IAS 7 - Statement of cash flows

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Executive summary
In 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.
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Content, format and classification
Cash 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.
Similar
Operating, investing and financing activities are
specifically defined.
Similar, except for some differences
explained on a later slide.
IFRS
US GAAP
Both the direct and indirect method of presenting
cash flows from operations are allowed.
Similar
Similar
Entities must disclose their policy for determining
which items are cash equivalents.
Similar
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Content, format and classification
Interest and dividends
IFRS
Permits 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 GAAP
Requires 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.
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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 classification
Interest and dividends
Cash flow classification
Transaction IFRS US GAAP
Interest paid Operating or financing Operating
Interest received Operating or investing Operating
Dividends paid Operating or financing Financing
Dividends received Operating or investing Operating
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Content, format and classification
Income taxes
IFRS
Requires 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 GAAP
Requires 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.
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Content, format and classification
Indirect method
IFRS
The 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 GAAP
When using the indirect method of
presenting operating cash flows, the
reconciliation from income to cash flows
must begin with net income.
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Content, format and classification
Direct method
IFRS
This
reconciliation
is not
required.
US GAAP
ASC 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 2010 reports that 495 companies of the 500 surveyed in
2009 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 2011 meeting, based on outreach to preparers and users of cash flow
statements, there was little support for the direct method. The Boards made no formal decisions at this meeting regarding the technical
aspects or timing of future discussions on this project.
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Content, format and classification
Components of cash and cash equivalents
IFRS
Required 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 GAAP
No 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.


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Example 1:
Banks Designers, Inc. (BDI) is preparing its statement of cash flows for the year ended
December 31, 2011. 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.

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Example 1 (continued):
Balance sheet accounts:
Statement of cash flows example
As of
January 1, 2011
As of
December 31, 2011
Cash $ 555,000 $ 674,480
Accounts receivable 157,800 149,000
Inventory 254,600 269,000
Prepaid expenses 59,000 62,000
Equipment 875,000 875,000
Accumulated
depreciation
(120,000) (175,000)
Land 500,000 450,000
Total assets $2,281,400 $2,304,480
As of
January 1, 2011
As of
December 31, 2011
Accounts payable $ 95,000 $ 87,500
Accrued liabilities 45,000 49,800
Notes payable 1,200,000 1,050,000
Common stock 400,000 400,000
Retained
earnings
541,400 717,180
Total liabilities
and equity
$2,281,400 $2,304,480
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Example 1 (continued):
Income statement balances:
Statement of cash flows example
For the year ended
December 31, 2011
Sales $1,300,500
Interest revenue 5,000
Dividend revenue 4,500
Cost 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
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Statement of cash flows example
Example 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, 2011, 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 2011.
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.

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Example 1 solution:
Statement of cash flows example
US GAAP
BDI
Statement of cash flows
For the year ended December 31, 2011
Operating activities
Net income $195,780
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense $55,000
Loss on sale of land 5,000
Decrease in accounts receivable 8,800
Increase in inventory (14,400)
Increase in prepaid expenses (3,000)
Decrease in accounts payable (7,500)
Increase in accrued liabilities 4,800
Net cash provided by operating activities 244,480
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*Note that the cash balance at December 31, 2011, must exclude bank overdrafts of $12,000.
Statement of cash flows example
US GAAP
Investing activities
Sale of land $45,000
Net cash provided by investing activities $ 45,000
Financing activities
Borrowings loan repayments (150,000)
Borrowings bank overdraft 12,000
Payment of dividends (20,000)
Net cash used in financing activities (158,000)
Net increase in cash 131,480
Cash at January 1, 2011 555,000
Cash at December 31, 201* $686,480
Example 1 solution (continued):
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Statement of cash flows example
IFRS reconciling to net income
BDI
Statement of cash flows
For the year ended December 31, 2011
Operating activities
Net income $195,780
Adjustments to reconcile net income to net cash provided by operating activities:
Interest revenue $(5,000)
Dividend revenue (4,500)
Depreciation expense 55,000
Loss on sale of land 5,000
Interest expense 23,000
Income taxes paid due to investing and financing activities 9,000
Decrease in accounts receivable 8,800
Increase in inventory (14,400)
Increase in prepaid expenses (3,000)
Decrease in accounts payable (7,500)
Increase in accrued liabilities 4,800
Net cash provided by operating activities $266,980
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Statement of cash flows example
IFRS reconciling to net income
Investing activities
Sale of land $45,000
Receipt of interest 5,000
Receipt of dividends 4,500
Income taxes paid due to investing activities (2,000)
Net cash provided by investing activities $ 52,500
Financing activities
Borrowings 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 cash 119,480
Cash at January 1, 2011 555,000
Cash at December 31, 2011 $674,480
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Disclosures
IFRS
Does not have restrictions on the
disclosure of cash flows per share.
US GAAP
Prohibits disclosure of cash flows per
share.
Additional disclosure differences not mentioned previously: