In our view, if the period between acquisition and payment is not significant, it would
not be appropriate to regard any of the payment as a financing cash flow. On the other
hand, if the period of deferral is significant, payments to reduce this liability could be
regarded as financing cash flows. However, the greater the extent to which the actual
value of the contingent consideration payable depends on factors other than the time
value of money, such as future business performance, the more difficult it would be to
identify a financing element.
6.3.3.B Asset
acquisitions
outside of business combinations
The purchase price of intangible assets or tangible assets acquired outside of a business
combination often includes contingent consideration as well. The appropriate
disclosure of the cash payment of that contingent consideration will depend on the facts
and circumstances of the transaction. The classification in the statement of cash flow
should follow the accounting treatment adopted in the statement of financial position
and statement of comprehensive income with regard to changes in the fair value of that
contingent consideration.
6.3.4
Settlement of amounts owed by the acquired entity
A question that sometimes arises is how to treat a payment made by the acquirer to
settle amounts owed by a new subsidiary, either to take over a loan that is owed to the
vendor by that subsidiary or to extinguish an external borrowing.
Payments made to acquire debt instruments of other entities are normally included
under investing activities. [IAS 7.16]. Therefore, the payment to the vendor is classified
under the same cash flow heading irrespective of whether it is regarded as being part of
the purchase consideration or the acquisition of a debt. This presentation can be
contrasted with the repayment of external debt by the new subsidiary, using funds
provided by the parent, which is a cash outflow from financing activities. [IAS 7.17].
6.3.5
Settlement of intra-group balances on a demerger
A similarly fine distinction might apply on the demerger of subsidiaries. These
sometimes involve the repayment of intra-group indebtedness out of the proceeds from
external finance raised by the demerged subsidiary. If the external funding is raised
immediately prior to the subsidiary leaving the group, it is strictly a financing inflow in
the consolidated statement of cash flows, being cash proceeds from issuing short or
long-term borrowings. [IAS 7.17]. If the subsidiary both raises the external funding and
repays the intra-group debt after the demerger, the inflow is shown in the consolidated
3036 Chapter 36
statement of cash flows under investing activities, being a cash receipt from the
repayment of advances and loans made to other parties. [IAS 7.16].
6.4
Cash flows of subsidiaries, associates and joint ventures
6.4.1
Investments in associates and joint ventures
Changes in cash and cash equivalents relating to associates or joint ventures accounted
for under the equity or cost method will impact the entity’s statement of cash flows only
to the extent of the cash flows between the group and the investee. [IAS 7.37]. The same
concept would apply to associates or joint ventures carried at fair value as allowed by
IAS 28 – Investments in Associates and Joint Ventures (discussed in Chapter 11).
Examples include cash dividends received and loans advanced or repaid. [IAS 7.37]. Cash
flows in respect of an entity’s investment in an equity accounted associate or joint
venture would also be presented. [IAS 7.38].
Cash dividends received from equity accounted associates and joint ventures would be
classified as operating or investing activities in accordance with the entity’s determined
policy for other dividends received (see 4.4.1 above). Where the net cash inflow from
operating activities is determined using the indirect method, the group’s share of profits
or losses from equity-accounted investments will appear as a non-cash reconciling item
in the cash flow statement (see 4.1.2 above).
6.4.2
Cash flows of joint operations
IAS 7 does not specifically deal with the treatment of the cash flows of joint operations.
However, following the guidance of IFRS 11 – Joint Arrangements – all transactions
should be reflected in the accounts of the joint operators financial results to the extent
of its interests in those transactions. [IFRS 11.20]. Therefore the cash flows of the joint
arrangement are already included in the operator’s financial statements and no
additional adjustments are required to reflect the activities of the joint operation.
The treatment of cash flows for the acquisition and disposal of a joint operation is less
clear as there is an argument for presentation either as a single net cash flow in investing
activities (as is required for the cost of a business combination, discussed at 6.3 above);
or as separate cash flows, classified according to the nature of the underlying assets and
liabilities acquired. The IASB issued an amendment to IFRS 11, effective from
1 January 2016, [IFRS 11.C1AA], which requires an entity to determine whether the activity
undertaken by a joint operation constitutes a business as defined in IFRS 3 and to apply
business combination or asset acquisition accounting in accordance with that analysis.
[IFRS 11.21A]. Whilst this amendment does not change the requirements of IAS 7, it would
be appropriate to apply a similar approach, with acquisitions and disposals of operations
meeting the definition of a business giving rise to a single investing cash flow, and
acquisitions and disposals of operations not regarded as a business giving rise to cash
flows according to the nature of the assets and liabilities acquired. However, other
approaches would be acceptable.
6.4.3 Cash flows in investment entities
IAS 7 does not address the treatment of subsidiaries held at fair value in an investment
entity. As these investments are accounted for at fair value through profit or loss in
Statement of cash flows 3037
accordance with IFRS 9, the related cash flows would be treated consistently with cash
flows from joint ventures and associates discussed at 6.4.1 above.
The disclosures required by an investment entity on the acquisition of subsidiaries are
less than those required for other entities. Investment entities need only disclose the
total consideration paid or received and the portion of the consideration consisting of
cash and cash equivalents are required to be disclosed. [IAS 7.40-40A].
6.5
Cash flows in separate financial statements
6.5.1
Cash flows of subsidiaries, associates and joint ventures
IAS 7 addresses the treatment of cash flows of associates, joint ventures and subsidiaries
accounted for by use of the cost method, restricting its reporting in the statement of
cash flows to the cash flows between itself and the investee, for example, to dividends
and advances as discussed in 6.4.1 above. [IAS 7.37]. This treatment would also be applied
to associates, joint ventures and subsidiaries either held at fair value through profit or
loss, or
using the equity accounted method in the separate financial statements, as
allowed by IAS 27 – Separate Financial Statements – and discussed in Chapter 8.
6.5.2
Group treasury arrangements
Some groups adopt treasury arrangements under which cash resources are held
centrally, either by the parent company or by a designated subsidiary company. Any
excess cash is transferred to the designated group entity. In some cases a subsidiary
might not even have its own bank account, with all receipts and payments being made
directly from centrally controlled funds. Subsidiaries record an intercompany
receivable when otherwise they would have held cash and bank deposits at each period
end. A question that arises is whether or not a statement of cash flows should be
presented when preparing the separate financial statements of such a subsidiary given
that there is no cash or cash equivalents balance held at each period end and, for some
entities, at any time during the year. In our view, the preparation of the statement of
cash flows should be based upon the actual cash flows during the period regardless of
cash and cash equivalents balance held directly by the entity.
Where no cash flows through an entity, but rather all transactions flow through another
group company, the entity should still record receipts from debtors and payments to
suppliers, albeit with an associated deposit to or withdrawal from a balance with another
group company. Just as a bank processes payments and receipts as agent for the account
holder, so the group treasury function acts as agent for the entity, and these transactions
should be reflected in a statement of cash flows. This approach is consistent with the
requirements in IAS 7 that all entities should prepare a statement of cash flows which
forms an integral part of the financial statements. [IAS 7.1].
Where the subsidiary makes net deposits of funds to, or net withdrawals of funds from
the designated group entity during the reporting period, a further question arises as to
how movements should be presented in the subsidiary’s statement of cash flows.
Normally these transactions give rise to intercompany balances. Therefore the deposits
or withdrawals should be evaluated against the definitions of the categories of cash
flows and presented as either operating activities or alternatively as investing or
3038 Chapter 36
financing activities, as appropriate. Further consideration should be made as to whether
these cash flows meet the criteria for net presentation as discussed in 5.2 above.
In extremely rare cases the intercompany balances may meet the definition of cash
equivalents and be regarded as short-term highly liquid investments that are readily
convertible into known amounts of cash and are subject to insignificant risk of changes
in value. However, in most cases such funds are transferred to the designated group
entity for an indeterminate term and the fact that both the subsidiary and designated
group entity are controlled by the parent company makes it difficult to conclude that
the subsidiary could demand repayment of amounts deposited independently of the
wishes of the parent company.
7
ADDITIONAL IAS 7 CONSIDERATIONS FOR FINANCIAL
INSTITUTIONS
IAS 7 applies to banks, insurance entities and other financial institutions. Nevertheless,
there are some differences in its application as compared to entities that are not
financial institutions. For example, in considering the components of cash and cash
equivalents, banks would not usually have borrowings with the characteristics of an
overdraft, and cash for their purposes should normally include cash and balances at
central banks, together with loans and advances to other banks repayable on demand.
Allianz discloses such items as components of its cash and cash equivalents, as shown
in Extract 36.13 below.
Extract 36.13: Allianz SE (2017)
CONSOLIDATED STATEMENTS OF CASH FLOWS [extract]
Cash and cash equivalents
€ mn
As of 31 December
2017
2016
Balances with banks payable on demand
8,745
6,855
Balances with central banks
1,973
1,273
Cash on hand
71
94
Treasury bills, discounted treasury notes, similar treasury securities, bills
of exchange and checks
6,331
6,241
Total 17,119
14,463
IAS 7 contains a number of additional provisions affecting the preparation of statements
of cash flow by financial institutions. These are covered in broad outline below.
7.1
Operating cash flows
Cash advances and loans made by financial institutions are usually classified as
operating activities (and not as investing activities, as they are for other entities) since
they relate to a financial institution’s main revenue-producing activity. [IAS 7.15, 16(e)].
Similarly, receipts from the repayment of loans and advances would be included in
operating cash flows. [IAS 7.16(f)].
Statement of cash flows 3039
Interest paid and interest and dividends received are usually classified as operating cash
flows for a financial institution. [IAS 7.33].
For an insurance entity, cash receipts and cash payments for premiums and claims,
annuities and other policy benefits would be included in its operating cash flows as these
relate to the principal activities of the entity.
Under the direct method of reporting operating cash flows, a financial institution that
does not obtain information from its accounting records can derive the disclosures for
major classes of gross cash receipts and payments by adjusting interest and similar
income and interest expense and similar charges and other items recognised in profit or
loss for:
(a) changes during the period in operating receivables and payables;
(b) other non-cash items; and
(c) other items for which the cash effects are investing or financing cash flows.
[IAS 7.19].
Where an insurance entity presents its operating cash flows using the direct method, it
should separately disclose cash flows arising from insurance contracts. [IFRS 4.37(b)].
Comparative information is required. [IFRS 4.42]. When an entity adopts IFRS 17, which
is mandatory for periods beginning on or after 1 January 2021, the specific disclosure
requirements under IFRS 4 – Insurance Contracts – will no longer apply.
Subject to the differences noted above, the principles for a financial institution
presenting operating cash flows under the indirect method are the same as those
discussed at 4.1.2 above for other entities.
7.2
Reporting cash flows on a net basis
Cash flows 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. [IAS 7.24].
8
REQUIREMENTS OF OTHER STANDARDS
8.1
Cash flows of discontinued operations
IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations – requires an
entity to disclose the net cash flows attributable to the operating, investing and financing
activities of discontinued operations. These disclosures can be presented either on the
face of the statement of cash flows or in the notes. Disclosure is not required for disposal
groups that are newly acquired subsidiaries which are classified as held for sale on
3040 Chapter 36
acquisition in accordance with IFRS
5. [IFRS 5.33(c)]. The general presentation
requirements of IFRS 5 are dealt with in Chapter 4.
In the example below, Netcare Limited elected to show the cash flows of discontinued
operations on the face of the statement of cash flows, as well as in the note. Over and
above this, the entity has elected to include additional disclosures by splitting cash flows
in respect of interest and tax paid into those relating to continuing and discontinued
operations. In the notes to the financial statements, Netcare Limited further analyses
these cash flows by separate major business line.
Extract 36.14: Netcare Limited (2012)
GROUP STATEMENT OF CASH FLOWS [extract]
for the year ended 30 September
Rm
2012 2011
Cash generated from operations
5 193
5 572
Interest paid
(1 976)
(1 836)
Continuing operations
(1 959)
(1 817)
Discontinued
operations
(17)
(19)
Taxation paid
(740)
(674)
Continuing
operations
(720)
(658)
Discontinued
operations
(20)
(16)
Capital reductions paid
(83)
Ordinary dividends paid
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 602
