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What are cash and cash equivalents?
Cash equivalents are defined as short-term, highly
liquid investments that are readily convertible
to known amounts of cash and which are subject to
an insignificant risk of changes in value [IAS7.6].
Amounts are disclosed as cash equivalents provided
that they meet the definition of a cash equivalent.
The "short-term" characteristic of a cash
equivalent is generally taken as a maturity of three
months from the date of acquisition [IAS7.7] .
Structure of cash flow statement
The following three main headings should be used
for all cash flow statements [IAS7.10]:
| a) |
operating cash flows; |
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| b) |
investing cash flows; and
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| c) |
financing cash flows. |
The level of detail within each category should
reflect the nature of the bank's operations. Comparatives
should be given in the cash flow statement for each
year presented in the financial statements [IAS1R.36].
The nature of an entity's business will determine
the classification of cash flows among the three
headings [IAS7.10-11]. Activities carried out by
a bank in its ordinary course of business will be
classified as operating activities, even though
for other entities the same activity would likely
be classified as investing or financing.
A cash flow that relates to the investing activities
of an entity will be classified as such. Financing
cash flows are similarly identified. All remaining
cash flows will be classified as operating. Although
IFRS allows a reasonable amount of discretion with
respect to classification, whichever classification
an entity adopts, it should be followed consistently.
Where appropriate, the cash flows of a transaction
should be divided into their constituent parts according
to their nature and the respective elements included
within operating, investing and financing [IAS7.12] .
The resulting cash flow total for the period is
the movement in the balance of cash and cash equivalents
from the start of the period to the end of the period.
If the total for cash and cash equivalents presented
cannot be traced directly to the balance sheet,
a reconciliation must be presented in the notes
to the financial statements . [IAS7.45].
Operating cash flows
Operating cash flows comprise all cash flows during
the period that do not qualify as either investing
cash flows or financing cash flows.
Operating cash flows may be prepared from the entity's
accounting records under the direct method . Alternatively, the entity
can calculate the cash flows indirectly by adjusting
the net profit or loss for the period for non-cash
items and for investing and financing items [IAS7.18]
.
The preferred method is the direct method because
the information provided is more useful [IAS7.19].
Loans and advances made by a bank should be classified
as operating activities as should the interest received
on those balances. Short term financing, such as
amounts borrowed from other banks, are usually classified
as operating activities. Likewise dividends received
should be classified as operating cash flows
Interest paid is classified as an operating activity,
even though it will arise on financing balances.
Investing cash flows
Investing activities include cash payments to acquire
property, plant and equipment and other long-term
assets [IAS7.16(a)]. Investing activities also include
cash payments and cash receipts relating to acquisition
and disposal of debt and equity interests in other
entities and interests in joint ventures (except
those relating to dealing or trading activity or
cash and cash equivalents) [IAS7.16(c)].
Financing cash flows
Financing cash flows include cash flows relating
to the obtaining, the servicing and the redemption
of sources of finance. The sources of finance, which
for banks are usually long term, can include loans,
debentures and share capital [IAS7.17(a)-(e)].
Dividends paid should be classified separately
and are usually included in financing cash flows
[IAS7.31].
Classification of other cash flows
Classification of tax cash flows
Tax cash flows are normally classified as operating
cash flows. However, where specific cash flows can
be identified with either investing activities or
financing activities, then it is appropriate to
classify that element of the tax cash flows as investing
or financing respectively [IAS7.10] .
Where the tax cash flows are included in investing
or financing categories, disclosure should also
be made of the total tax cash flows [IAS7.36].
Netting of cash flows
Generally cash flows should be shown gross. The
primary exceptions are when [IAS7.22]:
| a) |
cash is received and payments are made
on behalf of a customer and therefore represent
the transactions of the customer and not the
reporting entity; |
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| b) |
cash receipts and payments for items in
which the turnover is quick, the amounts large,
and the maturities short;
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| c) |
cash receipts and payments for
the acceptance and repayment of deposits with
a fixed maturity date; |
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| d) |
the placement of deposits with
and withdrawal of deposits from other financial
institutions; and |
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| e) |
the advancement and repayment
of loans and advances to customers. [IAS7.24].
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The derivation of operating cash flows by the indirect
method also results in some netting of cash flows.
Foreign currency cash flows
Foreign currency cash flows should be translated
into the reporting currency at the rate of exchange
on the date of the transaction [IAS7.25]. This is
consistent with the translation of the transaction
for inclusion in the income statement.
The cash flows of a foreign subsidiary should also
be translated at the exchange rates relevant to
the underlying transactions [IAS7.26]. However,
a rate that approximates the actual rate, for example
a weighted average rate, may be used, consistent
with the guidance in IAS 21.
The period-end rate cannot be used to translate
foreign currency cash flows [IAS7.27]. However,
residual balances arising as a result of a foreign
currency transaction will be included in the balance
sheet at the period-end rate. Consequently a reconciling
difference will arise between the changes in cash
and cash equivalents reported in the cash flow statement
and the equivalent amounts obtained from the balance
sheet. This reconciling difference is not a cash
flow but is reported separately in the cash flow
statement [IAS7.28].
Classification of short-term investments
Investments with an original maturity of less than
three months should not be considered a cash equivalent
if there is any doubt that the obligated entity
will redeem fully the security at maturity [IAS7.7]
.
Not all investments that meet the definition of
cash equivalents are required to be treated as such.
The nature of the transaction should be considered
in determining the classification
The policy for determining which items are treated
as cash equivalents should be consistently applied
and disclosed [IAS7.45].
Other matters
Acquisitions and disposals
The cash flows in respect of each major acquisition
or disposal should be separately disclosed and classified
as an investing cash flow [IAS7.39]. The amount
reported is net of any cash included in the entity
acquired or disposed [IAS7.42].
The amount of cash in the entities acquired or
disposed of should be disclosed in the notes. This
can be given in aggregate. The value of the consideration
given or received should also be disclosed in the
notes together with the proportion represented by
cash [IAS7.40].
The cash flows of subsidiaries are consolidated
into the cash flow statement from the date of acquisition.
The cash flows of other investments accounted for
using the equity method are recognised as dividend
income [IAS7.37].
Discontinuing operations
The net cash flows relating to discontinuing operations
should be disclosed, generally in a note (Disposal groups and discontinued operations - Presentation
and disclosure). The cash flows should be classified
between operating, investing and financing [IFRS5.33(c)].
Non-cash transactions
The cash flow statement should not include transactions
that do not include the transfer of cash [IAS7.43].
However, relevant information concerning non-cash
transactions should be disclosed in the notes [IAS7.43].
The information should be classified between operating,
investing and financing transactions [IAS7.43] .
Classification of cash flows relating to hedging instruments
Cash flows relating to financial instruments such
as futures and forwards are generally classified
as operating [IAS7.16(g)]. However, the cash flows
of financial instruments that are appropriately
designated as hedges should be classified with the
cash flows of the underlying transaction being hedged.
Segmental analysis
Entities are encouraged, but not required, to give
a summary analysis of cash flows by segment .
This would be at the level of operating, investing
and financing cash flows [IAS7.52].
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