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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-7/” type=”big” color=”red”] Return to Section 7 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” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]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 is paid, in this case it would be more appropriate to show this within investing activities.
Although no guidance is provided in relation to sales and purchase 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 6: Cash received as part of the acquisition
Company A acquired company B for CU100,000 and acquired cash of CU60,000 as part of the subsidiary. The net investment to be shown in investing activities in the cash flow statement of CU40,000.
Example 6a: Cash received as part of the acquisition
Company A acquired company B for CU50,000 and acquired cash of CU60,000 as part of the subsidiary. The net investment to be shown in investing activities in the cash flow statement of CU10,000 being the net CU10,000 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 CU100,000 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 CU100,000.
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 CU100,000. The CU100,000 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 FC100,000 which was booked in the accounts at CU120,000 on that date. One month later the loan was repaid and CU130,000 was received based on the rate on that date. The difference of CU10,000 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 CU10,000 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 FC100,000 to Company B during the year which was retranslated to the functional currency as CU125,000. At the year end this FC100,000 was retranslated to CU135,000 with the difference/gain of CU10,000 recognised as a foreign exchange gain in the profit and loss. Assume a profit of CU50,000 was made in the year.
In the cash flow statement the below would be included
|
Profit After Taxation |
CU50,000 |
|
Unrealised Gain on Loan |
(CU10,000) |
|
Net Cash Inflow from Operating Activities |
CU40,000 |
Extract from cash flow statement:
Financing activities
| Advance made to third party | CU125,000 (i.e. CU135,000-CU10,000 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 FC100,000 and FC150,000 in cash at 31 December 2014 and 2015 respectively. This was retranslated at a rate of CU1=FC0.80 and CU1=0.85 at each year end respectively. The average rate during the year 2015 is CU1-FC0.82. The FX rate to be shown on the face of the balance sheet is
|
(FC100,000/0.80)-(FC100,000/0.85) |
CU 7,353 loss |
|
(FC50,000/0.85)-(FC50,000/0.82) |
CU2,151 gain |
|
Foreign Exchange Difference |
CU9,504 loss |
This CU9,504 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 CU100,000 was posted to other comprehensive income and the exchange rate reserve. Company B had FC100,000 and FC150,000 in cash at 31 December 2013 and 2014 respectively. This was retranslated into the parent functional currency at a rate of CU1=FC0.80p and CU1=FC0.85p at each year end respectively. The average rate for the year used in the translation was CU1=FC0.82p.
|
Opening Balance = (FC100,000/0.80)-(FC100,000/0.85) |
CU 7,353 loss |
|
Increase (FC50,000/0.85)-(FC50,000/0.82) |
CU2,151 loss |
|
Foreign Exchange Difference on Cash to be Reclassified |
CU9,504 loss |
This CU9,504 is shown on the face of the cash flow statement as part of the reconciliation of opening to closing cash equivalents.
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