IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 5 / Cash Flow Statements (l AS 7)

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temporarily and cover its customer by honoring the checks issued to its creditors . The bounce protection arrangement thus is invoked. In such cases, it would be appropriate to view such a bank arra ngement as an integral part of the entity' s cas h manage ment; because the acco unt with the bank may fluctuate from positive to ove rdrawn from time to time, such a bank ove r– draft would qualify as a compone nt of cas h equivale nts. Regul ar bank overdrafts that are part of the funded facilities negotiated with banks by entities on a periodic basis (whereby the banks lend funds to the entities based on criteria such as pre– dete rmined working capital requi rements or a percentage of the net book value of trade re– ceivables) would not meet the criteria of cash equiva lents and therefore are considered fi– nancing activities for the purposes of the cash flow statement. 5.3 Movements in Cash Equivalents Movements within or between the items of cas h equivalents are exc luded from cas h flows for the purp oses of the prepar ation of the cas h flow statement, as they are part of the cas h management of the entity as opposed to its operating, financing, and investing activities. Facts XYZ Inc., as part of its cash management activities, invested $ 10 million in redeemable preference shares (within three months from the date of their redemption). To do so, XYZ instruc ted its bank to use a maturing time deposit (a two-month fixed deposit) with the bank. Required Determine how XYZ Inc. would treat in its cash flow statement the cas h outflows resulting from the in– vestment of funds in redeemable preferre d shares and the cash inflows resulting from the withd rawa l of funds from the bank by using a maturing time depos it. Solution The se would not be considered either as a cash inflow or a cash outflow for the purposes of the ca sh flow statement of XYZ Inc. because both activities are part of the entity's cash management and com– prised movements between components of cash equivalents. 6. PRESENTATION OF THE CASH FLOW STATEMENT 6.1 lAS 7 requ ires that a cash flow statement should be classified into four components: ( I) op– era ting activities, (2) investi ng activities, (3) financing activities, and (4) cas h and cas h equivalents. In other words, the cash flow statement provides information about an entity's cas h receipts and cas h payment s (i.e., cas h flows) for the period categorized under three headings (I) operating activit ies, (2) inves ting activities, and (3) financing activities-along with changes in cash and cas h equivalents. Such classificati on of information provided by the cash flow statement allows users of financial statements to assess the impact of those activities on the financia l position of the entity and the amount of cash and cash equivalents. 6.2 Due care must be taken to includ e transactions under the appropriate category. Whatever clas– sifica tion chosen has to be applied in a consistent manner from year to yea r. Example If "interest received" is presented as a cash flow f rom investing activities in year I, the same classi– fica tion should be fo llowed fro m year to year, even though lAS 7 allows "interest received " to be presented either as a cash flowfro m operating activities or as cash flow from investing activities. 6.3 A single transaction may includ e cas h flows that are classified partly as one type of activity and partly as another catego ry. Example Cash payment made toward repayment of a bank loan has two components: the repayment of prin– cipal portion of the loan, which is classified as a financing activity, and repayment of the interest, which is classified as an operating activity. Case Study 1