Statement of Cashflows

Statement of cash flows

Academic Resource CenterStatement of cash flowsPage *

Typical coverage of US GAAPPurpose and scopeContent, format and classificationPreparation


Executive summaryIn general, the requirements under IFRS and US GAAP are quite similar. There are some differences with regard to classification among operating, investing and financing activities. The most notable of these are the differences in interest and dividends paid and received: Under IFRS, interest and dividends paid can be classified either as operating or financing cash flows. Interest and dividends received can be classified either as operating or investing cash flows. Under US GAAP, interest paid, interest received and dividends received are all classified as operating cash flows. Dividends paid are classified as financing cash flows.


Primary pronouncementsUS GAAPASC 230, Statement of Cash FlowsIFRSIAS 7, Statement of Cash Flows


Progress on convergenceIn October 2008, the IASB and the FASB issued a joint Discussion Paper (DP), Preliminary Views on Financial Statement Presentation. The objective of the Boards joint project was to create a standard that requires entities to organize financial statements in a manner that clearly communicates an integrated financial picture of the entity. There was a staff draft of an exposure draft (staff draft) issued on this topic on July 1, 2010. The Boards had tentatively proposed presenting cash flows using the direct method. In conjunction with the issuance of the staff draft, the Boards engaged in a targeted outreach program, the principal outcome of which was a realization that respondents have concerns about the process of applying a direct method cash flow model. To date, the Boards have not reached any tentative decisions on the proposed model and have delayed further effort on cash flow reporting convergence to focus on convergence projects that are deemed to have higher priority.


Purpose and scopeAccording to ASC 230-10-10-1, the primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period. Cash and cash equivalents are defined.SimilarSimilarIFRSUS GAAP


Purpose and scopeIFRSIAS 7 applies to all enterprises for each period for which financial statements are presented. US GAAPASC 230-10-15-4 exempts defined benefit plans and other plans with similar characteristics that present similar financial information, along with certain investment companies, from the scope.


Content, format and classificationCash flows are presented in three classifications: operating, investing and financing activities. The totals from the three activities (operating, investing, financing) are summed and this balance is reconciled with the beginning and ending cash (and cash equivalents) balances. SimilarOperating, investing and financing activities are specifically defined.Similar, except for some differences explained on a later slide.IFRSUS GAAPBoth the direct and indirect method of presenting cash flows from operations are allowed. SimilarSimilarEntities must disclose their policy for determining which items are cash equivalents. Similar


Content, format and classificationBank overdraftsIFRSOverdrafts that are payable on demand are included as cash and cash equivalents if considered to be an integral part of an enterprises cash management. Bank borrowings (which are considered a financing activity) are distinguished from bank overdrafts by asserting that, in the case of overdrafts, the balance fluctuates from positive to overdrawn and should be shown as a component of cash and cash equivalents.US GAAPDoes not address bank overdrafts although they are typically considered to be liabilities and are included in the financing section of the statement of cash flows. Convergence: The staff draft issued July 1, 2010 specifies that bank overdrafts should be presented in the debt category of the financing section of the statement of financial position.


Content, format and classificationInterest and dividendsIFRSPermits an entity: (a) to classify interest and dividends paid or received as operating cash flows; or (b) to classify interest and dividends paid as financing cash flows and interest and dividends received as investing cash flows. However, interest and dividends must be classified in a consistent manner from period to period. US GAAPRequires that interest paid and interest and dividends received be classified as operating cash flows. Dividends paid are a financing cash flow because they are considered a cost of obtaining resources.


In practice, there may be little practical significance to this difference because IAS 7 requires separate disclosure of interest paid and received and of dividends paid and received.

Summary of treatment of interest and dividends:

Content, format and classificationInterest and dividends

Cash flow classificationTransactionIFRSUS GAAPInterest paid Operating or financingOperatingInterest receivedOperating or investingOperatingDividends paidOperating or financingFinancingDividends receivedOperating or investingOperating


Content, format and classificationIncome taxesIFRSRequires that cash payments or refunds of income taxes be classified as operating activities unless they can be specifically identified with financing or investing activities. In that case, the tax cash flows may be classified as financing or investing activities, as appropriate. Statements would not necessarily result in a loss of comparability with US GAAP since IFRS requires disclosure of the total amount of income taxes paid. US GAAPRequires that income taxes paid be classified as an operating cash flow. Convergence: The staff draft issued July 1, 2010, specifies income taxes would be a separate section of the balance sheet, the statement of comprehensive income and the statement of cash flows.


Content, format and classificationIndirect methodIFRSThe particular income line item that must begin the reconciliation is not specified. Thus, an entity could begin the reconciliation under IFRS with operating income. US GAAPWhen using the indirect method of presenting operating net cash flows, US GAAP requires a reconciliation from net income to net cash flows from operating activities (ASC 230-10-45-28).


Content, format and classificationDirect methodIFRSThis reconciliation is not required.US GAAPASC 230-10-45-30 requires that an entity using the direct method of reporting net cash flows from operating activities must provide (in a separate schedule) a reconciliation of net income to net cash flows from operating activities. This has little practical significance, however, because few enterprises in the United States use the direct method. The AICPA Accounting Trends and Techniques 2012 reports that 495 companies of the 500 surveyed in 2011 used the indirect method of presenting operating cash flows. Convergence: The Boards had tentatively proposed presenting cash flows using the direct method (including operating cash flows) and requiring the presentation of an indirect reconciliation of operating income to operating cash flows in the notes to financial statements. In the Staff Paper presented to the combined Boards at their March 2012 meeting, based on outreach to preparers and users of cash flow statements, there was little support for the direct method. To date, the Boards have not reached any tentative decisions on the proposed model and have delayed further effort on cash flow reporting convergence to focus on convergence projects that are deemed to have higher priority.


Content, format and classificationComponents of cash and cash equivalentsIFRSRequired disclosure of the components of cash and cash equivalents.

The total cash and cash equivalents presented in the statement of cash flows does not need to agree to a single line item in the statement of financial position. Entities must disclose a reconciliation of the components of cash and cash equivalents to the amounts presented on the statement of financial position. Thus, while users of a statement of cash flows prepared might not be able to trace changes in cash and cash equivalents directly between the statement of financial position and the statement of cash flows, this difference from US GAAP has little practical significance.US GAAPNo required disclosure of the components of cash and cash equivalents.Requires that the cash and cash equivalents line item in the statement of cash flows equals the cash and cash equivalents in the statement of financial position.


Example 1: Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year ended December 31, 2012. BDI wants to see what the statement would look like using US GAAP as well as IFRS. On the next slides are the balance sheet and statement of income account balances, and some additional information.Statement of cash flows example

Prepare the following:A statement of cash flows using US GAAP.A statement of cash flows using IFRS with net income for the reconciliation of income to operating cash flows.A statement of cash flows using IFRS with operating income for the reconciliation of income to operating cash flows.


Example 1 (continued):Balance sheet accounts:Statement of cash flows example

As of January 1, 2012As of December 31, 2012Cash$ 555,000$ 674,480Accounts receivable157,800149,000Inventory254,600269,000Prepaid expenses59,00062,000Equipment875,000875,000Accumulated depreciation(120,000)(175,000)Land 500,000 450,000Total assets$2,281,400$2,304,480

As of January 1, 2012As of December 31, 2012Accounts payable$ 95,000$ 87,500Accrued liabilities45,00049,800Notes payable1,200,0001,050,000Common stock400,000400,000Retained earnings 541,400 717,180Total liabilities and equity$2,281,400$2,304,480


Example 1 (continued):Income statement balances:Statement of cash flows example

For the year ended December 31, 2012Sales$1,300,500Interest revenue 5,000Dividend revenue4,500Cost of goods sold(750,500)Salary expense(125,500)Depreciation expense(55,000)Other operating expenses(49,800)Loss on sale of land(5,000)Interest expense(23,000)Income tax expense (105,420)Net income$ 195,780


Statement of cash flows exampleExample 1 (continued):Other information:The following account balances are all zero at both the beginning and end of the year: interest payable, interest receivable, dividends payable, dividends receivable and income taxes payable.BDI does not include any interest or dividend cash flows in the operating section of the statement of cash flows when it prepares its statement under IFRS.BDI uses the indirect method for the operating section for both US GAAP and IFRS.As of December 31, 2012, BDI has one bank account balance that is overdrawn. The overdraft amount is $12,000. BDI has not yet moved this from its cash account into the liabilities section of its balance sheet. Overdrafts are an integral part of BDIs cash management.BDI paid dividends of $20,000 during 2012.BDI paid income taxes of $7,000 that were attributable to financing activities. It paid income taxes of $2,000, all attributable to investing activities.BDI sold land this year with a cost basis of $50,000. It reported a $5,000 loss on the sale.


Example 1 solution:Statement of cash flows exampleUS GAAP

BDIStatement of cash flows For the year ended December 31, 2012Operating activitiesNet income$195,780Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense$55,000Loss on sale of land5,000Decrease in accounts receivable 8,800Increase in inventory (14,400)Increase in prepaid expenses (3,000)Decrease in accounts payable (7,500)Increase in accrued liabilities 4,800Net cash provided by operating activities 244,480


*Note that the cash balance at December 31, 2012, must exclude bank overdrafts of $12,000.Statement of cash flows exampleUS GAAPExample 1 solution (continued):

Investing activitiesSale of land$45,000Net cash provided by investing activities$ 45,000Financing activitiesBorrowings loan repayments(150,000)Borrowings bank overdraft12,000Payment of dividends(20,000)Net cash used in financing activities(158,000)Net increase in cash131,480Cash at January 1, 2012555,000Cash at December 31, 2012*$686,480


Statement of cash flows exampleIFRS reconciling to net income

BDIStatement of cash flows For the year ended December 31, 2012Operating activitiesNet income$195,780Adjustments to reconcile net income to net cash provided by operating activities: Interest revenue$(5,000)Dividend revenue(4,500)Depreciation expense55,000Loss on sale of land5,000Interest expense23,000Income taxes paid due to investing and financing activities9,000Decrease in accounts receivable 8,800Increase in inventory(14,400)Increase in prepaid expenses(3,000)Decrease in accounts payable(7,500)Increase in accrued liabilities 4,800Net cash provided by operating activities $266,980


Statement of cash flows exampleIFRS reconciling to net income

Investing activitiesSale of land$45,000Receipt of interest5,000Receipt of dividends 4,500Income taxes paid due to investing activities(2,000)Net cash provided by investing activities$ 52,500Financing activitiesBorrowings loan repayment(150,000)Payment of interest(23,000)Payment of dividends(20,000)Payment of income taxes(7,000)Net cash used in financing activities (200,000)Net increase in cash119,480Cash at January 1, 2012555,000Cash at December 31, 2012$674,480


Statement of cash flows exampleIFRS reconciling to operating income * Components of operating income include sales, cost of goods sold, salary expense, depreciation expense and other operating expenses.

BDIStatement of cash flows For the year ended December 31, 2012Operating activitiesOperating income*$319,700Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation expense$55,000Income taxes paid(96,420)Decrease in accounts receivable 8,800Increase in inventory(14,400)Increase in prepaid expenses(3,000)Decrease in accounts payable(7,500)Increase in accrued liabilities 4,800Net cash provided by operating activities $266,980


Statement of cash flows exampleIFRS reconciling to operating income

Investing activitiesSale of land$45,000Receipt of interest5,000Receipt of dividends4,500Income taxes paid due to investing activities(2,000)Net cash provided by investing activities$52,500Financing activitiesBorrowings loan repayment(150,000)Payment of interest(23,000)Payment of dividends(20,000)Payment of income taxes(7,000)Net cash used in financing activities (200,000)Net increase in cash119,480Cash at January 1, 2012555,000Cash at December 31, 2012$674,480


PreparationSince the statement of cash flows under both US GAAP and IFRS contains the same three classifications, preparation is generally similar.SimilarIFRSUS GAAP


DisclosuresIFRSDoes not have restrictions on the disclosure of cash flows per share. US GAAPProhibits disclosure of cash flows per share. Additional disclosure differences not mentioned previously:


Ernst & Young LLPAssurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US.

2012 Ernst & Young Foundation (US). All Rights Reserved.SCORE No. MM4129C.

****************************

Documents

Statement of Cashflows