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Contents
7.1.1 Extract from FRS102: Section 7.1.
7.1.2.2 Entities exempt from the requirements to provide cash flow statements.
7.2.1 Extract from FRS102: Section 7.2.
7.2.2.2 The criteria for recognition as cash and cash equivalents.
7.3 Information to be presented in the statement of cash flows.
7.3.1 Extract from FRS102: Section 7.3 and Section 7.10A-7.10E.
7.3.2.1 Categories of Cash Flows.
7.3.2.2 Cash flows permitted if reported on a net basis.
7.4.1 Extract from FRS102: Section 7.4 and Section 7.7-7.9.
7.4.2.1 Operating activities -defined.
7.4.2.1.1 Assessing whether an item is an operating or investing activity cash flow.
7.4.2.2 Examples of cash flows from operating activities.
7.4.2.3 Presenting cash flows from operating activities.
7.4.2.3.2.1 Illustration of the indirect method.
7.4.2.3.1.3.1 Illustration of the requirements of the Direct Method.
7.5.1 Extract from FRS102: Section 7.5 and Section 7.10.
7.5.2.1 Investing Activities Defined.
7.5.2.2 Example of cash flow items classified as investing activities.
7.5.2.3 Identifying the actual cash paid for the cash flow Investing Activities.
7.5.2.3.1 Need to show only cash paid in the cash flow- fixed assets on finance lease.
7.5.2.3.2 Fixed Asset not paid at year end.
7.5.2.4 Cash flow permitted to be reported on a net basis.
7.6.1 Extract from FRS102: Section 7.6 and Section 7.10.
7.6.2.1 Financing activities defined.
7.6.2.2 Examples of cash flow items classified as financing activities.
7.6.2.3 Cash flow permitted to be reported on a net basis.
7.7.1 Extract from FRS102: Section 7.14-7.16.
7.7.2.1 Treatment of interest cost capitalised.
7.8.1 Extract from FRS102: Section 7.17.
7.8.2.2 Treatment of Capital Gains Tax.
7.8.2.3 Sales and Purchase Taxes.
7.9 Non-controlling interests-consolidated financial statements.
7.9.1.1 Dividends paid to non-controlling interests.
7.9.1.2 Cash flow for purchase or sale of part of subsidiary where control is not lost.
7.10 Acquisition and disposal of subsidiary.
7.10.1.2 Examples illustrating treatment of acquisitions.
7.10.1.2.1 Cash received as part of acquisition.
7.10.1.2.2 Acquisition part funded by cash and shares.
7.10.1.2.3 Loans assumed as part of acquisition.
7.11 Foreign currency cash flows.
7.11.1 Extract from FRS102: Section 7.11-7.13.
7.11.2.1 Realised foreign exchange gains/losses explained.
7.11.2.1.1 Individual financial statements –settled transactions.
7.11.2.2. Unrealised foreign exchange gains/losses.
7.11.2.2.1.1 Unrealised gain-non-operating.
7.11.2.2.2 Unrealised foreign exchange on cash and cash equivalents.
2.11.2.2.3 Consolidated financial statements.
7.12 Components of cash and cash equivalents.
7.12.1 Extract from FRS102: Section 7.20-7.20A.
7.13.1 Extract from FRS102: Section 7.18-7.19.
7.13.2.2 Examples of non-cash transactions.
7.13.2.3 Non-cash items sample disclosure.
7.14 Sample of Cash Flow Statement.
7.15 Other disclosures – Cash and cash equivalents not available for use.
7.15.1 Extract from FRS102: Section 7.21.
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7.4 Operating activities
7.4.1 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
7.4.2 OmniPro comment
7.4.2.1 Operating activities – defined
Section 7.4 of FRS102 defines investing activities as the principal revenue providing activities of the entity. In essence the cash flows arise from day to day trading activities (other than one off profit/loss on disposal of fixed assets)
7.4.2.1.1 Assessing whether an item is an operating or investing activity cash flow
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.
7.4.2.2 Examples of cash flows from operating activities
Examples of cash flow from such activities as per Section 7.4 of FRS102 include
(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.
See example 3 at 7.4.2.3.1 for further examples of operating activity cash flows
7.4.2.3 Presenting cash flows from operating activities
7.4.2.3.1 Overview
Section 7.7 of FRS102 gives an entity a choice to use either the direct method (see 7.4.2.3.1.2) or the indirect method (see 7.4.2.3.1.1)
7.4.2.3.2 Indirect Method
Section 7.7(a)of FRS102 under the indirect method 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.
7.4.2.3.2.1 Illustration of the indirect method
See application of the indirect method and the requirements of Section 7.8 of FRS102 in example 2 below with regard to calculating the net cash flow from operating activities. It gives the same result as the direct method but is laid out differently.
Example 3: Cash flows from operating activities – Indirect Method
7.4.2.3.1.3 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 do not gather this data. See below the example of the direct method:
7.4.2.3.1.3.1 Illustration of the requirements of the Direct Method
Example 4: Cash flows from operating activities – Direct Method
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Examples:
Example 1: Cash and cash equivalents. Example 2: Cash and cash equivalents. Example 3: Cash flows from operating activities – Indirect Method. Example 4: Cash flows from operating activities – Direct Method. Example 5: Need to show only cash paid in the cash flow – fixed assets on finance lease. Example 6: Fixed asset not paid at year end. Example 7: Fixed asset not paid at year end. Example 8: Cash received as part of the acquisition. Example 9: Cash received as part of the acquisition. Example 10: Subsidiary acquired partly by way of cash and partly by issuance of shares. Example 11: Loans assured as part of the acquisition. Example 12: Settled foreign exchange gain/loss. Example 13: Unrealised gain-non-operating. Example 14: Unrealised foreign exchange on cash and cash equivalents. Example 15: Foreign subsidiaries. Example 16: Analysis of cash and cash equivalent and net debt. Example 17: Effective interest rate adjustments. Example 18: Non-cash items example disclosure. Example 19: Cash flow statement – see below.
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