosed insteadNon-cash transactions – not included in statement; disclosed instead

22 IAS 7 – Specific Items Cash flows between an entity and its subsidiaries, associates and joint ventures reported only if accounted for by the cost or equity methodCash flows between an entity and its subsidiaries, associates and joint ventures reported only if accounted for by the cost or equity method Acquisition/loss of control of subsidiary – investing cash flow Acquisition/loss of control of subsidiary – investing cash flow Exchange rate changes on foreign cash balances – reconciling item at bottom of statementExchange rate changes on foreign cash balances – reconciling item at bottom of statement

23 IAS 7 - Disclosures Operating, investing, financing flowsOperating, investing, financing flows Change in cash and cash equivalentsChange in cash and cash equivalents Components of cash and cash equivalentsComponents of cash and cash equivalents Reconciliation of change to amounts on statement of financial positionReconciliation of change to amounts on statement of financial position Explanation of significant cash balances not available for useExplanation of significant cash balances not available for use

24 Looking Ahead Part of Phase B of Financial Statement Presentation projectPart of Phase B of Financial Statement Presentation project Likely to link related items on each financial statement; e.g., business items (operating and investing) and financing itemsLikely to link related items on each financial statement; e.g., business items (operating and investing) and financing items May move to explain change in cash only – exclude cash equivalentsMay move to explain change in cash only – exclude cash equivalents May require use of direct method on statement with reconciliation to profit or loss in the notesMay require use of direct method on statement with reconciliation to profit or loss in the notes Phase B discussion paper expected in late 2008Phase B discussion paper expected in late 2008

25 End-of-Chapter Practice

26 End-of-Chapter Practice

27 End-of-Chapter Practice

28 End-of-Chapter Practice

ICMAP STAGE 1,2,3,4 FUNDAMENTALS OF FINANCIAL ACCOUNTING ECONOMICS FUNDAMENTALS OF COST ACCOUNTING FINANCIAL ACCOUNTING COST ACCOUNTING PERFORMANCE APPRAISAL ADVANCED FINANCIAL ACCOUNTING

PIPFA FOUNDATION,INTERMEDIATE,FINAL BASIC ACCOUNTINGBASIC ACCOUNTING BASIC COST ACCOUNTINGBASIC COST ACCOUNTING FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING PERFORMANCE MEASUREMENTPERFORMANCE MEASUREMENT FINANCIAL REPORTINGFINANCIAL REPORTING MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTING

COACHING CLASSES MA-ECONOMICSMA-ECONOMICS B.COMB.COM BBA & MBABBA & MBA O/A LEVEL (ACCOUNTING)O/A LEVEL (ACCOUNTING)

KHALID AZIZ R-1173,ALNOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI, PAKISTAN