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FRC issues consultation on improving the Statement of Cash Flows

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20 Oct 2016

The Financial Reporting Council (FRC) has today issued a discussion paper on improving the Statement of Cash Flows with the aim of identifying possible evolutionary improvements to the statement of cash flows as currently required by International International Accounting Standard (IAS) 7 'Statement of Cash Flows'.

The discussion paper notes that "the statement of cash flows is a well-established part of financial reporting" and that it is clear that the information it provides "is valuable to investors and other users of financial statements". However, IAS 7 was originally issued in 1992 and in the FRC's view it would be "surprising" if improvements to it "cannot be identified from the perspective of 2016".

The paper presents some ideas to improve the usefulness of the statement of cash flows, which might be of interest to the IASB as part of their project on Primary Financial Statements.

These suggestions, which are not official positions of the FRC, are "intended to stimulate debate by providing an opportunity for those interested in financial reporting to comment on them".  The feedback will be of interest to the IASB.  The FRC highlights that the issues discussed in the discussion paper "include some of the main issues that should be considered in improving the statement of cash flows" but does not include "a comprehensive discussion of all of the relevant issues" which would require a longer and more complex paper.

The paper is divided into five sections.

  1. The usefulness of information about cash flows. This section reviews the purpose of providing information about cash-flows, as well as questions about how significant non-cash transactions should be reported.
  2. The classification of cash flows. This section looks at the classification of cash flows.  It suggests that operating activities should be positively defined or described, rather than being a residual or default classification and notes that items should not be excluded from operating activities just because they are unusual or non-recurring.  This section also suggests that cash flows from operating activities should include capital expenditure.  This section also covers cash flows relating to interest and tax.
  3. Cash equivalents and the management of liquid resources. This section suggests that the statement of cash flows should report movements in cash, rather than cash and cash equivalents, with cash flows relating to the management of liquid resources presented in a separate section of the statement. It also discusses when the netting of cash flows should be permitted.
  4. Reconciliation of operating activities. This section looks at the presentation of a reconciliation between operating profit and cash flows from operating activities, suggesting that such a reconciliation should always be required as a note supplementing the statement of cash flows; not just in those cases where an indirect method cash flow statement is presented.
  5. Direct or indirect method? This section suggests that preparing the statement of cash flows using the direct method should be neither prohibited nor required but that disclosure relating to certain particularly significant components of cash flows from operating activities should be required.

The discussion paper includes 11 specific questions relating to these sections but also invites any other comments on issues relating to possible improvements to the statement of cash flows.

Responses are requested by 28 February 2017.  Note that on 21 December 2016 the deadline for responses was extended to 31 March 2017.

The discussion paper and associated press release are available from the FRC website.

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