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Key Topics
- Requirement
- Solution
- Statement of cash flows
- Would, and how would, the changes being discussed better meet user needs?
- Deficiency for Open definition of Operating Activity
- Cash Outflow from acquiring property
- Cash flow from Interest and dividend
- Reconciliation between Operating Profit and Cash flow from Operating Activity
- Reference
Requirement
What areas of IAS 7 are perceived to be deficient?
Solution
Statement of cash flows
It is to be noted IAS 7 talks about the reporting requirement of statement of Cash Flow. The research has been carried out by the FRC staff UK in relation IAS 7. It is to be noted that currently the requirement of the IAS 7 gives the preparer the choice to follow different practice as per their decision; However it is to be noted that to give the correct picture of the cash area for all the company , one standard practice need to be followed.
Currently the Objective of the IAS 7 is to present historic change in the Entities cash and cash equivalent, however the it is to be noted that the term Cash and cash equivalent does not give exact component to be included and it is in vague nature.
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Currently, the Operating activity does not have inclusive definition; rather it includes all activities which do not form part of the investment and financing activity (IFRS Foundation. 2016). I can say that this is misleading in nature. It is possible that some activity is not in operating nature but because it does not classify in Financing and investment Activity, it required to be included in operating nature.
The current IAS 7 allows the prepares to opt choice between two method of cash flow (a) Direct method and (b) Indirect method(IFRS Foundation. 2016). However, it is to be noted that direct method is least use and should be eliminated to form the standardization. Currently it gives choice to preparers.
Despite, the existing requirement there is still confusion in for classification of interest received, interest expense and tax expense. Whether interest paid, received forms part of operating activity or financing activity is confusing in nature.
Currently the outflow for purchase of plant & machinery is reported under-investment activity (Deloitte. 2016), however ideally as it part of business it should be reported in the operating activity section.
The proceeds from operating activity make the user confusion, why there is a difference in the profit of the financial statement and proceed from the operating activity. It created the point of confusion for the user. The operating profit in the financial statement and the operating cash profit of IAS 7 are different and to make the user understand it need to b reconciled.
Currently cash flow received from the dividend - interest received and paid need to be classified under either Operating, financing or investing activity uniformly . However , it gives open space to the preparer to follow the practice which gives best result the eyes of investor , though the actual picture may be different
To conclude I can say that there are few area where the IAS 7 gives an open window to the organization to follow different practice and hence the principal of uniform disclosure breeches. Accounting standards main objective is to take all reporting requirement in one bridge so different company’s statement can be compared.
Would, and how would, the changes being discussed better meet user needs?
It is to be noted that the above deficiency has been identified by the RAC staff in research now they have also suggested the solution for the same and we are discussing whether this suggestion will help for better disclosure and meet the requirement of the users.
Deficiency for Open definition of Operating Activity
We discussed in above section that operating activity contains the residuary activities which do not part of other tow activities, however suggestion has been made to define the operating activity. The operating activities with creditors, customers, debtors and regular operation need to be defining positively. The activity which does not form part of the operating activity should b reported separately (FRC ,2016).The above suggestion will help the user to know the correct cash proceeds from the operating activity and also come to know which parts are included in the operating activity . It will give correct and clear picture to the users.
Cash Outflow from acquiring property
Currently the acquisition of the plant & machinery is reported under cash outflow from investment activity. However FRC members have suggested to include that as operating activity outflow . The sub total of cash generation from the regular operating activity suggested to be reported before showing the capital expenditure of the business. I can say that this suggestion will not help the user to have correct understanding , though the suggestion is good but users will surely get confused for the question why capital expenditure include in operating activity , though it is not part of regular activity of the organization.
Cash flow from Interest and dividend
Current requirement of the cash flow gives the open window to treat the interest and dividend cash flow as financing, operating and investing activity. However suggestion has been made to include the cash flow of financial asset and liability as financing activity and cash flow that is interest from the customer as operating activity(FRC ,2016). This suggestion will help to get uniformity in the reporting of the interest and dividend requirement and will give the correct picture .
Cash flow as Cash and Cash Equivalent
It is suggested that rather than defining cash as cash and cash equivalent, the management of the liquid source of organization should be presented. Also organization needs to disclose he policy for management of liquid source(FRC ,2016).This will help the users to know the management of the readily convertible liquidity.
Reconciliation between Operating Profit and Cash flow from Operating Activity
Often the profit from the operating activity and proceed from operating cash activity lead the user confusion why both are different. Which one to be relied and why they are differ are the big two question for normal users. To avoid the same FRC has suggested present reconciliation between this two profits so users can know the reason for difference in the profit and can help them to take informed decision. (Lennard, A. & Knubley, R. 2016)
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IFRS Foundation. 2016. Joint CMAC and GPF minutes June 2016. Online at: http://www.ifrs.org/About-us/IASB/Advisory-bodies/GPF/Documents/CMAC-GPF-June-2016-meeting-notes.pdf. Last accessed 17 November 2016.
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Lennard, A. & Knubley, R. 2016. Staff Paper: Primary Financial Statements – Improving the Statement of Cash Flows. Online at: http://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2016/AP3-Statement-of-Cash-Flows-CMAC-GPF-June-2016.pdf. Last accessed 17 November 2016.
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FRC. 2016. Improving the Statement of Cash Flows: Draft of a Discussion Paper prepared by staff of the UK Financial Reporting Council. Online at: http://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2016/AP3A-Draft-FRC-Discussion-Paper-Improving-the-Statement-of-Cash-Flows.pdf. Last accessed 17 November 2016..
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IFRS Foundation. 2012. Technical Summary: IAS 7 Statement of Cash Flows. Online at: http://www.ifrs.org/documents/ias7.pdf. Last accessed 16 September 2016.
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Deloitte. 2016. IAS 7 Statement of Cash Flows. Online at: http://www.iasplus.com/en-gb/standards/ias/ias7. Last accessed 16 September 2016.
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Laux, J. 2009. ‘Accounting Issues: An Essay Series, Part IX—Statement of Cash Flows’, in Journal of College Teaching & Learning – May/June 2009 Volume 6, Number 3. Online at http://cluteinstitute.com/ojs/index.php/TLC/article/download/1160/1144. Last accessed 16 September 2016
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