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IFRS Classification of business operations with the objective of CFS

IFRS Classification of business operations with the objective of CFS

IFRS Classification of business operations with the objective of CFS: International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organisation called the International Accounting Standards Board (IASB).

IFSR Provides global framework for should companies prepare and disclose their financial statements. All the general guidelines for preparation of financial statements are provided in IFRS.

IFRS provides international standards, having an international standard is very much important for the company. A single set of world wide standard will simply accounting procedure for a company to use one reporting language. Investors and auditors will also be provided with cohesive view of finance.

IFRS Classification of business operations with the objective of CFS: Syllabus

IAS 7 “Statement of Cash Flows” (CCF)

  • – Purpose and application of the standard. Concepts;
  • – The structure of the Cash Flow Statement;
  • – Classification of business operations with the objective of CFS;
  • – Types of cash flow statement presentation;
  • – A direct method for preparation of cash flow statement;
  • – The indirect method cash flow statement preparation;
  • – Identification of inflows and outflows of cash and cash equivalents provided by the bank’s operations.

IFRS Classification of business operations with the objective of CFS

This module, updated in January 2013, focuses on the requirements for the presentation of the statement of cash flows in accordance with Section 7 Statement of Cash Flows of the IFRS for SMEs that was issued in July 2009 and the related non-mandatory guidance subsequently provided by the IFRS Foundation SME Implementation Group.. Section 3 Financial Statement Presentation sets out general presentation requirements and Sections 4–8 focus on the requirements for presenting the individual statements that together comprise a complete set of financial statements.

This module introduces the learner to the subject, guides the learner through the official text, develops the learner’s understanding of the requirements through the use of examples and indicates significant judgements that are required in presenting a statement of cash flows. Furthermore, the module includes questions designed to test the learner’s knowledge of the requirements and case studies to develop the learner’s ability to present a statement of cash flows in accordance with the IFRS for SMEs.

IFRS Classification of business operations with the objective of CFS

IFRS Classification of business operations with the objective of CFS: Learning objectives Upon successful completion of this module you should know the financial reporting requirements for the statement of cash flows in accordance with the IFRS for SMEs as issued in July 2009. Furthermore, through the completion of case studies that simulate aspects of the real-world application of that knowledge, you should have enhanced your competence to present the statement of cash flows in accordance with the IFRS for SMEs. In particular you should, in the context of the IFRS for SMEs:

  1. Know the purpose of the statement of cash flows;
  2. Understand the requirements for presenting this statement;
  3. Be able to distinguish cash equivalents from other financial assets;
  4. Be able to distinguish the cash flows from operating, investing and financing activities;
  5. Be able to prepare the statement of cash flows using both the indirect method and the direct method; and
  6. Be able to prepare notes to financial statements and commentary by management in accordance with the requirements of Section 7 of the IFRS for SMEs.

IFRS Classification of business operations with the objective of CFS

The objective of general purpose financial statements of a small or medium-sized entity is to provide information about the entity’s financial position, performance and cash flows that is useful for economic decision-making by a broad range of users (eg owners who are not involved in managing the business, potential owners, existing and potential lenders and other creditors) who are not in a position to demand reports tailored to meet their particular information needs. Section 3 prescribes general requirements for the presentation of financial statements and specifies that a statement of cash flows is required in a complete set of financial statements. Section 7 specifies requirements for presenting a statement of cash flows.

Presentation of a statement of cash flows is required because users of SMEs’ financial statements—particularly lenders and short-term creditors—find that information useful

To assess an entity’s prospects for future net cash inflows, existing and potential investors, lenders and other creditors need information about the resources of the entity, claims against the entity, and how efficiently and effectively the entity’s management and governing board have discharged their responsibilities to use the entity’s resources . The statement of cash flows, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in the net assets of an entity, 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 entity to generate cash and cash equivalents and enables users to develop models to asses and compare the present value of the future cash flows of different entities. It also enhances the comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events

The statement of cash flows presents changes in both cash and cash equivalents in the period. Most SMEs have only easily identifiable items of cash and cash equivalents. Consequently they should experience no difficulty in identifying those items. Other SMEs may have items that are more difficult to identify as cash equivalents using the definition in the IFRS for SMEs. Judgement is needed to determine whether some items qualify as cash equivalents. Consequently, an entity develops criteria so that it can exercise that judgement consistently in accordance with the definition of cash equivalents and with the related guidance requires an entity to disclose these judgements when they have the most significant effect on the amounts recognised in the financial statements. From the definition of cash equivalents in the Glossary, four criteria for a cash equivalent are identified:

(i) they are short-term;

(ii) they are highly liquid investments;

(iii) they are readily convertible to known amounts of cash; and

(iv) they are subject to an insignificant risk of changes in value. Furthermore, cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes.

It follows that cash equivalents may include some investments with financial institutions, some certificates of deposit, some money market instruments, some short-term corporate bonds and some highly liquid investments, provided that they are ‘near to cash’ (ie short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value) and are held to meet short-term cash commitments rather than for investment or other purposes.

IFRS Classification of business operations with the objective of CFS: Classification by activity

Classification by activity (operating, investing or financing) provides more detailed information to help users to assess the ability of the entity to generate cash flows in a particular accounting period and in the future. This information is also useful in evaluating the relationships between those activities when predicting future cash flows. Judgement is required to classify some cash flows as operating, investing or financing. The substance of the transaction that underlies the cash flow (rather than its legal form), judged in the entity’s particular circumstances, is applied in classifying cash flows. Because these judgements also apply to classifications in the statement of financial position and the statement of comprehensive income, there should be consistency of treatment across the statements. Furthermore, the concept of consistency of presentation results in consistent presentation by an entity over time.

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IFRS Classification of business operations with the objective of CFS

IFRS Classification of business operations with the objective of CFS

IFRS Classification of business operations with the objective of CFS

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