Cash flow statement

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Exemptions

IFRS: No exemptions.

US GAAP: Limited exemptions for certain investment entities and defined benefit plans.

 

Direct/indirect method

IFRS: Inflows and outflows of ‘cash and cash equivalents’ are reported in the cash flow statement. The cash flow statement may be prepared using either the direct method (cash flows derived from aggregating cash receipts and payments associated with operating activities) or the indirect method (cash flows derived from adjusting net income for transactions of a non-cash nature such as depreciation). The indirect method is more common in practice. Non-cash investing and financing transactions are to be disclosed.

US GAAP: The cash flow statement provides relevant information about ‘cash receipts’ and ‘cash payments’. Similar to IFRS, either the direct method or indirect method may be used. The latter is more common in practice. A reconciliation of net income to cash flows from operating activities is disclosed if the direct method is used.  Significant non-cash transactions are disclosed.

 

Definition of cash and cash equivalents

IFRS: Cash is cash on hand, and demand deposits and cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a maturity of three months or less from its acquisition date. Cash may also include bank overdrafts repayable on demand but not short-term bank borrowings; these are considered to be financing cash flows.

US GAAP: The definition of cash equivalents is similar to that in IFRS, except bank overdrafts are not included in cash and cash equivalents; changes in the balances of overdrafts are classified as financing cash flows, rather than being included within cash and cash equivalents.

 

Format

IFRS: Cash flows from operating, investing and financing activities are classified separately.

US GAAP: Whilst the headings are the same as IFRS, there is more specific guidance on items that are included in each category as illustrated in the below table.

 

Classification of specific items

IFRS and US GAAP require the classification of interest, dividends and tax within specific categories of the cash flow statement.

 

Changes in accounting policy

IFRS: Changes in accounting policy are accounted for retrospectively. Comparative information is restated, and the amount of the adjustment relating to prior periods is adjusted against the opening balance of retained earnings of the earliest year presented. Effect of retrospective adjustments on equity items is presented separately in this SoRIE and SoCIE (Statements of Changes in Equity) (see ‘Statements of recognised income’). An exemption applies when it is impracticable to change comparative information. Policy changes made on the adoption of a new standard are accounted for in accordance with that standard’s transition provisions. The method described above is used if transition provisions are not specified.

US GAAP: Similar to IFRS.

 

Correction of errors

IFRS: The same method as for changes in accounting policy applies.

US GAAP: Similar to IFRS, reported as a prior-period adjustment; restatement of comparatives is mandatory.

 

Changes in accounting estimates

IFRS: Changes in accounting estimates are accounted for in the income statement when identified.

US GAAP: Similar to IFRS.

 

Recent proposals – US GAAP

In July 2007, the SEC issued a proposed rule that would allow foreign private issuers that prepare financial statements in accordance with the English-language version of IFRS as published by the IASB to file those financial statements with the SEC without reconciling them to US GAAP. The proposed amendments state that such financial statements would need to include an explicit statement asserting that they are in compliance with IFRS as published by the IASB. The proposed amendment would not apply to issuers that use a jurisdictional or other variation of IFRS in which the financial statements would be different compared to financial statements prepared under IFRS as published by the IASB. The comment period on the proposed rule ended on 24 September 2007.

Recent proposals – US GAAP

In August 2007, the SEC issued a concepts release to gauge the extent and nature of the public’s interest on allowing US issuers the option to prepare their financial statements in accordance with IFRS. The concepts release poses specific questions around the impact on the US capital markets, standard setting, education and training as well as encouraging constituents to raise any other relevant issues. The comment period on the concepts release ends on 13 November 2007. REFERENCES: IFRS: IAS 1, IAS 7, IAS 8, IAS 21, IAS 29, IAS 32, SIC-30. US GAAP: CON 1-7, FAS 16, FAS 52, FAS 95, FAS 130, FAS 141, FAS 154, APB 28, APB 30, ARB 43, SEC Regulation S-X, FIN 39.