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Anesu Daka CA (SA) - CAA
Cash FLOW STATEMENT
IAS 7
Anesu Daka CA (SA) - CAA
Objective
• Presentation of information about the historical
changes in cash and cash equivalents of an entity
by means of a statement of cash flows, which classifies
cash flows during the period according to operating,
investing, and financing activities.
CFS = to a reconciliation of the bank balance of an entity
Anesu Daka CA (SA) - CAA
Fundamental Principles • All entities that prepare financial statements in conformity
with IFRSs are required to present a statement of cash flows. [IAS 7.1]
• Cash & cash equivalents comprise (IAS 7.7-9): • cash on hand; and
• demand deposits (bank), • together with short-term, highly liquid investments that are
readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value.
Note: Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition.
Anesu Daka CA (SA) - CAA
Fundamental Principles • Equity investments are normally excluded, unless they
are in substance a cash equivalent (e.g. preferred
shares acquired within three months of their specified
redemption date).
• Bank overdrafts which are repayable on demand and
which form an integral part of an entity's cash
management are also included as a component of cash
and cash equivalents. [IAS 7.7-8]
Anesu Daka CA (SA) - CAA
Cash flows from operating activities
+ Cash flows from investing activities
+ Cash flows from financing activities
Net change in cash during period
+ Beginning cash balance
Ending cash balance
Format and structure of the cash flow statement
Anesu Daka CA (SA) - CAA
• Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]
Elements of a Consolidated Statement of Cash Flows
□ Cash flows from operating activities;
□ Cash flows from investing activities;
□ Cash flows from financing activities;
□ Net changes in cash and cash equivalents,
representing the differences between cash and cash
equivalents at the beginning and end of the reporting
period.
Presentation of the Statement of
Cash Flows
Anesu Daka CA (SA) - CAA
Key Principles:
• operating activities are the main revenue-producing • • • /"T 1 * 1 • • /T« •
activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS7.14]
• investing activities are the acquisition and disposal of long- term assets and other investments that are not considered to be cash equivalents [IAS 7.6]
financing activities are activities that alter the equity capital
and borrowing structure of the entity [IAS 7.6]
Anesu Daka CA (SA) - CAA
Key Principles:
interest and dividends received and paid may be classified as operating, investing, or financing cash flows, PROVIDED THAT they are classified consistently from period to period [IAS 7.31]
cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35] Operating cash flows shall be reported using the: • direct method of presentation (most encouraged), or •indirect method is acceptable [IAS 7.18]
Anesu Daka CA (SA) - CAA
THE DIRECT METHOD
The direct method shows each major class of gross cash receipts and gross cash payments, as follows:
Presentation of the statement of Cash
Flows from Operating Activities
Anesu Daka CA (SA) - CAA
Presentation of the statement of Cash
Flows from Operating Activities
Anesu Daka CA (SA) - CAA
INDIRECT METHOD
The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions:
Profit before income taxes xxxxx
+/- Non-cash income & expenses:
- Depreciation expense
- Profit on disposal of PPE, e.t.c xx,xxx
+/- Changes in working capital:
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
+/- Items shown directly on CFS
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
Presentation of the statement of Cash Flows
Anesu Daka CA (SA) - CAA
Comparison of Direct and Indirect
Anesu Daka CA (SA) - CAA
DIRECT METHOD
• Applying the direct method
Anesu Daka CA (SA) - CAA
Cash Receipts from customers
Balance b/d
Bad Debtors W/O
Credit Sales
New subsidiary Sold Subsidiary
FCTR/forex exchange rates gain
Bank (receipts from customers)
Balance b/d
Debtors Control Account
Anesu Daka CA (SA) - CAA
Cash paid to suppliers and employees
Direct Method- Method 1 Indirect Method- Method 2
Anesu Daka CA (SA) - CAA
Method 1
Use the following when the components of the P/L are clear:
Cost of sales xxxxx
+Other expenses xxxxx
Total expenses accrued xxxxx
ADJUST FOR:
+/- Non-cash items:
- Depreciation expense xxxxx
- impairment loss, e.t.c xx,xxx
+/- Changes in working capital:
Increase in receivables (not applicable in this formula) 0
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
+/- Items shown directly on CFS (if included in above items)
Interest paid xx,xxx
Cash paid to suppliers and employees & expenses xx,xxx
Cash paid to suppliers and employees
Anesu Daka CA (SA) - CAA
Method 2
Use the following when the components of the P/L is not given:
Profit before income taxes xxxxx
Less: Revenue (xxxxx)
Total expenses accrued xxxx
+/- Non-cash items:
- Depreciation expense
- Profit on disposal of PPE, e.t.c xx,xxx
+/- Changes in working capital:
Increase in receivables (not applicable in this formula) 0
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
+/- Items shown directly on CFS
Interest paid
Interest received xx,xxx
Cash paid to suppliers and employees & expenses xx,xxx
Cash paid to suppliers and employees
Anesu Daka CA (SA) - CAA
• Depreciation and impairment of property, plant and equipment
• Amortisation and impairment of intangible assets
• Share-based payment transaction expense
• Decrease in investment properties
• Decrease in financial instruments
• Gain on disposal of property, plant and equipment
• Fair value adjustment of contingent consideration
• Finance income 9.4 (1,635) (724) IAS 7.20(c)
• Finance costs 9.3 3,305 1,561 IAS 7.20(c)
• Other operating income
• Share of net profit of associate 7 (83) (81)
• Movements in provisions, pensions and government grants
• Forexloss and gains
• Employee benefits expenses on defined benefit plan
Non-cash items includes:
Anesu Daka CA (SA) - CAA
Foreign currency transactions - use the spot rate at payment or receipt date [IAS 7.25]
Cash flows of foreign subsidiaries - use exchange rates prevailing when the cash flows took place [IAS 7.26]
• Cash flows of associates where the equity method is used, the statement of cash flows should report only cash flows between the investor and the investee;
• Cash flows of joint ventures- where proportionate consolidation is used, the
cash flow statement should include the venture's share of the cash flows of the investee [IAS 7.37-38]
• aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business
units should be presented separately and classified as investing activities, with specified additional disclosures. [IAS 7.39]
• The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.42]
Foreign Currency Cash Flows
Anesu Daka CA (SA) - CAA
• Analyse the movements in balance sheet for the year i.e. Difference between prior and current year financial position, and isolate the following:
• Part of the movements relating to the no cash transactions;
• Part of the movements relating to cash transactions already entered else where on the in the statement of cash flows; and
• Part of the movement attributable to cash transactions that are to be entered in the statement of cash-flows
• Note:
• Reverse the accrual principle and apply the Cash principle - identify cash in and outflows and record them appropriately.
Approach to Cashflows
Anesu Daka CA (SA) - CAA
• Investment income: • Show interest and dividends received - reconstruct the T - accounts for the
receivable of these amounts.
• Note the Share of profit from associate is a non-cash item
• Interest Paid - disclose in CFS, both the:
• Finance cost
• Borrowing costs capitalised - IAS 23
• Tax and Dividend paid
• Tax paid - use the tax payable account to determine tax paid
• Dividend paid - use the dividend payable account to determine dividend paid • Note -deferred tax is not a cash item so exclude this on calculating tax paid. -
reduce tax expense with deferred tax expense. • Note - scrip shares allotted in the place of dividend are not a cash-flow item. • Note - dividends paid by subsidiary to non-controlling interest shall be also be
included on the cash flow statement
Items shown directly on the CFS
Anesu Daka CA (SA) - CAA
• Proceeds from sale of property, plant and equipment IAS 7.16(b)
• Purchase of property, plant and equipment IAS 7.16(a)
• Replacement & additions
• Purchase of investment properties IAS 7.16(a)
• Purchase of financial instruments IAS 7.16(c)
• Proceeds from sale of financial instruments IAS 7.16(d)
• Development expenditures IAS 7.16(a)
• Acquisition of a subsidiary, net of cash acquired IAS 7.39
• Acquisition of investment in associates &JVs
• Receipt of government grant
• Proceeds from sale of subsidiary
• Note - use T- Accounts to determine the cash items noted above
Cash flows from investing activities
Anesu Daka CA (SA) - CAA
• Proceeds from exercise of share options IAS 7.17(a)
• Acquisition of non-controlling interest IAS 7.42A
• Transaction costs of issue of shares IAS 7.17(a)
• Payment of finance lease liabilities IAS 7.17(e)
• Proceeds from borrowings IAS 7.17(c)
• Repayment of borrowings IAS 7.17(d)
• Interest paid IAS 7.31
• Dividends paid to equity holders of the parent IAS 7.31
• Dividends paid to non-controlling interests
• Note - use T- Accounts to determine the cash items noted above
Cash flows from financing activities
Anesu Daka CA (SA) - CAA
Reconcile as follows:
Net Change in cash and cash equivalents
Cash and cash equivalents at the beginning of the yr
+/-Forex rate changes for foreign cash (IAS 7.28)
Closing balance
XXXX XXX
_XX
XXXX
Disclosures required:
• Policy of determining cash and cash equivalents - IAS 7.47
• Show the components of cash and cash equivalents - IAS 7.47
• Disclose circumstances around availability of cash
Reconciliation of cash and cash-
equivalents
Anesu Daka CA (SA) - CAA
Specific CF Aspect
Anesu Daka CA (SA) - CAA
Interest and Dividends
• Classification: Basis of classification- entity’s accounting policy as
either operating, investing or financing activities (IAS7.31)
• Interest and dividends received: IAS 7 allows companies to classify them as either operating or investing activities.
• Interest paid: IAS 7 classifies it as either an operating activity or a financing activity; but it must be applied consistently.
• Dividends paid: IAS 7 allows classification as either a financing activity or as an operating activity. NB: always check the entity’s accounting policy on
classification and presentation of interest and dividends in CFS
Anesu Daka CA (SA) - CAA
Principle: • Where control is obtained or lost, include in the CFS under
investing activities the following: □ the amount of cash paid less amount of cash and cash equivalents
acquired on date of acquisition (purchase of a subsidiary) □ The amount of cash received as sales consideration on disposal date
less amount of cash and cash equivalents sold (sale of a subsidiary)
Disclosure of the following may be required: • The total consideration paid or received;
• The portion of consideration consisting of cash and cash equivalents; • The amount of cash or cash equivalents in the subsidiary over which
control is obtained or lost; and • The amount of the other assets and liabilities in the subsidiary over
which control is obtained or lost, summarized by each category (IAS
7.40)
Acquisition and Disposal subsidiary
Anesu Daka CA (SA) - CAA
Example 1 (Disclosure investment in
sub) •
H Ltd acquired 80% of equity of S Ltd for 1.6 m at date of acquisition and net assets acquired are as follows:
Land & buildings
Plant (8ook-3ook)
Mortgage bond
Inventory
Receivables
Payables
Bank
NAV
NCI
Goodwill
Cost of Investment (Bank)
Less Cash and cash equivalents taken over
# ACQUISITION OF SUBSIDIARY (1,600,000 LESS 30,000)
(1,200,000)
(500,000)
500,000
(350,000)
(550,000)
180,000
_(30,000)
(1,950,00)
390,000
40,000
1,600,000
(30,000)
1,570,000
Anesu Daka CA (SA) - CAA
Example 2 (Disclosure a
proceeds from sale)
H Ltd sold its entire interest in S Ltd for $850,000 at 30 September
Land & buildings 350,000
Plant (800k-300k) 240,000
Inventory 180,000
Receivables 420,000 Payables (120,000)
Bank (30,000)
NAV 1,040,000
NCI (260,000)
Goodwill 70,000
Cost of Investment (Bank) 850,000
Less Bank-overdraft sold 30,000
# PROCEEDS OF SUBSIDIARY 880,000
Anesu Daka CA (SA) - CAA
Remember:
• Take into account the non-cash mvt arising from acquisitions and disposals on calculation of cash movements: • Assets
• Liabilities
• ONLY IF AFFECTED BY THE ACQUISITION OR DISPOSAL, E.G. IF ASSET ACQUIRED DOES not have inventory there will not be an impact in the inventory account due to acquisition of subsidiary.
• Also now calculate profit or loss on sale of subsidiary and include in calculation of cash flows to suppliers and employees as well as the reconciliation of profit before tax to the cash flows from operations.
• Profit from sale at date of sale is calculated as follows:
Proceeds on sale 850,000
Less % of NAV sold (75%X $1040K (780,000)
Profit/(Loss) on disposal of subsidiary 70,000
Anesu Daka CA (SA) - CAA
A non-cash or part cash
transaction
• No cash flow arises in this case, however, the following should be shown under investing activities.
Cash and cash equivalents held by a sub at date of acq RXXXX
Acquision of a subsidiary for part cash.
- show the cash paid less the cash and cash equivalents
Disclosure as shown in slide 25 above is still required whether cash is paid or not.
Anesu Daka CA (SA) - CAA