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Statement of cash flows: Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, ASC 230 is the primary source of guidance for presentation of the statement of cash flows.

Under IFRSs, IAS 7, Statement of Cash Flows, is the primary source of guidance for presentation of the statement of cash flows.

The table below summarizes these differences and is followed by a detailed explanation of each difference.1

SubjectU.S. GAAPIFRSs

Definition of cash and cash equivalents

Cash and short-term, highly liquid investments are included. Bank overdrafts are excluded. Restricted cash is not included in cash and cash equivalents. Instead, changes in restricted cash should generally be presented as investing activities.

Cash and short-term, highly liquid investments are included. Bank overdrafts are included in certain situations.

Classification of components of transactions in the statement of cash flows

Components of a transaction are classified collectively on the basis of the predominant source of the cash flows.

Separate components of a single transaction are classified as operating, investing, or financing.

Statement of cash flows classification

More specific guidance is provided on items to be included in each category.

More flexibility exists regarding which items are to be included in each category.

Reporting cash flows from operating activities

Use of the direct or indirect method is allowed. Under both methods, net income must be reconciled to net cash flows from operating activities.

Use of the direct or indirect method is allowed. Net income must be reconciled to net cash flows from operating activities only under the indirect method.

Comparative periods

Presentation of comparative periods is not required.

The most recent two years must be presented.

Scope

Provides industry-specific guidance (e.g., not-for-profit entities (NFPs)).

Provides principles for classification of cash flows but little industry-specific guidance.

Scope exemptions

Limited scope exemptions exist for defined benefit plans and for certain investment companies.

No scope exemptions exist.

Disclosure of cash flows pertaining to discontinued operations

Before application of ASU 2014-08 — Separate disclosure is not required. If a company elects to report cash flows from discontinued operations, it must report them separately by category.

After application of ASU 2014-08 — Must disclose either the total operating and investing cash flows of the discontinued operation or the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation.

Disclosure of cash flows from discontinued operations under each category is required either on the face of the cash flow statement or in the notes.

Presentation of cash flow per share on the face of the financial statements

Prohibited.

Disclosure of cash flow per share is not explicitly prohibited.

Cash flows from hedging instruments

A company may classify cash flows from hedging activities in the same category as the cash flows from the hedged item provided that certain requirements are met and the accounting policy is disclosed.

Companies are required to classify cash flows from hedging activities in the same category as the cash flows from the item being hedged.

Definition of Cash and Cash Equivalents

The definition of cash and cash equivalents under U.S. GAAP is similar to that under IFRSs. The definitions in ASC 230-10-20 and paragraph 6 of IAS 7 both include cash and short-term, highly liquid investments with maturities of generally three months or less. One distinguishing feature is that under IFRSs, cash and cash equivalents may include bank overdrafts if they are an "integral part of an entity's cash management." Paragraph 8 of IAS 7 explains that in these circumstances, "the bank balance often fluctuates from being positive to overdrawn." If an entity classifies bank overdrafts as cash and cash equivalents, it should disclose this policy.

In addition, under U.S. GAAP, restricted cash is excluded from the definition of cash and cash equivalents. Changes in restricted cash are generally presented as investing activities. 

Under U.S. GAAP, ASC 230-10-45-4 states that the "total amounts of cash and cash equivalents at the beginning and end of the period shown in the statement of cash flows shall be the same amounts as similarly titled line items or subtotals shown in the statements of financial position as of those dates." Under IFRSs, paragraph 45 of IAS 7 states that an entity is required to reconcile "the amounts [of cash and cash equivalents] in its statement of cash flows with the equivalent items reported in the statement of financial position."

Under U.S. GAAP, ASC 230-10-50-1 requires entities to disclose their policies for determining cash and cash equivalents. Under IFRSs, paragraph 46 of IAS 7 indicates that an entity is required to disclose its policy for determining cash and cash equivalents; but paragraph 45 of IAS 7 also requires disclosure of the components of cash and cash equivalents.

Classification of Components of Transactions in the Statement of Cash Flows

Under U.S. GAAP, ASC 230-10-45-22 and 45-23 indicate that when a cash receipt or payment has characteristics of more than one category of cash flows, it is classified on the basis of the predominant source of the cash flow.

Under IFRSs, paragraph 12 of IAS 7 indicates that a company should classify each individual component in a transaction separately as either operating, investing, or financing.

Statement of Cash Flows Classification

ASC 230-10-45-10 under U.S. GAAP and paragraph 10 of IAS 7 under IFRSs indicate that cash flows are classified into three categories: operating, investing, and financing. While the headings are the same, ASC 230-10-45-10 through 45-17 under U.S. GAAP include more specific guidance on classification of certain transactions as follows:

TransactionsClassification Under U.S. GAAPClassification Under IFRSs

Interest paid

Operating

Operating2 or financing

Interest received

Operating

Operating2 or investing

Dividends paid

Financing

Operating or financing

Dividends received

Operating or investing3

Operating or investing

Taxes paid

Operating

Operating4

Reporting Cash Flows From Operating Activities

ASC 230-10-45-25 under U.S. GAAP and paragraph 18 of IAS 7 under IFRSs both allow the use of the direct or indirect method for reporting cash flows from operating activities, with most companies using the indirect method. However, there are differences between the two sets of accounting standards. Under U.S. GAAP, ASC 230-10-45-29 indicates that a company must reconcile net income to net cash flows from operating activities regardless of whether it is using the direct method or the indirect method. Under IFRSs, paragraph 18 of IAS 7 indicates that a company must reconcile net income (profit or loss) to net cash flows from operating activities only when it is using the indirect method.

Comparative Periods

Under U.S. GAAP, ASC 230 does not require the presentation of comparative cash flow statements. However, for SEC registrants, SEC Regulation S-X, Rule 3-02, "Consolidated Statements of Income and Changes in Financial Positions," requires an audited cash flow statement to be presented for the previous three fiscal years.

Under IFRSs, paragraph 36 of IAS 1, Presentation of Financial Statements, requires entities to present one year of comparative cash flow statements.

Scope

Under U.S. GAAP, ASC 230 provides certain industry-specific guidance (e.g., for NFPs, investment companies, and real estate entities).

IAS 7 contains some guidance that is specific to financial institutions; however, it does not provide as much industry-specific guidance as ASC 230.

Scope Exemptions

Under IFRSs, entities are not exempt from providing a statement of cash flows. Under U.S. GAAP, ASC 230-10-15-4(a) states that statements of cash flows are not required to be provided in defined benefit pension plans and certain other employee benefit plans that present financial information in accordance with or similar to that required by ASC 960. In addition, highly liquid investment companies that meet all of the criteria in ASC 230-10-15-4(c) are exempt from the requirement to provide a statement of cash flows.

Disclosure of Cash Flows Pertaining to Discontinued Operations

Under U.S. GAAP

ASU 2014-08 is effective for public entities prospectively for all disposals (or classifications as held for sale) of components occurring in an annual period beginning on or after December 15, 2014. All other entities have an additional year to adopt the ASU. Early adoption is permitted (with certain limitations).

Before application of ASU 2014-08 — Under U.S. GAAP, an entity is not required to disclose cash flows pertaining to discontinued operations separately in the statement of cash flows but may choose to do so. See ASC 230-10-45-24. See also 230-10-45 (Q&A 30) for further discussion of presentation alternatives.

After application of ASU 2014-08 — Under U.S. GAAP, an entity must provide either of the following disclosures about a discontinued operation (if not already presented on the face of the financial statements as part of discontinued operations):

  • The total operating and investing cash flows of the discontinued operation.
  • The depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation.

See ASC 205-20-50-5B(c).

Under IFRSs

Paragraph 33(c) of IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations, requires that net cash flows pertaining to discontinued operations for each of the categories in the statement of cash flows be presented either in the notes to the financial statements or on the face of the cash flow statement.

Presentation of Cash Flow per Share on the Face of the Financial Statements

Under U.S. GAAP, ASC 230-10-45-3 prohibits an entity from reporting cash flow per share.

Under IFRSs, there is no explicit prohibition of reporting cash flow per share, and IAS 7 does not refer to disclosure of this metric. Accordingly, an entity may choose to voluntarily report cash flow per share.

Cash Flows From Hedging Instruments

Under U.S. GAAP, an entity that accounts for a derivative instrument as a fair value hedge or cash flow hedge may classify the cash flows from these hedging activities in the same category as the cash flows from the hedged items, provided that the entity meets the following criteria set forth in ASC 230-10-45-27:

  • "[T]he derivative instrument does not include an other-than-insignificant financing element at inception, other than a financing element inherently included in an at-the-market derivative instrument with no prepayments."
  • "[T]he accounting policy is disclosed."

Under IFRSs, paragraph 16 of IAS 7 requires an entity to classify cash flows from hedging instruments in the same category as the cash flows from the item being hedged.

____________________

1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

2 Paragraph 33 of IAS 7 indicates that financial institutions typically classify both interest paid and received as operating.

3 ASC 230-10-45-12(b) and ASC 230-10-45-16(b) distinguish between returns of investment, which should be classified as inflows from investing activities, and returns on investment, which should be classified as inflows from operating activities.

4 Paragraph 35 of IAS 7 notes that these transactions are classified as operating unless specifically identified with financing or investing activities.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.