Statement of cash flows
Typical coverage of US GAAP
►
Purpose and scope
►
Content, format and classification
►
Preparation
Statement of cash flows
Academic Resource Center
Page 2
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.
Statement of cash flows
Academic Resource Center
Page 3
Primary pronouncements
US GAAP
►
ASC 230, Statement of Cash Flows
IFRS
►
IAS 7, Statement of Cash Flows
Statement of cash flows
Academic Resource Center
Page 4
Progress on convergence
►
►
In 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.
Statement of cash flows
Academic Resource Center
Page 5
Purpose and scope
US GAAP
IFRS
According 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.”
Similar
Cash and cash equivalents are defined.
Similar
Statement of cash flows
Academic Resource Center
Page 6
Purpose and scope
US GAAP
►
IFRS
ASC 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.
►
IAS 7 applies to all enterprises for each
period for which financial statements are
presented.
Statement of cash flows
Academic Resource Center
Page 7
Content, format and classification
US GAAP
IFRS
Cash flows are presented in three classifications:
operating, investing and financing activities.
Similar
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.
Both the direct and indirect method of presenting
cash flows from operations are allowed.
Similar
Entities must disclose their policy for determining
which items are cash equivalents.
Similar
Statement of cash flows
Academic Resource Center
Page 8
Content, format and classification
Bank overdrafts
US GAAP
► Does 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.
IFRS
► Overdrafts that are payable on demand are included
as cash and cash equivalents if considered to be an
integral part of an enterprise’s 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.
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.
Statement of cash flows
Academic Resource Center
Page 9
Content, format and classification
Interest and dividends
US GAAP
►
IFRS
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.
►
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.
Statement of cash flows
Academic Resource Center
Page 10
Content, format and classification
Interest and dividends
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:
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
Statement of cash flows
Academic Resource Center
Page 11
Content, format and classification
Income taxes
US GAAP
►
Requires that income taxes
paid be classified as an
operating cash flow.
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.
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.
Statement of cash flows
Academic Resource Center
Page 12
Content, format and classification
Indirect method
US GAAP
When 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 -1045-28).
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.
Statement of cash flows
Academic Resource Center
Page 13
Content, format and classification
Direct method
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 – 2012 reports that 495 companies of the 500 surveyed in
2011 used the indirect method of presenting operating cash flows.
IFRS
►
This
reconciliation
is not
required.
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.
Statement of cash flows
Academic Resource Center
Page 14
Content, format and classification
Components of cash and cash equivalents
US GAAP
IFRS
►
No required disclosure of the
components of cash and cash
equivalents.
►
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.
►
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.
Statement of cash flows
Academic Resource Center
Page 15
Statement of cash flows example
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.
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.
Statement of cash flows
Academic Resource Center
Page 16
Statement of cash flows example
Example 1 (continued):
Balance sheet accounts:
As of
January 1, 2012
Cash
As of
December 31, 2012
As of
January 1, 2012
$ 555,000
$ 674,480
Accounts payable
Accounts receivable
157,800
149,000
Accrued liabilities
Inventory
254,600
269,000
59,000
62,000
875,000
875,000
(120,000)
(175,000)
500,000
450,000
$2,281,400
$2,304,480
Prepaid expenses
Equipment
Accumulated
depreciation
Land
Total assets
95,000
$
87,500
45,000
49,800
Notes payable
1,200,000
1,050,000
Common stock
400,000
400,000
Retained
earnings
541,400
717,180
$2,281,400
$2,304,480
Total liabilities
and equity
Statement of cash flows
Academic Resource Center
$
As of
December 31, 2012
Page 17
Statement of cash flows example
Example 1 (continued):
Income statement balances:
For the year ended
December 31, 2012
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
Interest expense
Income tax expense
Net income
(23,000)
(105,420)
$ 195,780
Statement of cash flows
Academic Resource Center
(5,000)
Page 18
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, 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 BDI’s 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.
Statement of cash flows
Academic Resource Center
Page 19
Statement of cash flows example
US GAAP
Example 1 solution:
BDI
Statement of cash flows
For the year ended December 31, 2012
Operating activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
Loss on sale of land
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Decrease in accounts payable
Increase in accrued liabilities
Net cash provided by operating activities
Statement of cash flows
Academic Resource Center
$195,780
$55,000
5,000
8,800
(14,400)
(3,000)
(7,500)
4,800
244,480
Page 20
Statement of cash flows example
US GAAP
Example 1 solution (continued):
Investing activities
Sale of land
$45,000
Net cash provided by investing activities
$ 45,000
Financing activities
Borrowings – loan repayments
Borrowings – bank overdraft
Payment of dividends
Net cash used in financing activities
Net increase in cash
Cash at January 1, 2012
Cash at December 31, 2012*
(150,000)
12,000
(20,000)
(158,000)
131,480
555,000
$686,480
*Note that the cash balance at December 31, 2012, must exclude bank overdrafts of $12,000.
Statement of cash flows
Academic Resource Center
Page 21
Statement of cash flows example
IFRS reconciling to net income
BDI
Statement of cash flows
For the year ended December 31, 2012
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
Statement of cash flows
Academic Resource Center
Page 22
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, 2012
555,000
Cash at December 31, 2012
$674,480
Statement of cash flows
Academic Resource Center
Page 23
Statement of cash flows example
IFRS reconciling to operating income
BDI
Statement of cash flows
For the year ended December 31, 2012
Operating activities
Operating income*
$319,700
Adjustments to reconcile operating income to net cash provided by operating
activities:
Depreciation expense
$55,000
Income taxes paid
(96,420)
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
* Components of operating income include sales, cost of goods sold, salary expense, depreciation expense and other operating expenses.
Statement of cash flows
Academic Resource Center
Page 24
Statement of cash flows example
IFRS reconciling to operating 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, 2012
555,000
Cash at December 31, 2012
$674,480
Statement of cash flows
Academic Resource Center
Page 25
Preparation
US GAAP
IFRS
Since the statement of cash flows under both
US GAAP and IFRS contains the same three
classifications, preparation is generally similar.
Statement of cash flows
Academic Resource Center
Similar
Page 26
Disclosures
Additional disclosure differences not mentioned previously:
US GAAP
►
Prohibits disclosure of cash flows per
share.
IFRS
►
Does not have restrictions on the
disclosure of cash flows per share.
Statement of cash flows
Academic Resource Center
Page 27
Ernst & Young LLP
Assurance | Tax | Transactions | Advisory
About Ernst & Young
Ernst & 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.
Statement of cash flows
Academic Resource Center
Page 28