IAS 7 – Cash Flow Statement
Objective: To require the presentation of information about historical changes in
entity cash and cash equivalents, from operating, investing, and financing activities.
Cash flow statement must analyze changes in cash and cash equivalents during a
period. Cash equivalent include investments for short term less than three months,
and generally exclude equity investment. Cash flow from operating, investing, and
financing activities must be separately reported.
Cash flow from operating activities is reported using either the direct or indirect
methods. Cash flow arising from taxes on income is classified as operating unless
they can be specifically identified with financing or investing activities. The exchange
rate use for transaction in a foreign currency should be rate at the date of the cash
flow. Acquisition and disposals of subsidiaries and other business unit should be
presented separately and classified as investing activities with specified additional
disclosures. Investing and financing transaction that do not require the use of cash
should be excluded from the cash flow statement and they should be separately
disclosed.
The Differences and Similarities between US GAAP Law and IFRS
Similarities:
Both in IFRS and US GAAP the cash flow classified into operating, investing, and
financing activities, and in both cash include certain short-term investments, also in
both IFRS and US GAAP net cash flow from all three categories are totaled to show
the change in cash and cash equivalents during the period, which then used to
reconcile opening and closing cash and cash equivalents. When at both IFRS and US
GAAP cash flow from operating activities may be presented using either the direct
method or the indirect method. And at last in both all financing and investing cash
flow are reported gross.
Significant Differences:
Cash and cash equivalents
Cash payment and receipt
US Law GAAP
Cash does not include
bank overdrafts.
Cash receipt and payment
with attributes of more
than one class of cash flow
then the transaction is
classified based on the
predominant source.
IFRS
Cash include bank
overdrafts.
The separate components
of single transaction each
are classified as operating,
investing or financing.
Direct method
The direct method for creating a cash flow statement reports major classes of gross
cash receipts and payments. Under IAS 7, dividends received may be reported under
operating activities or under investing activities. If taxes paid are directly linked to
operating activities, they are reported under operating activities; if the taxes are
directly linked to investing activities or financing activities, they are reported under
investing or financing activities.
Indirect method
The indirect method uses net-income as a starting point, makes adjustments for all
transactions for non-cash items, then adjusts for all cash-based transactions. An
increase in an asset account is subtracted from net income, and an increase in a
liability account is added back to net income. This method converts accrual-basis net
income (or loss) into cash flow by using a series of additions and deductions.
The following rules are used to make adjustments for changes in current assets and
liabilities, operating items not providing or using cash and non operating items.
Decrease in non-cash current assets are added to net income
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Increase in non-cash current asset are subtracted from net income
Increase in current liabilities are added to net income
Decrease in current liabilities are subtracted from net income
Expenses with no cash outflows are added back to net income (depreciation and/or
amortization expense are the only operating items that have no effect on cash flows
in the period)
Revenues with no cash inflows are subtracted from net income
Non operating losses are added back to net income
Non operating gains are subtracted from net income