ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)
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Chapter 9: Statements of cash flows
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Example
The statements of financial position of Entity M at 1 January and 31 December Year
1 included the following items:
1January
Year1
31December
Year1
$
$
Equitysharesof$1each 440,000
660,000
Sharepremium
310,000
1,080,000
The cash obtained from issuing shares during the year is calculated as follows:
$
Sharecapital+SharepremiumattheendofYear1
1,740,000
Sharecapital+SharepremiumattheendofYear1 750,000
=CashobtainedfromissuingnewsharesinYear1
990,000
Cash from new loans/cash used to repay loans
Cash from new loans or cash paid to redeem loans in the year can be calculated
simply by looking at the difference between the liabilities for loans and bonds at the
beginning and the end of the year.
An increase in loans or bonds means there has been an inflow of cash.
A reduction in loans or bonds means there has been a payment (outflow) of cash.
Remember to add any loans or bonds repayable within one year (current liability) to
the loans or bonds repayable after more than one year (non-current liability) to get
the total figure for loans or bonds.
$
Loans at end of year (current and non-current liabilities) A
Loans at beginning of year (current and non-current liabilities) B
If A>B, cash inflow from loans in the year (A – B)
If B>A, cash outflow to repay loans in the year
The same calculation can be applied to bonds or loan stock that the company might
have issued. Bonds and loan stock are long-term debt.
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Example
The balance sheet of Entity M at 1 January and 31 December Year 1 included the
following items:
1January
Year1
31December
Year1
$ $
Loansrepayablewithin12months 650,000 370,000
Loansrepayableafter12months
2,600,000 2,750,000
The cash flows relating to loans during the year is calculated as follows.
$
LoansoutstandingattheendofYear1
3,120,000
LoansoutstandingatthebeginningofYear1 3,250,000
=Netloanrepaymentsduringtheyear(cashoutflow)
130,000
1.8 Cash and cash equivalents
IAS 7 defines cash and cash equivalents as follows:
Cash
− Cash in hand (petty cash and other cash not in a bank account) plus ‘demand
deposits’
− Demand deposits are deposits with a bank (or other financial institution) that
can be withdrawn on demand. This should include bank balances in normal
business bank accounts.
Cash equivalents
− Short-term, highly-liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in
value
− Examples include a bank deposit or a savings account where notice of
withdrawal is required and short-term money market investments.
A statement of cash flows ends with the following items:
The increase or decrease in cash and cash equivalents during the period. This is
the sum of the cash flows from operating activities, investing activities and
financing activities. It may be a positive or negative amount.
A reconciliation between cash and cash equivalents and the beginning of the
year and the cash and cash equivalents at the end of the year. An example is
shown below.
$000
Increase in cash and cash equivalents during the period 250
Cash and cash equivalents at the beginning of the period 110
Cash and cash equivalents at the end of the period 360
Chapter 9: Statements of cash flows
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A note to the statement of cash flows is also required, showing the components of
cash and cash equivalents at the end of the current year and the end of the previous
year.
The note to the statement of cash flows might be presented as follows:
Current year
Previous year
$000 $000
Cash on hand and balances with banks 220 100
Bank overdraft 0 (20)
Short-term investments 140 30
––––––––––––––––
––––––––––––––––
360 110
––––––––––––––––
––––––––––––––––
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Consolidated statements of cash flows
The special features of a consolidated statement of cash flows
Illustrative format
Exchange rate differences
2 Consolidated statements of cash flows
2.1 The special features of a consolidated statement of cash flows
A consolidated statement of cash flows is prepared largely from the consolidated
statement of financial position, statement of comprehensive income (or income
statement) and statement of changes in equity. The rules for preparing a group
statement of cash flows are similar to the rules for a statement of cash flows for an
individual entity.
However, there are additional items in a consolidated statement of cash flows that
are not found in the statement of cash flows of an individual company. The most
significant of these are cash flows (or adjustments to profit before tax) relating to:
non-controlling interests
associates
and acquiring or disposing of subsidiaries during the year.
2.2 Illustrative format
It might be useful to look at the format of a consolidated statement of cash flows, to
see where these items appear. The indirect method is used here to present the cash
flows from operating activities.
EntityXYZ
Statementofcashflowsfortheyearended31December20X7
$000 $000
Cashflowsfromoperatingactivities
Profitbeforetax
440
Adjustmentsfor:
Depreciationandamortisationcharges
450
Lossondisposalofplantandmachinery
50
Shareofprofitofassociatesandjointventures
(100)
Foreignexchangeloss
40
Investmentincome
(25)
Interestexpense
25
–––––––––––––
880
Chapter 9: Statements of cash flows
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Increaseintradeandotherreceivables (80)
Increaseininventories
(60)
Increaseintradepayables
40
–––––––––––––
Cashgeneratedfromoperations 780
Interestpaid
(30)
Incometaxespaid
(200)
–––––––––––––
Netcashfromoperatingactivities
550
Cashflowsfrominvestingactivities
Acquisitionofsubsidiary,netofcashacquired(note1)
(450)
Purchaseofproperty,plantandequipment(note2)
(220)
Proceedsfromthesaleofequipment
30
Interestreceived
25
Dividendsreceivedfromassociates
45
–––––––––––––
Netcashusedininvestingactivities
(570)
Cashflowsfromfinancingactivities
Proceedsfromtheissueofsharecapital
500
Proceedsfromlong‐termloan
100
Redemptionofdebtsecurities
(150)
Paymentoffinanceleaseliabilities
(80)
Dividendspaidtonon‐controllinginterests(NCI)
(70)
Dividendspaidtoparentcompanyshareholders
(200)
–––––––––––––
Netcashinflowfromfinancingactivities
100
–––––––––––––
Netincreaseincashandcashequivalents
80
Cashandcashequivalentsatthebeginningoftheperiod(note3)
150
–––––––––––––
Cashandcashequivalentsattheendoftheperiod(note3)
230
–––––––––––––
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Notes to the statement of cash flows
Note 1: Acquisition of subsidiary
During the year, the group acquired a subsidiary ABC. The fair value of assets
acquired and liabilities assumed were as follows:
$000
Cash
50
Inventories 90
Tradereceivables
60
Property,plantandequipment
870
Tradepayables
(70)
Long‐termloan
(200)
–––––––––––––
Totalpurchaseprice
800
MinuscashofABC
(50)
–––––––––––––
750
Sharesissuedaspartofthepurchaseprice
300
–––––––––––––
Cashflowonacquisitionnetofcashacquired
450
–––––––––––––
Note 2: Property, plant and equipment
During the year, the group acquired property, plant and equipment with a total cost
of $400,000, of which $180,000 was acquired by means of finance leases. Cash
payments of $220,000 were made to acquire property, plant and equipment.
Note 3: Cash and cash equivalents
Cash and cash equivalents consist of cash in hand, bank balances, and money
market investments. Cash and cash equivalents in the statement of cash flows
comprise the following amounts in the statement of financial position:
20X7
20X6
$000
$000
Cashinhandandbalanceswithbanks 120
110
Short‐terminvestments
210
80
Cashandcashequivalentsaspreviouslyreported
330
190
Effectofexchangeratechanges ‐
(40)
Cashandcashequivalentsasre‐stated
330
150
Chapter 9: Statements of cash flows
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Note 4: Segment information
(This information is recommended by IAS 7, but is not a compulsory requirement).
Segment1
Segment2
Total
$000 $000 $000
Operatingactivities 550 250 800
Investingactivities
(200) (370) (570)
Financingactivities
60 40 100
410 (80) 330
2.3 Exchange rate differences
A gain or loss arising from exchange rate differences is not a cash flow item. When
the indirect method is used to present cash flows from operating activities, it is
therefore necessary to make an adjustment to get from ‘profit’ to ‘cash flow’.
A loss arising from exchange rate differences (shown in the example above as a
‘foreign exchange loss’) must be added back.
A gain arising from exchange rate differences must be subtracted.
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Non-controlling interests and associates in the statement of cash
flows
Obtaining the required figures for cash flows
Minority interests and the group cash flow statement
Dividends paid to minority interests and foreign exchange adjustments
Associates and the group cash flow statement
Calculating dividends received from an associate
3 Non-controlling interests and associates in the
statement of cash flows
3.1 Obtaining the required figures for cash flows
The cash flows and adjustments in a group statement of cash flows are obtained
from the other group financial statements. You should expect an examination
question to provide you with an opening and closing consolidated statement of
financial position, together with the related consolidated income statement or
statement of comprehensive income, and possibly a statement of changes in equity.
Other relevant information may also be provided.
A group statement of cash flows reports the cash flows that affect the group’s
consolidated cash (and cash equivalents). Any transactions not affecting the group
cash position should not be shown in the statement of cash flows , except (with the
indirect method) where a non-cash item is presented as an adjustment to the profit
before tax to calculate the ‘Cash generated from operations’.
3.2 Non-controlling interests and the group statement of cash flows
Unless there is an acquisition or a disposal of a subsidiary during the year, the only
cash flow relating to non-controlling interests is the amount of dividends paid to
the non-controlling interests by subsidiaries.
This might have to be calculated as a balancing figure, using the following
calculation:
$
Non-controlling interest in group net assets at the beginning of the
year
A
Non-controlling interest in profits after tax for the year B
A + B
Non-controlling interest in group net assets at the end of the year (C)
Dividends paid to non-controlling interests (balancing figure) A + B – C
Chapter 9: Statements of cash flows
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The dividends paid to non-controlling interests by subsidiaries are usually included
in the ‘Cash flows from financing activities’ part of the statement of cash flows.
(This is the same part of the statement of cash flows where dividends paid to the
parent company shareholders are usually shown.)
Example
The following information has been extracted from consolidated financial
statements of P, a holding company which prepares accounts to 31 December. P has
a subsidiary Q, for which a final dividend is declared before the end of the financial
year.
20X7
20X6
$000
$000
Non‐controllinginterestingroupnetassets 1,510
1,380
Non‐controllinginterestinconsolidatedprofitaftertaxation
250
470
What figure should appear in the consolidated statement of cash flows for the year
to 31 December 20X7 for the dividends paid to non-controlling interests?
Under what heading will this figure appear in the group statement of cash flows?
Answer
$000
Non‐controllinginterestingroupnetassetsatthebeginningoftheyear
1,380
Non‐controllinginterestinprofitsaftertaxfortheyear 250
1,630
Non‐controllinginterestingroupnetassetsattheendoftheyear 1,510
Dividendspaidtonon‐controllinginterests(balancingfigure)
120
The dividend paid of $120,000 will be disclosed as a cash flow from financing
activities.
3.3 Dividends paid to non-controlling interests and foreign exchange
adjustments
If there is a gain or loss on translation for a foreign subsidiary, the non-controlling
interest has a share of this exchange gain or loss. This means that the amount shown
as the non-controlling interest in the consolidated statement of financial position
includes the non-controlling interest share of any foreign exchange gains or is after
deducting any foreign exchange losses.
A gain or loss arising from exchange rate differences is not a cash flow, but it
changes the amount for non-controlling interest in the consolidated statement of
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financial position. When the figures for non-controlling interest in the opening and
closing statements of financial position are used to calculate dividend payments to
non-controlling interests, we must therefore remove the effect of exchange rate
differences during the year.
The calculation of the dividends paid to the non-controlling interests should then be
calculated as follows:
$
Non-controlling interest in group net assets at the
beginning of the year
A
Non-controlling interest in profits after tax for the year B
Add non-controllinginterest share of foreign exchange
gain (G), or
G or (L)
Subtract non-controlling interest share of foreign
exchange loss (L)
A + B + G or – L
Non-controlling interest in group net assets at the end of
the year
(C)
Dividends paid to non-controlling interests A + B – C + G or – L
3.4 Associates and the group statement of cash flows
When a group has an interest in an associate entity, the consolidated statement of
cash flows must show the cash flows that occur between the associate and the
group. The consolidated statement of cash flows shows the effect on the group’s
cash position of transactions between the group and its associate.
The cash held by an associate is not included in the group’s cash figure in the
consolidated statement of financial position. This is because the equity method of
accounting does not add the associate’s cash to the cash of the holding company and
subsidiaries. As far as cash flows are concerned, the associate is outside the group.
(The same principles apply to other investments accounted for under the equity
method, such as joint ventures accounted for by the equity method).
Share of profit (or loss) of an associate
In the consolidated statement of comprehensive income or the income statement,
the group profit includes the group’s share of the profits of associates. These profits
are not a cash flow item. When the indirect method is used to present the cash flows
from operating activities, an adjustment is therefore needed to get from ‘profit’ to
‘cash flow’.
The group’s share of the profit of an associate must be deducted from profit.
The group’s share of the loss of an associate must be added to profit.
Cash flows involving associates
The cash flows that might occur between a group and an associate, for inclusion in
the consolidated statement of cash flows are as follows: