G L O B A L A C C O U N T A N T - G R O U P S T A T E M E N T O F C A S H F L O W S - S T E V E C O L L I N G S , F M A A T F C C A w w w . g l o b a l a c c o u n t a n t w e b . c o m

by Steve Collings, FMAAT FCCA

Students attempting financial reporting papers will need an awareness of the concept of the statement of cash flows. Under IFRS, IAS 7 Statement of Cash Flows deals with principles underlying the preparation of such a financial statement. It is worth mentioning at this point that the statement of cash flows forms part of the primary financial statements of a reporting entity, and therefore it is given equal prominence to that of the statement of profit or loss (income statement) and statement of financial position.

The logic behind the statement of cash flows is to enable the user of the financial statements to understand how a reporting entity has both generated cash in an accounting period and how the entity has spent that cash.

The principles in IAS 7 require various cash flows to be classified according to activity and IAS 7 stipulates three types of activity:

• Operating activities

• Investing activities

• Financing activities

Operating activities are the day-to-day, revenue-producing activities of the business that are not investing or financing activities. It follows, therefore, that this activity is essentially a ‘default’ category encompassing all cash flows that do not fall within the classification of ‘investing’ or ‘financing’.

Investing activities are those activities which involve the acquisition and disposal of long-term assets, such as the acquisition and disposal of non-current assets and the acquisition and disposal of a subsidiary.

Financing activities are those activities which change the equity and borrowing composition of a company. For example, a reporting entity may issue additional shares during the accounting period and such cash flows arising from the share issue will be classified as a financing activity.

When students progress to more advance studies, they must understand the basic mechanisms of how the statement of cash flows is prepared. Once this knowledge is sewn up, students can then move on to the more complex statement of cash flows, which is the consolidated statement of cash flows.

Consolidated statement of cash flows

In addition to the individual financial statements that members of a group will prepare, the parent company will also prepare consolidated financial statements. Again, it is important to understand at the outset the principal objective of consolidated financial statements which is to show the results of the group in line with its economic substance - that of a single reporting entity.

The group statement of cash flows is prepared from the consolidated financial statements and as such reflects the cash flows of the group. Students often have concerns when it comes to preparing the consolidated statement of cash flows; however, the principles underpinning the group statement of cash flows is essentially the same as preparing a statement of cash flows at individual company level.

The issue students need to appreciate is that when a group statement of cash flows is being prepared, there are additional cash flows to consider, such as:

• Dividends paid out to non-controlling interests

• Dividends received from equity accounted investees, such as associates

• Cash flows arising from the acquisition or disposal of subsidiary companies

GROUP STATEMENT OFCASH FLOWS

G L O B A L A C C O U N T A N T - G R O U P S T A T E M E N T O F C A S H F L O W S - S T E V E C O L L I N G S , F M A A T F C C A w w w . g l o b a l a c c o u n t a n t w e b . c o m

I will consider each of the above three additional cash flows as follows.

Dividends paid to non-controlling interests

There are various transactions that affect non-controlling interests (NCIs) (remember non-controlling interests are the additional investors who hold the remainder of the shares in the subsidiary company), such as:

• Proposed dividends to NCIs

• NCIs share of foreign exchange losses

• NCIs share of after-tax profit

• NCIs share of any revaluation gains/losses

The dividend paid to NCIs can be calculated as a balancing figure by way of a control account (or a ‘T’ account if you prefer) as follows:

DEBIT CREDIT

Opening NCI balance b/fwd X

Dividend proposed X

Share of profit after tax X

Share of revaluation gain X

Share of foreign exchange loss X

Dividends paid in the year X*

Closing NCI balance c/fwd Y

X X

Closing balance c/fwd (proof): X

NCI X

Proposed dividend to the NCIs X

X

* = balancing figure

Dividends received from associates and joint ventures

Again, the calculation of dividends received from associates and joint ventures can be calculated using a control account (or ‘T’ account if you prefer):

DEBIT CREDIT

Fixed Asset Investments b/fwd X

New Shares X

Share of Profit after Tax X

Dividends Received from Associate

X*

Closing Balance c/fwd Y

X X

Closing Balance c/fwd (proof):

Fixed asset investment c/fwd X

Dividends Due from Associates X

X

* = balancing figure

Worked example

Extracts from the financial statements of Alicia Co for the year ended 31 December 2012 are as follows:

Statement of Financial Position 2012$,000

2011$,000

Net assets in associate 300 280

Proposed dividend to parent 60 65

Proposed dividend to NCI 4 8

Non-controlling interests 54 34

Statement of profit or loss

Income from associate 24

Non-controlling interest (45)

Statement of changes in equity

Dividends on ordinary shares (95)

You are required to show how the above items will be dealt with in the statement of cash flows of Alicia Co.

SOLUTION $’000 $’000

Dividend from associate (W1) 4

Dividend paid to NCIs (W2) (29)

Equity dividend paid (W3) (100)

Workings DR CR

W1

Net assets in associates b/fwd 280

Share of Profit 24

Dividends received (bal figure) 4

Balance c/fwd 300

304 304

W2

Opening bal - Dividend 8

- NCI 34

To Statement of Profit/Loss 45

Dividends paid to NCI (bal figure) 29

Balance c/fwd - dividend 4

- NCI 54

87 87

W3

Balance b/fwd 65

Per SoCIE 95

Dividends Paid to group (bal figure) 100

Bal c/fwd 60

160 160

Acquisition and disposal of subsidiary undertakings

The key to dealing with the cash flows that arise as a result of an acquisition or a disposal of a subsidiary undertaking is to deal with it in a logical manner. Such issues are faced in a higher level financial reporting paper and there are some important issues to keep in mind as I discuss below.

Parent acquires a subsidiary in the periodWhen calculating the operating cash flows, remember to subtract inventory, receivables and payables etc at the date of acquisition from the movement on these items.

Parent disposes of a subsidiary in the periodWhen calculating the operating cash flows, remember to add inventory, receivables and payables etc at the date of acquisition from the movement on these items.

When comparing the group statements of financial position, each of the individual net assets of a subsidiary that has been acquired, or disposed of, in the accounting period must be excluded. This is because the overall net cash effect has already been dealt with as a purchase of a subsidiary and net cash (or overdraft) acquired.

Worked example

Lucas Co acquired Gabriella Co for $22m during the year to 31 December 2012. The terms of the acquisition included consideration of 3 million 25c shares with a market value of $4 each. The balance was paid in cash.

On the date of acquisition, the net assets of Gabriella were as follows:$’000

Tangible non-current

assets

13,000

Inventories 8,995

Trade and other receivables

14,280

Cash at bank 2,830

Trade and other payables

(23,224)

Bank overdraft (5,182)

NCI (5)

10,694

You are required to show how the above will be dealt with in the group statement of cash flows.

Solution

The Lucas GroupGroup Statement of Cash Flows (extract)as at 31 December 2012

Notes to the group statement of cash flows (extract)

$’000

Net Assets Acquired

Tangible non-current assets 13,000

Inventories 8,995

Trade and other receivables 14,280

Cash at Bank 2,830

Trade and other payables (23,224)

Bank overdraft (5,182)

NCI (5)

10,694

Goodwill (balancing figure) 11,306

22,000

Satisfied by:

Shares allotted (3000 x $4) 12,000

Cash (Balancing figure) 10,000

22,000

$’000

Investing Activities

Purchase of Subsidiary (10,000)

Overdraft acquired on acquisition (5,182 less 2,830)

(2,352)

Worked exampleNow assume that the pre-tax profit of the Lucas Group for the year was $20m. Included in the pre-tax profit are depreciation charges of $3.2m and in the year the Lucas Group sold an item of machinery with a net book value of $1.1m for $1m. The statement of financial position extracts are as follows:

2012 2011$’000 $’000

Tangible non-current assets 165,110 143,228

Inventories 92,113 60,142

Trade and other receivables 45,687 23,164

Trade and other payables 75,897 41,231

You are required to show the impact of the above on the group statement of cash flows.

Solution

$,000 $,000Profit before tax 20,000Loss on disposal of non-current asset 100Depreciation charge 3,200Increase in inventory (92,113 - (60,142 + 8,995)) (22,976)Increase in receivables (45,687 - (23,164 + 14,280)) (8,243)Increase in payables (75,897 - (41,231 + 23,224)) 11,442Net cash flow from operating activities 3,523

Investing activitiesPurchase of tangible non-current assets (W1) (13,182)Sale of non-current assets 1,000 (12,182)

Purchase of subsidiary (see previous example) (10,000)Overdraft acquired with subsidiary (2,352) (12,352)

W1:Opening balance b/fwd 143,228Subsidiary acquired (see previous example) 13,000Depreciation charge (3,200)Disposals (1,100)Balance c/fwd (165,110)Additions = balancing figure 13,182

The above worked examples for subsidiaries concentrated on the acquisition of a subsidiary during an accounting period. It is not uncommon for parent companies to dispose of a subsidiary and the cash effects of such disposals will affect the group statement of cash flows.

Worked example Alex Inc has held a 75% investment in James Inc for several years. On 31 December 2012, Alex Inc disposed of the investment in its entirety for $1.5 million in cash.

Extracts from James’s statement of financial position are as follows:

$,000Inventories 489Receivables 525Cash at bank 110

The consolidated statement of financial position for the Alex Group as at 31 December 2012 include: 2012 2011 $,000 $,000Inventories 1,645 1,983Receivables 4,385 4,662Cash 410 165

You are required to show how the disposal of the investment in James Inc will affect the statement of cash flows for Alex Inc for the year ended 31 December 2012.

Solution

Alex Group IncGroup statement of cash flows (extract)for the year ended 31 December 2012 $,000Profit before tax XIncrease in inventories (1,645 + 489 - 1,983) (151)Increase in receivables (4,385 + 525 - 4,662) (248)Net cash from operating activities X

Acquisitions and disposalsDisposal of subsidiary 1,500Net cash disposed of in subsidiary (110)

Notes to the group statement of cash flows (extract)

Net assets disposed of:Inventories 489Receivables 525Cash 110 Non-controlling interests (X) XProfit / (loss) on disposal X(X) 1,500Satisfied by:Cash 1,500

ConclusionThis article has considered the preparation of a group statement of cash flows using a step-by-step approach in order to aid students understand the steps required. It is important that question practise includes an appropriate level and number of exam standard questions (attempted under exam conditions). With adequate preparation and an understanding as to why and how figures are included in the group statement of cash flows, students should comfortably pass any examination question requiring the preparation of a group statement of cash flows.

Steve Collings FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd and the author of ‘IFRS For Dummies’. He is also the author of ‘Interpretation and Application of International Standards on Auditing’, ‘Financial Accounting For Dummies’ and ‘Frequently Asked Questions in IFRS’ and was named ‘Accounting Technician of the Year’ at the 2011 British Accountancy Awards. Follow Steve on Twitter - @stecollings