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IFRS Types of cash flow statement presentation

IFRS Types of cash flow statement presentation:  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.

Important Note – Preparing for IFRS?
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IFRS Types of cash flow statement presentation

  • Operating activities – Net income.

    • Cash generated from the sale of goods
    • cash paid for merchandise
  • Investing activities- Non current assets.

    • Long-term investments;
    • Property, plant, and equipment; and
    • The principal amount of loans made to other entities.
  • Financing activities non current liabilities as well as owners’ equity.

    • The principal amount of long-term debt,
    • Stock sales and repurchases, and
    • Dividend payments.

Let see about its contents and syllabus 

IFRS Types of cash flow statement presentation: 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 Types of cash flow statement presentation:

A statement of cash flows provides investors with information about cash inflows and outflows and the resulting change in cash and cash equivalents. For this purpose cash flows are classified into three key activities: operating, investing and financing.

For many investors, cash and cash flow are not only a critical area of focus when analysing value and value creation, they also help in analysing liquidity. Despite its omnipotence in the world of valuation, investors tell us that the practicalities of assessing cash flow can present challenges to even the most seasoned investment professional. In the first issue of The Essentials, we offer some insight on the accounting Standard1 that covers the cash flow statement and discuss how it plays a role as an input in commonly used methods of assessing a company’s cash-generating capabilities.

IFRS Types of cash flow statement presentation

What you need to know about the cash flow statement In this issue, we highlight four essentials for reading and using the cash flow statement.

Important Note – Preparing for IFRS?
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1. The buckets To help analysts assess how different types of activity affect a company’s financial position, cash flows are classified by: operating, investing and financing activities. Operating activities: this is where cash flows that generally result from transactions and other events that determine profit or loss (P&L) are reported.

Typical examples include: cash from the sale of goods and rendering of services, cash payments to suppliers and cash payments to employees. Investing activities: this is where investors find expenditures for items that are ultimately intended to generate future income and cash flows. This information supports analysts’ efforts to analyse capital expenditures.

2. Three buckets: one statement By requiring companies to consider transactions through the lens of operating, investing and financing activities, the cash flow statement is organised in a manner that can support many investors’ methods of analysing the present value of future cash flows and of making comparisons across companies.

2. Three buckets: one statement By requiring companies to consider transactions through the lens of operating, investing and financing activities, the cash flow statement is organised in a manner that can support many investors’ methods of analysing the present value of future cash flows and of making comparisons across companies.

4. No statement is an island! No financial statement should be taken in isolation. Indeed, an unwary investor who looked only at the cash flow statement could miss out on important information contained elsewhere in the financial statements. For example, investing activities can often include non-cash transactions—one instance would be when finance leases are used to obtain property, plant and equipment (PP&E). This introduces a potential ‘capex blind spot’ into an investor’s analysis. When cash is used to purchase PP&E, an analyst would see this capex cash flow classified in investing activities. However, PP&E acquired via a finance lease is a non-cash investing transaction that results in assets and liabilities being recognised in the balance sheet without any corresponding cash flows presented in the cash flow statement.

IFRS Types of cash flow statement presentation

There are a variety of views on virtually every aspect of financial reporting. Because of the importance of cash flows in the valuation process, it is not surprising that this is an area that stimulates hot debate. Commonly cited areas of concern include:

• Dividends and interest paid can be classified as either operating or financing activities. This results in some diversity in reporting practices across companies, requiring analysts to make appropriate adjustments when making comparisons. For instance, if a company classifies interest paid in the financing section of the cash flow statement, then the analyst may adjust the reported operating cash flow by this amount when calculating free cash flow for valuation purposes. Conversely, interest paid that is reported within operating activities may be reclassified to financing by investors who focus on assessing the company’s ability to service debt.

• Expenditures on research and development activities are classified as cash from operating activities; however, some analysts consider these to be long-term investments in future income generating activities. What is the most helpful starting point for reconciling the P&L to operating cash flow? The presentation of operating profit under the indirect method of the cash flow statement can start with either P&L before or after tax. An investor’s ability to make comparisons across companies may be affected if different starting points are presented in the reconciliation.

IFRS Types of cash flow statement presentation : Free cash flow valuation

For many investors, the core concept in estimating free cash flow is the excess of a company’s operating cash flows over its capital expenditures. Applying free cash flow in intrinsic valuation methods, such as a discounted cash flow model (DCF), is often considered to be more appropriate than simply using the disclosed operating cash flow. This is because it considers the cash flows available to owners after funding the investment (or reinvestment) needs of the business.

To enable this analysis to be as precise as possible, companies are encouraged to disclose separately cash flows that increase operating capacity and those required to maintain it (some investors refer to this as ‘maintenance capex’ vs ‘growth capex’). As well, these measures of a company’s cash flow can be used as an indicator of financial strength, which may be useful to investors analysing a company’s ability to repay debt.

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IFRS - Types of cash flow statement presentation

IFRS Types of cash flow statement presentation

IFRS Types of cash flow statement presentation

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