TJH_FRS_FRS7

"FRS 7 - CF; Scope"

1) An enterprise should prepare a cash flow statement in accordance with the requirements of this Standard and should present it as an integral part of its financial statements for each period for which financial statements are presented. 3) Users of an enterprise's financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise's activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial institution. Enterprises need cash for essentially the same reasons however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Accordingly, this Standard requires all enterprises to present a cash flow statement.

"FRS 7 - CF; Presentation of a CF Statement"

10) The cash flow statement should report cash flows during the period classified by operating, investing and financing activities. 11) An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities. 12) A single transaction may include cash flows that are classified differently. For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.

"FRS 7 - CF; Operating Activities (1)"

13) The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to repay loans, maintain the operating capability of the enterprise, pay dividends and make new investments without recourse to external sources of financing. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. 15) An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that enterprise.

"FRS 7 - CF; Operating Activities (2)"

14) Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. Examples of cash flows from operating activities are: a) cash receipts from the sale of goods and the rendering of services; b) cash receipts from royalties, fees, commissions and other revenue; c) cash payments to suppliers for goods and services; d) cash payments to and on behalf of employees; e) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits; f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and g) cash receipts and payments from contracts held for dealing or trading purposes.

"FRS 7 - CF; Financing Activities"

17) The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the enterprise. Examples of cash flows arising from financing activities are: a) cash proceeds from issuing shares or other equity instruments; b) cash payments to owners to acquire or redeem the enterprise's shares; c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long-term borrowings; d) cash repayments of amounts borrowed; and e) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

"FRS 7 - CF; Reporting Cash Flows From Operating Activities (1)"

18) An enterprise should report cash flows from operating activities using either: a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

"FRS 7 - CF; Reporting Cash Flows From Operating Activities (2)"

19) Enterprises are encouraged to report cash flows from operating activities using the direct method. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either: a) from the accounting records of the enterprise; or b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial institution) and other items in the income statement for c) changes during the period in inventories and operating receivables and payables; d) other non-cash items; and e) other items for which the cash effects are investing or financing cash flows.

"FRS 7 - CF; Reporting Cash Flows From Operating Activities (3)"

20) Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of: a) changes during the period in inventories and operating receivables and payables; b) non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign currency gains and losses, undistributed profits of associates, and minority interests; and c) all other items for which the cash effects are investing or financing cash flows.

"FRS 7 - CF; Reporting Cash Flows on a Net Basis (1)"

22) Cash flows arising from the following operating, investing or financing activities may be reported on a net basis: a) cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise; and b) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.

"FRS 7 - CF; Reporting Cash Flows on a Net Basis (2)"

23) Examples of cash receipts and payments referred to in paragraph 22(a) are: a) the acceptance and repayment of demand deposits of a bank; b) funds held for customers by an investment enterprise; and c) rents collected on behalf of, and paid over to, the owners of properties. Examples of cash receipts and payments referred to in paragraph 22(b) are advances made for, and the repayment of: a) principal amounts relating to credit card customers; b) the purchase and sale of investments; and c) other short-term borrowings, for example, those which have a maturity period of three months or less.

"FRS 7 - CF; Reporting Cash Flows on a Net Basis (3)"

24) Cash Flows arising from each of the following activities of a financial institution may be reported on a net basis: a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date; b) the placement of deposits with and withdrawal of deposits from other financial institutions; and c) cash advances and loans made to customers and the repayment of those advances and loans.

"FRS 7 - CF; Foreign Currency Cash Flows (1)"

25) Cash flows arising from transactions in a foreign currency shall be recorded in an entity's functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow. 26) The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows.

"FRS 7 - CF; Foreign Currency Cash Flows (2)"

27) Cash flows denominated in a foreign currency are reported in a manner consistent with FRS 21 Accounting for the Effects of Changes in Foreign Exchange Rates. This permits the use of an exchange rate that approximates the actual rate. For example, a weighted average exchange rate for a period may be used for recording foreign currency transactions or the translation of the cash flows of a foreign subsidiary. However, FRS 21 does not permit use of the exchange rate at the balance sheet date when translating the cash flows of a foreign subsidiary. 28) Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the cash flow statement in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates.

"FRS 7 - CF; Interest and Dividends (1)"

31) Cash flows from interest and dividends received and paid should each be disclosed separately. Each should be classified in a consistent manner from period to period as either operating, investing or financing activities. 32) The total amount of interest paid during a period is disclosed in the cash flow statement whether it has been recognised as an expense in the income statement or capitalised in accordance with FRS 23 Borrowing Costs.

"FRS 7 - CF; Interest and Dividends (2)"

33) Interest paid and interest and dividends received are usually classified as operating cash flows for a financial institution. However, there is no consensus on the classification of these cash flows for other enterprises. Interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of profit or loss. Alternatively, interest paid and interest and dividends received may be classified as financing cash flows and investing cash flows respectively, because they are costs of obtaining financial resources or returns on investments. 34) Dividends paid may be classified as a financing cash flow because they are a cost of obtaining financial resources. Alternatively, dividends paid may be classified as a component of cash flows from operating activities in order to assist users to determine the ability of an enterprise to pay dividends out of operating cash flows.

"FRS 7 - CF; Taxes on Income"

35) Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. 36) Taxes on income arise on transactions that give rise to cash flows that are classified as operating, investing or financing activities in a cash flow statement. While tax expense may be readily identifiable with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transaction. Therefore, taxes paid are usually classified as cash flows from operating activities. However, when it is practicable to identify the tax cash flow with an individual transaction that gives rise to cash flows that are classified as investing or financing activities the tax cash flow is classified as an investing or financing activity as appropriate. When tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is disclosed.

"FRS 7 - CF; Investments in Subsidiaries, Associates and JVs"

37) When accounting for an investment in an associate or a subsidiary accounted for by use of the equity or cost method, an investor restricts its reporting in the cash flow statement to the cash flows between itself and the investee, for example, to dividends and advances. 38) An enterprise which reports its interest in a jointly controlled entity (see FRS 31 Interests in Joint Ventures) using proportionate consolidation, includes in its consolidated cash flow statement its proportionate share of the jointly controlled entity's cash flows. An enterprise which reports such an interest using the equity method includes in its cash flow statement the cash flows in respect of its investments in the jointly controlled entity, and distributions and other payments or receipts between it and the jointly controlled entity.

"FRS 7 - CF; Acquisitions and Disposals of Subsidiaries and other business Units (1)"

39) The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units should be presented separately and classified as investing activities. 40) An enterprise should disclose, in aggregate, in respect of both acquisitions and disposals of subsidiaries or other business units during the period each of the following: a) the total purchase or disposal consideration b) the portion of the purchase or disposal consideration discharged by means of cash and cash equivalents; c) the amount of cash and cash equivalents in the subsidiary or business unit acquired or disposed of; and b) the amount of the assets and liabilities other than cash or cash equivalents in the subsidiary or business unit acquired or disposed of, summarised by each major category.

"FRS 7 - CF; Benefits of CF information"

4) A cash flow statement, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events. 5) Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.

"FRS 7 - CF; Acquisitions and Disposals of Subsidiaries and other business Units (2)"

41) The separate presentation of the cash flow effects of acquisitions and disposals of subsidiaries and other business units as single line items, together with the separate disclosure of the amounts of assets and liabilities acquired or disposed of, helps to distinguish those cash flows from the cash flows arising from the other operating, investing and financing activities. The cash flow effects of disposals are not deducted from those of acquisitions. 42) The aggregate amount of the cash paid or received as purchase or sale consideration is reported in the cash flow statement net of cash and cash equivalents acquired or disposed of.

"FRS 7 - CF; Non-cash Transactions"

43) Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. 44) Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an enterprise. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these items do not involve cash flows in the current period. Examples of non-cash transactions are: a) the acquisition of assets either by assuming directly related liabilities or by means of a finance lease; b) the acquisition of an enterprise by means of an equity issue, and c) the conversion of debt to equity

"FRS 7 - CF; Cash and Cash Equivalents"

7) Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date. 8) Bank borrowings are generally considered to be financing activities. However, in some countries, bank overdrafts which are repayable on demand form an integral part of an enterprise's cash management. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn. 9) Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.

"FRS 7 - CF; Objective"

Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.