In October 2016 the Financial Reporting Council (FRC) launched a consultation on improvements to IAS 7, Statement of Cash Flows, a standard that has been largely unchanged for over 20 years.
This is an unusual move for the FRC, as it does not usually consult on International Financial Reporting Standards’ (IFRS) matters, suggesting that some wider long-term consideration on presentation of financial statements are taking place. These changes are also likely to affect the future changes to FRS 102.
The Statement of Cash Flows is one of the key primary statement for investors as it shows where and how the company generated cash and where it was spent, and it is information in this primary statement that often drives investors decisions.
So how are the proposed changes likely to impact the financial reporting close process?
While some of the proposed amendments relate to incremental improvements in presentation and classification of cash flows such as reporting cash flows related to tax in a separate tax section, as opposed to operating activities, other changes are more significant and may require businesses to change certain processes to enable the correct capture of the required information such as:
- Reporting cash flows to acquire property, plant and equipment with clear identification of whether the expenditure relates to replacement of assets or business expansion/enhancement.
- Removal of cash equivalents from cash flows and introduction of a separate section relating to management of liquid resources.
- Separate disclosure of non-cash transactions instead of reporting notional cash flows in the statement of cash flows.
- Reconciling operating profits to operating cash flows which may significantly affect those using the ‘direct method’ cash flow statements.
Although the final amendments and the outcome of the consultation are still up for the debate, it is clear that the change is coming, and planning for this will soon need to make into agendas of most IFRS and FRS 102 reporters, with some companies potentially requiring a number of substantial modifications to their period end reporting processes.
If you feel that issues highlighted in this article are likely to affect your reporting and would like to discuss this further with one of our specialist, you can contact AVEY of London on:
Tel: 01707 691 783
Email: info@aveyoflondon.co.uk
Further reading (FRC publication): >>> Cashflow statement improvements consultation launched
No responsibility for any person acting or referring to act as a result of any material contained in this guidance can be accepted by AVEY of London.