IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

5 CASH FLOW STATEMENTS (lAS 7)

1. BACKGROUND AND INTRODUCTION 1.1

lAS I, Presentation of Financial Statements, makes it incumbent upon entities preparing fi– nancia l statements under International Financial Reporting Standards (IFRS) to present a cash flow statement as an integral part of the financial statements. lAS 7, Cash Flow Statements, lays down rules regarding cash flow statement preparation and reporting. The cash flow statement provides information about an entity's cash receip ts and cash payments (i.e., cash flows) for the period for which the financial statements are presented. 1.2 The cash flow statement replaced the "fund flow statement," which most accounting stan– dards around the world (including the then International Accounting Standards) previously required to be presented as an integra l part of the financial statements. The fund flow statement reported the movements or changes in funds. Certain standards interpreted the term "funds" as "net liquid funds"; most others, however, interpreted "funds" as "working capital." Most standard setters re– vised their standards in favor of the cash flow statement, probably due to the ambiguity in the in– terpretation of the concept of "funds" coupled with the growing importance of the concept of "cas h generated by operations." With the change in requirements, whereby an entity is required to report a cash flow statement (in lieu of a funds flow statement) as an integral part of its financial state– ments, the emphasis has clearly shifted globally from reporting movements in funds (say, working capital) to cash inflows and cash outflows (i.e., cash receipts and cash payments) for the period for which the financia l statements are presented. 2. SCOPE All entities, regardless of the nature of their activities , should prepare a cash flow statement in ac– corda nce with the requirements of lAS 7. The cash flow statement should be presented as an inte– gra l part of the financial statemen ts for each period for which the financial statements are pre– sented . Recognizing that no matter how diverse the principal revenue-generating activities of the entities are, their needs for cash to pay their obligations (liabilities) and to produce returns for the shareholders is the same, the cash flow statement has been made mandatory for all entities . 3. DEFINITIONS OF KEY TERMS (in accordance with lAS 7, paragraph 6) Ca sh. Comprises cash on hand and demand deposits with banks. Ca sh equivalents. Short-term, highly liquid investments that are readily convertible into known amounts of cash and that are subject to an insignificant amount of risk of changes in value. Operating acti vities. Principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Invest ing activit ies. Activities of the entity that relate to acqui sition and disposal of long– lived assets and other noncurrent assets (including investments) other than those included in cash equivalents. Financing activities. Activities that result in changes in the size and composition of the equit y capital and borrowings of an entity. 4. BENEFITS OF PRESENTING A CASH FLOW STATEMENT 4.1 When presented along with the other components of financial statements (namely, a balance sheet, an income statement, and a statement of changes of equity), a cash flow statement provides this additional information to users of financial statements: