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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-1/” type=”big” color=”red”] Return to Section 1 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid” module_id=” “]Example 2 – Indirect Method
Statement of Cash Flows
Section 7 sets out the information that is to be presented in a statement of cash flows and how to present it. The statement of cash flows provides information about the changes in cash and cash equivalents of an entity for a reporting period, showing separately changes from operating activities, investing activities and financing activities.
Scope
Extract from FRS102: Section 7.1
7.1A This section and paragraph 3.17(d) do not apply to:
(a) mutual life assurance companies;
(b) retirement benefit plans;or
(c) investment funds that meet all the following conditions:
(i) substantially all of the entity’s investments are highly liquid;
(ii) substantially all of the entity’s investments are carried at market value; and
(iii) the entity provides a statement of changes in net assets.
OmniPro comment
From the above guidance all entities are requirement to prepare cash flow statements with the exception of:
- Mutual assurance companies
- Retirement benefit plans
- Investment funds the meet the conditions outlined in Section 7.1A(c) above
- A small company as defined by the Small Companies Regulation for the UK (The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980)) and an equivalent Regulation when enacted by the Republic of Ireland.
- Qualifying entities. A qualifying entity is an entity which is consolidated into publicly available consolidated financial statements that give a true and fair view. Therefore an entity which is considered a subsidiary of a parent company.
NOTE: The exemption for small companies only applies to UK and Northern Ireland registered companies. It does not apply to companies in the Republic of Ireland at this time. A company registered in the Republic of Ireland cannot apply this exemption until the Irish Government enact the EU directive 2013/34 for Ireland. This is expected to be issued in early 2016 however where financial statements are prepared and signed off before the enactment of this directive a cash flow statement will be required. The only exception to this is where the small company is a member of a group where its results are consolidated into a consolidated set of financial statements of its ultimate parent company and the accounts are publically available.
Cash equivalents
Extract from FRS102: Section 7.2
7.2 Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Bank overdrafts are normally considered financing activities similar to borrowings. However, if they are repayable on demand and form an integral part of an entity’s cash management, bank overdrafts are a component of cash and cash equivalents.
OmniPro comment
A key difference between old Irish/UK GAAP and FRS 102 is that FRS 102 defines cash and cash equivalents as cash on hand and demand deposits and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value whereas cash was defined in FRS 1 as “cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand. This will mean that there will be reclassification on transition to FRS 102.
To be classed as cash and cash equivalents it therefore must:
- Have a short term maturity of 3 months or less. The key point is when the money is deposited, it should be for a period of 3 months or less from the date of inception, it cannot be from the year end.
Example 1: Cash and cash equivalents
Company A entered into a 3 month short term deposit account. Funds can be withdrawn early without penalty.
In this case this would be considered a cash equivalent.
Example 2: Cash and cash equivalents
Company A entered into a 6 month deposit account on 1 September. The year end is 31 December. This deposit cannot be classed as cash equivalent as at inception the term of the deposit was 6 months. It is irrelevant that there is only two months left at the year end.
- Readily convertible into cash without an undue notice period and without incurring significant penalty on withdrawal. Consideration should be given where notice needs to be provided and the amount of notice that needs to be provided.
- There must be no doubt over the recoverability of the cash in order to be considered cash or cash equivalent.
A bank overdraft should only be included in cash or cash equivalents where it is repayable on demand.
NOTE: to be determined cash or cash equivalent it does not have to be with a bank or financial institution. It could also be with a group treasury company where the above conditions are met.
Information to be presented in the statement of cash flows
Extract from FRS102: Section 7.3 and Section 7.10A-7.10E
7.3 An entity shall present a statement of cash flows that presents cash flows for a reporting period classified by operating activities, investing activities and financing activities.
Extract from FRS102: Section 7.10A-7.10E
7.10A Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:
(a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short
7.10B Examples of cash receipts and payments referred to in paragraph 7.10A(a) are:
(a) the acceptance and repayment of demand deposits of a bank;
(b) funds held for customers by an investment entity; and
(c) rents collected on behalf of, and paid over to, the owners of properties.
7.10C Examples of cash receipts and payments referred to in paragraph 7.10A(b) are advances made for, and the repayment of:
(a) principal amounts relating to credit card customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, for example, those which have a maturity period of three months or less.
7.10D Financial institutions may report cash flows described in paragraph 34.33 on a net basis.
7.10E A financial institution that undertakes the business of effecting or carrying out insurance contracts, other than mutual life assurance companies scoped out of this section in paragraph 7.1A(a), should include the cash flows of their long-term business only to the extent of cash transferred and available to meet the obligations of the company or group as a whole.
OmniPro comment
The three categories in which cash flows should be presented on the cash flow statement are under:
- Operating activities
- Investing activities
- Financing activities
Operating activities
Extract from FRS102: Section 7.4 and Section 7.7-7.9
7.4 Operating activities are the principal revenue-producing activities of the entity.
Therefore, cash flows from operating activities generally result from the transactions and other events and conditions that enter into the determination of profit or loss.
Examples of cash flows from operating activities are:
(a) cash receipts from the sale of goods and the rendering of services;
(b) cash receipts from royalties, fees, commissions and other revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash payments or refunds of income tax, unless they can be specifically identified with financing and investing activities;
(f) cash receipts and payments from investments, loans and other contracts held for dealing or trading purposes, which are similar to inventory acquired specifically for resale; and
(g) cash advances and loans made to other parties by financial institutions.
Some transactions, such as the sale of an item of plant by a manufacturing entity, may give rise to a gain or loss that is included in profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.
7.7 An entity shall present cash flows from operating activities using either:
(a) the indirect method, whereby profit or loss is adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows; or
(b) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed.
Indirect method
7.8 Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred tax, accrued income (expenses) not yet received (paid) in cash, unrealised foreign currency gains and losses, undistributed profits of associates, and non-controlling interests; and
(c) all other items for which the cash effects relate to investing or financing.
Direct method
7.9 Under the direct method, net cash flow from operating activities is presented by disclosing information about major classes of gross cash receipts and gross cash payments. Such information may be obtained either:
(a) from the accounting records of the entity; or
(b) by adjusting sales, cost of sales and other items in the statement of comprehensive income (or the income statement, if presented) for:
(i) changes during the period in inventories and operating receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing cash flows
OmniPro comment
Section 7.7(a) makes it clear that profit or loss is the starting point for the reconciliation to the net cash flow from operating activities. ‘Profit or loss’ is defined in Appendix I of FRS 102 as ‘the total of income less expenses, excluding the components of other comprehensive income’. In effect this is the profit after tax in the profit and loss account.
Section 7 does not specify where the reconciliation of the profit after tax to the cash flow from operating activities should be presented. Therefore, entities have a choice to show this on the face of the cash flow or include it in the notes to the financial statements.
When determining whether an item falls into operating or investing activities will depend on the business the entity is operating in. For example, purchase a land for a property developer who develops the land and sells houses, the purchase of this would fall into operating activities however if this was purchased by a frozen food company for its own use or to rent it for rental purposes as a one off purchase it would be classed as an investing activity.
Operating cash flows can be reported using either the direct or indirect method.
Direct method
The direct method reports the major classes of gross operating cash receipts and gross operating cash payments. These are then aggregated to arrive at the net operating cash flow of the entity. The gross operating receipts and payments can be obtained by adjusting operating profit and loss account items for non-cash items, changes in working capital and other items that relate to investing and financing cash flows. This method may be harder to apply than the indirect method if the accounting systems to not gather this data. See below the example of the direct method:
| Cash flows from operating activities | 2015 | 2014 |
| € | € | |
| Receipts from customers | XXX | XXX |
| Payments to suppliers and employees | (XXX) | (XXX) |
| Interest received | XXX | XXX |
| Dividends received | (XXX) | (XXX) |
| Finance costs paid | XXX | XXX |
| Income taxes paid/refunded | (XXX) | XXX |
| Net cash inflow from operating activities | XXX
|
XXX
|
Indirect method
See below an example of the indirect method with regard to calculating the net cash flow from operating activities. It gives the same result but is laid out differently:
| Reconciliation of profit to net cash inflow from operating activities | 2015 | 2014 |
| € | € | |
| Profit after taxation | XXX | XXX |
| Adjustments for: | ||
| Taxation expense/(income) | XXX | (XXX) |
| Finance expense | XXX | XXX |
| Interest income | (XXX) | (XXX) |
| Operating profit | XXX | XXX |
| Depreciation on property, plant and equipment | XXX | XXX |
| Amortisation of capital grant | (XXX) | (XXX) |
| Decrease in debtors | XXX | XXX |
| Decrease in creditors | (XXX) | (XXX) |
| Loss on disposal of subsidiary | XXX | – |
| Decrease in inventory | XXX | XXX |
| (Profit)/loss on disposal of fixed assets | (XXX) | XXX |
| Amortisation of goodwill and intangibles | XXX | (XXX) |
| Loss/(profit) on disposal of investments | XXX | (XXX) |
| Provision of impairment on property, plant and equipment | XXX | XXX |
| Reversal of prior year impairment on investments | (XXX) | (XXX) |
| (Increase)/decrease in fair value of investment property | (XXX) | XXX |
| Unrealised foreign exchange (gain)/loss on non-operating activities | (XXX) | XXX |
| Non-controlling interest | (XXX) | (XXX) |
| Pension contributions (less than)/more than amount charged | (XXX) | XXX |
| Undistributed profits of associates | (XXX) | (XXX) |
| Gain on pension scheme – non cash item | (XXX)
|
(XXX)
|
| Net cash inflow from operating activities | XXX
|
XXX
|
Investing activities
Extract from FRS102: Section 7.5 and Section 7.10
7.5 Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Examples of cash flows arising from investing activities are:
(a) cash payments to acquire property, plant and equipment (including self-constructed property, plant and equipment), intangible assets and other long-term assets. These payments include those relating to capitalized development costs and self-constructed property, plant and equipment;
(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments classified as cash equivalents or held for dealing or trading);
(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments classified as cash equivalents or held for dealing or trading);
(e) cash advances and loans made to other parties (except those made by financial institutions – see paragraph 7.4(g));
(f) cash receipts from the repayment of advances and loans made to other parties;
(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts, except when the contracts are held for dealing or trading, or the payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts, except when the contracts are held for dealing or trading, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge (see Section 12 Other Financial Instruments Issues), an entity shall classify the cash flows of the contract in the same manner as the cash flows of the item being hedged.
7.10 An entity shall present separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that net presentation is permitted by paragraphs 7.10A to 7.10E. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities.
OmniPro comment
Some examples other than those mentioned above would include:
- cash payments/proceeds arising from acquisition/disposal of subsidiaries and associates
- cash payments/proceeds on purchase/disposal of investments
- cash payments/proceeds on acquisition/disposal of fixed assets (excluding assets purchased on finance lease).
- Dividend received
- Interest received
The cash flows with regard to investing activities should reflect the actual cash flows in the year. Therefore for example additions in the fixed asset note may include fixed assets acquired under hire purchase/finance lease which did not result in a cash outflow, therefore the payments to acquire property, plant and equipment would be reduced to reflect the actual cash paid.
It may also be that some items have not been paid show and the amount owed is included in creditors, in this case the additions figure should only the cash paid i.e. it should deduct any amount included in creditors at the end of the current year but add back the amount included in creditor for fixed assets in the prior year.
Example 3: Need to show only cash paid in the cash flow
Company A has purchased €50,000 of fixed asset on finance lease. In this case the cash flow should show nil cash payments for fixed assets instead, this cash outflow should be netted against the movement on finance leases and hire purchase on the face of the cash flow.
Example 4: Fixed asset not paid at year end
Company A purchased €50,000 of property, plant and equipment on credit which was included in creditors at year end. In the cash flow the actual amount to be shown as fixed asset additions is nil and the movement in trade creditors should be decreased by the €50,000 in the reconciliation of profit to net cash inflow from operating activities.
Example 5: Fixed asset not paid at year end
If we take example 4 and assume in the prior year a fixed asset was purchased for €40,000 but was not paid for at the end of that year. In this years cash flow statement it should show the €40,000 in the line ‘purchases of property, plant and equipment’ and movement in creditors should be reducedby the net €10,000 (i.e. €50,000-€40,000 being the movement in accruals year on year).
When determining whether an item falls into operating or investing activities will depend on the business the entity is operating in. For example purchase a land for a property developer who develops the land and sells houses, the purchase of this would fall into operating activities however if this was purchased by a frozen food company for its own use or to rent it for rental purposes as a one off purchase it would be classed as an investing activity.
Financing activities
Extract from FRS102: Section 7.6 and Section 7.10
7.6 Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of an entity. Examples of cash flows arising from financing activities are:
(a) cash proceeds from issuing shares or other equity instruments;
(b) cash payments to owners to acquire or redeem the entity’s shares;
(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings;
(d) cash repayments of amounts borrowed; and
(e) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.
7.10 An entity shall present separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that net presentation is permitted by paragraphs 7.10A to 7.10E. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities.
OmniPro comment
See cash flow below for examples of financing activities on top of the examples given in Section 7.6 above. Some examples would include:
- Loan repayments
- Leasing payments
- Equity dividends paid
- Dividend paid to non-controlling interests
- Proceeds on share issue
- New loan or debentures issued
Interest and dividends
Extract from FRS102: Section 7.14-7.16
7.14 An entity shall present separately cash flows from interest and dividends received and paid. The entity shall classify these cash flows consistently from period to period as operating, investing or financing activities.
7.15 An entity may classify interest paid and interest and dividends received as operating cash flows because they are included in profit or loss. Alternatively, the entity may classify interest paid and interest and dividends received as financing cash flows and investing cash flows respectively, because they are costs of obtaining financial resources or returns on investments.
7.16 An entity may classify dividends paid as a financing cash flow because they are a cost of obtaining financial resources. Alternatively, the entity may classify dividends paid as a component of cash flows from operating activities because they are paid out of operating cash flows.
OmniPro comment
It is evident from above that entities have a choice as to where dividends and interest paid should be shown, it can be shown either in:
- Operating activities; or
- Financing cash flows as the entity needs to provide a return to the shareholders who provided the capital
It is also evident from above that entities have a choice as to where dividends and interest paid should be shown. It can be shown either in:
- Operating activities; or
- Investing cash flows
Interest costs which are capitalised as part of the option available in Section 25 should be shown in the cash flow in the same location as the asset to which they are attached to.
Income tax
Extract from FRS102: Section 7.17
7.17 An entity shall present separately cash flows arising from income tax and shall classify them as cash flows from operating activities unless they can be specifically identified with financing and investing activities. When tax cash flows are allocated over more than one class of activity, the entity shall disclose the total amount of taxes paid
OmniPro comment
Taxation paid/refunded should be shown separately from the reconciliation of the profit to the reconciliation of profit to net cash inflow from operating activities but is still classed as an operating activity. See this illustrated in the cash flow below. The only exception to the aforementioned point is where capital gains tax in paid, in this case it may be more appropriate to show this within investing activities.
Although no guidance is provided in relation to sales and purchases taxes, it would be usual for these to be shown net in the cash flow statement where the VAT is recoverable/payable. Where an entity is not registered for VAT it should be shown gross in the cash flow. The movement on the net vat liability/refund is shown within operating activities.
Non-controlling interests
OmniPro comment
In the consolidated cash flow statement the dividends paid to non-controlling parties would usually be classed within financing activities.
Cash flows (purchase from and sales to non-controlling parties) which result in a change in ownership where control is not lost in a subsidiary should be shown in cash flows from financing activities.
Acquisition and disposal of subsidiary
OmniPro comment
The acquisition or disposal of a subsidiary where control is obtained/lost should be shown within investing activities. The disposals and acquisitions cannot be netted in the cash flow. The cash flows from such transactions should be shown within investing activities.
Where a subsidiary is acquired only cash flows since the acquisition should be included and the opposite for disposals. This means that the balances on fixed assets, working capital (excluding cash and cash equivalents) and borrowings etc. of the related subsidiary at the date of acquisition or disposal needs to excluded from the cash flow statement. This is done be excluding these in the movement of creditors, debtors etc.
Cash acquired on acquisition of a subsidiary should be shown in investing activities.
Example 5: Cash received as part of the acquisition
Company A acquired company B for €100,000 and acquired cash of €60,000 as part of the subsidiary. The net investment to be shown in investing activities in the cash flow statement of €40,000.
Example 6: Cash received as part of the acquisition
Company A acquired company B for €50,000 and acquired cash of €60,000 as part of the subsidiary. The net investment to be shown in investing activities in the cash flow statement of €10,000 being the net €10,000 received.
Where consideration paid on acquisition is partly in shares and partly in cash, the cash flow statement should only include the cash element. The non-cash element is excluded but an explanation should be provided elsewhere in the notes.
Example 7: Subsidiary acquired partly by way of cash and partly by issuance of shares
Company A acquired 100% of Company B for €100,000 and a further 10,000 shares were issued in Company A to the shareholders in Company B. The cash flow statement should only show the outflow of €100,000.
Example 8: Cash received as part of the acquisition
Company A acquired company B and as part of the purchase it took on the loan liabilities of Company B of €100,000. The €100,000 would be shown as an investing activity on the face of the cash flow.
Foreign currency cash flows
Extract from FRS102: Section 7.11-7.13
7.11 An entity shall record cash flows arising from transactions in a foreign currency in the entity’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow or an exchange rate that approximates the actual rate (for example, a weighted average exchange rate for the period).
7.12 An entity shall translate cash flows of a foreign subsidiary at the exchange rate between the entity’s functional currency and the foreign currency at the date of the cash flow or at an exchange rate that approximates the actual rate (for example, a weighted average exchange rate for the period).
7.13 Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, to reconcile cash and cash equivalents at the beginning and the end of the period, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency must be presented in the statement of cash flows. Therefore, the entity shall remeasure cash and cash equivalents held during the reporting period (such as amounts of foreign currency held and foreign currency bank accounts) at period-end exchange rates. The entity shall present the resulting unrealised gain or loss separately from cash flows from operating, investing and financing activities.
OmniPro comment
Reaslised foreign exchange gains/losses
Where items are purchased in foreign currency there is usually a foreign exchange difference to reflect the fact that the rate at which an invoice was booked differs to the rate on the date of payment, hence a realised foreign exchange gain/loss is posted to the profit and loss.
Individual financial statements –settled transactions
Where the direct method for presenting cash flow statements is utilised there will be no issues with regard to foreign exchange gains/loss as the cash flows will show the actual amount settled in the functional currency.
Where the indirect method is used, any realised foreign exchange gains/losses will be posted to the profit and loss and where these arise from transactions on operating activities no adjustment is required. However where the foreign exchange gain/loss does not relate to operating activities (e.g. on interest received on a loan provided/dividend income which would not be considered operating etc.) that element of the realised foreign exchange gain/loss should be deducted/added back in the reconciliation of net profit to cash flow from operating activities and deducted/added to the cost of the related asset in the financing or investing section whichever is applicable.
Example 9: Settled foreign exchange gain/loss
Company A uses the indirect method in presenting its cash flow statement. During the year it provided a loan for £100,000 which was booked in the accounts at €120,000 on that date. One month later the loan was repaid and €130,000 was received based on the rate on that date. The difference of €10,000 being posted to the profit and loss account as an FX gain.
In the reconciliation of net profit to net cash from operating activities the €10,000 would be deducted and it would then be added to in the investing activities.
Unrealised foreign exchange gains/losses
Any unrealised exchanges gains/loss on monetary assets which do not related to operating activities where they have been booked at one rate and retranslated to year end rate are deducted/added back in the reconciliation of net profit to cash flow from operating activities. These are then added onto/deducted from the related movement in the financing or investing section of the cash flow statement. There would also be an adjustment for the movement on foreign cash balances.
Example 10: Unrealised gain-non operating
Company A provided a loan of £100,000 to Company B during the year which was retranslated to the functional rate as €125,000. At the year end this £100,000 was retranslated to €135,000 with the difference/gain of €10,000 recognised as a foreign exchange gain in the profit and loss. Assume a profit of €50,000 was made in the year.
In the cash flow statement the below would be included
| Profit after taxation | €50,000 |
| Unrealised gain on loan | (€10,000) |
| Net cash inflow from operating activities | €40,000 |
Extract from cash flow statement:
Financing activities
Advance made to third party
| €125,000 (i.e. €135,000-€10,000 gain) |
Section 7.13 makes it clear that differences that arise on translation of foreign currency cash and cash-equivalent balances are not cash flows. They should be disclosed on the cash flow statement to show the exchange difference. See details below.
Example 11: Unrealised foreign exchange on cash and cash equivalents
Company A had £100,000 and £150,000 in cash at 31 December 2013 and 2014 respectively. This was retranslated at a rate of €1=0.80 and €1=0.85 at each year end respectively. The average rate during the year 2014 is €1-0.82. The FX rate to be shown on the face of the balance sheet is
| (£100,000/0.80)-(£100,000/0.85) | € 7,353 loss |
| (£50,000/0.85)-(£50,000/0.82) | €1,524 gain |
| Foreign exchange difference | €5,829 loss |
This €5,829 is shown on the face of the cash flow statement as part of the reconciliation of opening to closing cash equivalents. Therefore this is added back in the reconciliation of profit to net cash flows from operating activities.
Consolidated financial statements
Section 30 provides guidance on translating from a subsidiaries functional currency to a presentational currency for consolidation purposes. The year-end balance sheet is retranslated at the year-end rate and the profit and loss at the average rate with the foreign exchange difference posted to other comprehensive income. However in the consolidated cash flow statement the foreign exchange movement in the cash balances should be shown on the face of the cash flow statement.
In reality it is easier if the subsidiary prepares its cash flow in its functional currency first, then it can be consolidated with the parents.
Example 12: Foreign subsidiaries
Parent A owns a sterling subsidiary, Company B. Parent A’s functional currency is euro. On retranslating the subsidiary a foreign change difference of €100,000 was posted to other comprehensive income and the exchange rate reserve. Company B had £100,000 and £150,000 in cash at 31 December 2013 and 2014 respectively. This was retranslated into the parent functional currency at a rate of €1=0.80p and €1=0.85p at each year end respectively. The average rate for the year used in the translation was €1=0.82p.
| Opening balance = (£100,000/0.80)-(£100,000/0.85) | €7,353 loss |
| Increase (£50,000/0.85)-(£50,000/0.82) | €1,524 gain |
| Foreign exchange difference on cash to be reclassified | €5,829 loss |
This €5,829 is shown on the face of the cash flow statement as part of the reconciliation of opening to closing cash equivalents.
Components of cash and cash equivalents
Extract from FRS102: Section 7.20-7.20A
7.20 An entity shall present the components of cash and cash equivalents and shall present a reconciliation of the amounts presented in the statement of cash flows to the equivalent items presented in the statement of financial position. However, an entity is not required to present this reconciliation if the amount of cash and cash equivalents presented in the statement of cash flows is identical to the amount similarly described in the statement of financial position.
7.20A Entities applying Part 1 General Rules and Formats of Schedule 2 to the Regulations should include as cash, only cash and balances at central banks and loans and advances to banks repayable on demand.
OmniPro comment
Where the movement on the cash balance between the current year and the prior year cannot be determined by reviewing the cash balance stated on the face of balance sheet a reconciliation of a cash and cash equivalent should be provided so as to allow greater clarity for readers of the financial statements. Although an analysis of net debt is not required it would be good practice to include, particularly where there are non-cash items. See an example of such a reconciliation below.
| Analysis of cash and cash equivalent and net debt | At 1 January
2015 |
At 1 January 2015 | Net Cash flow | Other non
cash changes |
At 31 December
2015 |
| € | € | € | € | € | |
| Cash at bank and in hand | XXX | XXX | XXX | XXX | XXX |
| Bank overdraft | (XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
| Cash and cash equivalents | (XXX) | (XXX) | XXX | XXX | (XXX) |
| Bank loans < one year | (XXX) | (XXX) | XXX | XXX | (XXX) |
| Hire purchase agreements | (XXX) | (XXX) | (XXX) | (XXX) | (XXX) |
| Bank loans > one year | (XXX) | (XXX) | XXX | XXX | (XXX) |
| Directors’ loans | (XXX)
|
(XXX)
|
(XXX)
|
(XX)
|
(XXX)
|
| (XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
- Other non-cash changes relate to foreign exchange translation adjustments, new finance leases raised, effective interest rate adjustment including debt issue costs. It also includes shares issued to XX Limited in return for the shares in XX Limited. See further detail at note X.
Non-cash transactions
Extract from FRS102: Section 7.18-7.19
7.18 An entity shall exclude from the statement of cash flows investing and financing transactions that do not require the use of cash or cash equivalents. An entity shall disclose such transactions elsewhere in the financial statements in a way that provides all the relevant information about those investing and financing activities.
7.19 Many investing and financing activities do not have a direct impact on current cash flows even though they affect the capital and asset structure of an entity. The exclusion of non-cash transactions from the statement of cash flows is consistent with the objective of a statement of cash flows because these items do not involve cash flows in the current period. Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabilities or by means of a finance lease;
(b) the acquisition of an entity by means of an equity issue; and
(c) the conversion of debt to equity.
OmniPro comment
Section 7 requires the notes to the financial statements to provide background on non-cash transactions however they do not form part of the cash flow statement. Any equity issued share capital provided as part of an acquisition should not be reported in the cash flow statement as no cash was paid. Instead this should be shown as a non-cash item in the analysis of net debt and a note provided for the material non-cash items. Examples include
- Acquisition of assets by way of finance leases
- Acquisition of entities by way of a share issue
- Conversion of debt to equity
- Effective interest rate adjustments so as to show loans at market rates
Example 13: Effective interest rate adjustments
Company A received a loan of €10,000 at non-market rates from its director which is repayable in 5 years. In this case, the fair value of the loan at a market rate of interest would be €7,000. The difference of €3,000 would be posted as a credit to the profit and loss under Section 11. This is a non-cash item and would not be included in the cash flow statement, instead, it would be deducted in the reconciliation of profit to operating activities as part of the interest income and then disclosed as a non-cash transaction in the notes to the cash flow, which would usually be in the analysis of changes in of net cash/debt.
- Release of loan costs under the effective interest method. This would be a similar adjustment to the above.
Example 14: Non-cash items example disclosure
1) During the year the company acquired Company B in exchange for €100,000. In addition to €50,000 paid in cash, the following non-cash transactions were used to settled the remaining portion of the acquisition:
| Assumption of liabilities | €20,000 |
| Issue of ordinary shares | €30,000 |
2) During the year the company acquired €XXXX of property, plant and equipment under finance and hire purchase agreement.
Example 15: Cash flow statement
| Statement of Cashflows | |||
| For the Year ended 31 December 2015 | |||
| 31-Dec | 31-Dec | ||
| 2015 | 2014 | ||
| Notes | € | € | |
| Cash flows from operating activities | |||
| Cash generated from operations | XXXXX | XXXXX | |
| Taxation (paid)/refunded | (XXXXX) | XXXX | |
| Net cash generated from operating activities | XXXX | XXXX | |
| Cash flows from investing activities | |||
| Purchase of property, plant and equipment | (XXX) | (XXX) | |
| Purchase of intangible fixed assets | (XXX) | (XXX) | |
| Acquisition of subsidiary undertakings (net of cash acquired) | (XXX) | – | |
| Interest received | XXX | – | |
| Dividend received from associates | XXX | – | |
| Dividends received | XXX | – | |
| Payment of contingent acquisition consideration | XXX | – | |
| Sale of subsidiary undertakings (net of cash disposed) | XXX | – | |
| Purchase of investments | (XXX) | (XXX) | |
| Cash acquired on acquisition of the trade | XXX | – | |
| Proceeds from disposal of investment properties | XXX | XXX | |
| Proceeds from disposal of investments | XXX | XXX | |
| Net cash generated/(used in) investing activities | XXX | (XXX) | |
| Cash flows from financing activities | |||
| Interest received | XXX | XXX | |
| Interest paid | (XXX) | (XXX) | |
| Issue cost of long term loans | (XXX) | (XXX) | |
| Dividend paid to equity shareholders | (XXX) | (XXX) | |
| Proceeds received from issue of ordinary shares net of costs | (XXX) | (XXX) | |
| Repayment of capital element on finance lease | (XXX) | (XXX) | |
| Purchase of own shares | (XXX) | (XXX) | |
| Repayment of loans | (XXX) | (XXX) | |
| Preference dividends paid | (XXX) | (XXX) | |
| (XXX) | (XXX) | ||
| Net cash generated/(used in) financing activities | XXXX | (XXXX) | |
| Net increase/(decrease) in cash and cash equivalents | XXX | (XXX) | |
| Translation adjustment | XXX | XXX | |
| Cash and cash equivalents at beginning of year | XXX | XXX | |
| Cash and cash equivalents at end of year | XXX | XXX | |
Principal transition adjustments
1) Cash and cash equivalence
A key difference between old Irish/UK GAAP and FRS 102 is that FRS 102 defines cash and cash equivalents as cash on hand and demand deposits and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value whereas cash was defined in FRS 1 as “cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand. Cash equivalents are investments that have a short term maturity of 3 months or less. Under old GAAP cash equivalents were categorised under liquid resources and not as cash. Therefore on transition entities will need to reclassify such balances on the cash flow statement such that these are shown as cash and cash equivalents.
2) Cash flow exemption for qualifying entities
Section 7 provides an exemption from preparing cash flow statements for entities who are considered qualifying entities. A qualifying entity is an entity which is consolidated into publically available consolidated financial statements that give a true and fair view. Therefore where the entity is a subsidiary and consolidated within the consolidated financial statements no cash flow is required to be prepared.
Under old GAAP, an exemption was only provided to subsidiaries that were 90% owned and that entity was included in consolidated financial statements that are publically available and gave a true and fair view.
On transition, an entity that was previously required to prepare a cash flow as it was less than 90%% owned but is still a subsidiary (i.e. >50% owned or another entity has control of the composition of the board) and consolidated financial statements for the parent company is publicly available in which its results are consolidated then no cash flow statement is required to be prepared.
3) Small companies in the Republic of Ireland prior to the date the EU Directive 2013/34 is enacted required to prepare a cash flow statement
Under old GAAP FRS 1 allowed an exemption for small companies from preparing cash flow statements. As the 2013/34 EU directive has not been enacted in Ireland at this time, a cash flow statement will be required for small entities under FRS 102 up until the date this directive is enacted.
NOTE: this is not applicable to UK entities as the small company legislation has been enacted.
4) Different classification in the cash flow between old GAAP and FRS 102
Old GAAP required cash flows to be separated into the following categories:
- acquisitions and disposals,
- equity dividend paid,
- capital investment and financing investment;
- management of liquid resources;
- operating activities;
- Returns on investment and servicing of finance; and
- Financing activities.
FRS 102 only provides three categories, namely; investing activities, financing activities and operating activities. Therefore on transition entities will need to revisit the cash flow statement to ascertain where the cash flows fall into under FRS 102. Refer to the example cash flow above for guidance.
Other disclosures
Extract from FRS102: Section 7.21
7.21 An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the entity. Cash and cash equivalents held by an entity may not be available for use by the entity because of, among other reasons, foreign exchange controls or legal restrictions.
OmniPro comment
See example disclosure in relation to the above:
Example 16: Restricted funds disclosure
The company holds €XXX in an escrow bank account for future funds to be paid on the purchase of XXXX. These funds may be payable to the previous owner if certain financial targets are archived in the next two years which were agreed at the time of the purchase.
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| Analysis of cash and cash equivalent and net debt | At 1 January
2015 |
At 1 January 2015 | Net Cash flow | Other non
cash changes |
At 31 December
2015 |
| € | € | € | € | € | |
| Cash at bank and in hand | XXX | XXX | XXX | XXX | XXX |
| Bank overdraft | (XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
| Cash and cash equivalents | (XXX) | (XXX) | XXX | XXX | (XXX) |
| Bank loans < one year | (XXX) | (XXX) | XXX | XXX | (XXX) |
| Hire purchase agreements | (XXX) | (XXX) | (XXX) | (XXX) | (XXX) |
| Bank loans > one year | (XXX) | (XXX) | XXX | XXX | (XXX) |
| Directors’ loans | (XXX)
|
(XXX)
|
(XXX)
|
(XX)
|
(XXX)
|
| (XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
(XXX)
|
i) Other non-cash changes relate to foreign exchange translation adjustments, new finance leases raised, effective interest rate adjustment including debt issue costs. It also includes shares issued to XX Limited in return for the shares in XX Limited. See further detail at note X.
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| Statement of Cashflows | ||||
| For the Year ended 31 December 2015 | ||||
| 31-Dec | 31-Dec | |||
| 2015 | 2014 | |||
| Notes | € | € | ||
| Cash flows from operating activities | ||||
| Cash generated from operations | XXXXX | XXXXX | ||
| Taxation (paid)/refunded | (XXXXX) | XXXX | ||
| Net cash generated from operating activities | XXXX | XXXX | ||
| Cash flows from investing activities | ||||
| Purchase of property, plant and equipment | (XXX) | (XXX) | ||
| Purchase of intangible fixed assets | (XXX) | (XXX) | ||
| Acquisition of subsidiary undertakings (net of cash acquired) | (XXX) | – | ||
| Interest received | XXX | – | ||
| Dividend received from associates | XXX | – | ||
| Dividends received | XXX | – | ||
| Payment of contingent acquisition consideration | XXX | – | ||
| Sale of subsidiary undertakings (net of cash disposed) | XXX | – | ||
| Purchase of investments | (XXX) | (XXX) | ||
| Cash acquired on acquisition of the trade | XXX | – | ||
| Proceeds from disposal of investment properties | XXX | XXX | ||
| Proceeds from disposal of investments | XXX | XXX | ||
| Net cash generated/(used in) investing activities | XXX | (XXX) | ||
| Cash flows from financing activities | ||||
| Interest received | XXX | XXX | ||
| Interest paid | (XXX) | (XXX) | ||
| Issue cost of long term loans | (XXX) | (XXX) | ||
| Dividend paid to equity shareholders | (XXX) | (XXX) | ||
| Proceeds received from issue of ordinary shares net of costs | (XXX) | (XXX) | ||
| Repayment of capital element on finance lease | (XXX) | (XXX) | ||
| Purchase of own shares | (XXX) | (XXX) | ||
| Repayment of loans | (XXX) | (XXX) | ||
| Preference dividends paid | (XXX) | (XXX) | ||
| (XXX) | (XXX) | |||
| Net cash generated/(used in) financing activities | XXXX | (XXXX) | ||
| Net increase/(decrease) in cash and cash equivalents | XXX | (XXX) | ||
| Translation adjustment | XXX | XXX | ||
| Cash and cash equivalents at beginning of year | XXX | XXX | ||
| Cash and cash equivalents at end of year | XXX | XXX | ||
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Direct method
The direct method reports the major classes of gross operating cash receipts and gross operating cash payments. These are then aggregated to arrive at the net operating cash flow of the entity. The gross operating receipts and payments can be obtained by adjusting operating profit and loss account items for non-cash items, changes in working capital and other items that relate to investing and financing cash flows. This method may be harder to apply than the indirect method if the accounting systems to not gather this data. See below the example of the direct method:
| Cash flows from operating activities | 2015 | 2014 |
| € | € | |
| Receipts from customers | XXX | XXX |
| Payments to suppliers and employees | (XXX) | (XXX) |
| Interest received | XXX | XXX |
| Dividends received | (XXX) | (XXX) |
| Finance costs paid | XXX | XXX |
| Income taxes paid/refunded | (XXX) | XXX |
| Net cash inflow from operating activities | XXX
|
XXX
|
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