• Expensed write-downs and reversals
• Cost of inventories recognized as an expense EXAMPLES OF RELATED NATIONAL STANDARDS
Australia: AASB 1019
Canada: CICA Handbook 3030 Malaysia: MASB 2
New Zealand: FRS 4 Taiwan: SFAS 10
United Kingdom: SSAP 9
IAS 7
cash flow statement. The information enables users to assess the entity’s abil- ity to generate cash and cash equivalents, and to use those cash flows. IAS 7 includes an example of a cash flow statement for all entities other than finan- cial institutions. An example of a cash flow statement for a financial institu- tion is also illustrated in the standard.
SCOPE
All entities producing financial statements that comply with IFRSs.
MAIN REQUIREMENTS
The purpose of a cash flow statement is to analyze changes in cash and cash equivalents during a financial period. Statements can be drawn up using ei- ther the direct method (encouraged by IASB), where each major class of gross cash receipts and gross cash payments are disclosed; or the indirect method (accepted by IASB) that adjusts the net profit or loss for the effects of non- cash transactions. Both methods will give a figure for the cash flow from op- eration activities. The direct method, however, provides the detail of the cash flows that make up the total of cash flows from operating activities. The indi- rect method makes adjustments to the net profit or loss for the period (for ex- ample adding back depreciation) to arrive at the total cash flow figure.
For the purpose of IAS 7, cash and cash flow equivalents should be incor- porated. These include the following:
• Cash on hand and deposits that can be withdrawn immediately in cash without suffering any penalties
• Short-term, highly liquid investments that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value
• Bank overdrafts that are repayable on demand and are an integral part of cash
• Equity investments if they are in substance a cash equivalent (for in- stance, preferred shares acquired within three months of their specified redemption date)
The cash flow statement must classify the information under three main headings:
Operating activities: The main revenue-producing activities of the enter- prise, for example, cash received from customers and cash paid to sup- pliers and employees.
Investing activities: The acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents, for ex- ample, acquisition of plant and equipment.
Financing activities:Activities that alter the equity capital and borrow- ing structure of the enterprise, for example, cash from issuing shares.
The standard explains the treatment of certain items, the main ones being:
• Interest and dividends received and paid may be classified as operating, investing or financing cash flows but must be treated consistently.
• Tax cash flows on income are normally classified as operating unless they can be specifically identified under another heading.
• Extraordinary items should be disclosed separately under the most ap- propriate heading.
• Foreign currency cash flows arising from transactions should be recorded at the rate of exchange applying on the date of the cash flow.
• Cash flows of foreign subsidiaries should be included in the group cash flow statement translated at the exchange rate on the dates of the cash flows.
• Futures, options and swaps held specifically for trading purposes come under the heading of operating activities.
ILLUSTRATIVE EXAMPLE: EFFECT OF TRANSACTION ON CASH FLOW STATEMENTS, INCOME STATEMENT AND BALANCE SHEET Machinery with a carrying value of $1.5 million in the balance sheet is sold for $1 million. The cash flow will show the proceeds of $1 million under the heading of investing activities. The loss of $500,000 will be recognized in the income statement. The cost of the asset and the relevant cumulative deprecia- tion will be removed from the balance sheet. In this hypothetical example, it is worthwhile raising the question why an impairment loss was not recog- nized previously if there was evidence available under IAS 36.
MAIN DISCLOSURES
• A cash flow statement in the format required by the standard using ei- ther the direct or the indirect method
• The components of cash and a reconciliation statement with the corre- sponding items on the balance sheet
• An explanation of any restrictions on the use of cash balances that are significant
IAS 7 • 81
Some cash transactions, such as the issue of shares to acquire assets, and significant lease arrangements, are not shown on the cash flow statement.
However, such transactions may have a substantial impact on investing and financing activities and should be stated as a note.
If significant cash or cash equivalent balances are not available for use by the group due to legal or other restrictions in the subsidiary’s country of oper- ations, this fact and the amount involved should be stated in the notes.
EXAMPLES OF RELATED NATIONAL STANDARDS Australia: AASB 1026
Canada: CICA Handbook 1540 Germany: GAS 2, GAS 2-10, GAS 2-20 Malaysia: MASB 5
New Zealand: FRS 10 Taiwan: SFAS 17 United Kingdom: FRS 1 United States: SFAS 95