Cash flow statements in interim reporting – a dismal issue

by John Hughes

The July issue of IFRIC update set out the Committee’s discussion on a rather strange issue. I’ll paste it here in its entirety:

  • “The submitter observed that there are divergent views on the presentation and content of the condensed statement of cash flows (in interim financial statements). One view is that an entity should present a detailed structure of the condensed statement of cash flows showing cash flows by nature. Another view is that an entity may present a three line condensed statement of cash flows showing only a total for each of operating, investing and financing cash flow activities.
  • The Interpretations Committee noted that a condensed statement of cash flows is one of the primary statements that is included as part of an interim financial report as prescribed by paragraph 8 of IAS 34. Paragraph 10 of IAS 34 specifies that each of the condensed statements shall include, at a minimum, each of the headings and subtotals that were included in the most recent annual financial statements. Paragraph 10 of IAS 34 also requires additional line items to be included if their omission would make the interim financial statements misleading.
  • The Interpretations Committee also noted that in an interim financial report:
  • (a) an entity shall include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. Information disclosed in relation to those events and transactions shall update the relevant information presented in the most recent annual financial report (see paragraph 15 of IAS 34).
  • (b) the overriding goal is to ensure that an interim financial report includes all information that is relevant to understanding an entity’s financial position and performance during the interim period (see paragraph 25 of IAS 34). The Interpretations Committee further noted that in accordance with paragraph OB20 of the IASB’s Conceptual Framework, information about cash flows helps users to understand a reporting entity’s operations, evaluate its financing and investing activities, assess its liquidity or solvency and interpret other information about financial performance.
  • In this respect, the Interpretations Committee noted that to meet the requirements in paragraphs 10, 15 and 25 of IAS 34 a condensed statement of cash flows should include all information that is relevant in understanding the entity’s ability to generate cash flows and the entity’s needs to utilize those cash flows. It also noted that it did not expect that a three-line presentation alone would meet the requirements in IAS 34.
  • On the basis of this analysis, the Interpretations Committee determined that an Interpretation or an amendment to a Standard was not necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.”

Unable to comprehend how this could ever have been a source of uncertainty or of diversity in practice, I dug up the submission to IFRIC, which came from the European Securities and Markets Authority (ESMA). There really doesn’t seem to have been much more to the argument than the premise that each of the broad totals of operating, investing and financing activities constitutes a heading and/or subtotal, and so would normally be sufficient for interim reporting purposes. ESMA’s submission says that in the view of proponents of this argument: “the IASB included a very high threshold in IAS 34 (condensed interim financial statements being misleading) to trigger reporting of additional line items in the condensed interim financial statements.” Apparently this way of looking at it is widespread enough to have been encountered in at least seven EU member states (I don’t recall ever seeing it in Canada though).

Personally, I find this issue rather depressing. It’s hard to imagine that any entity taking a scrupulous view to its interim financial reporting would ever want to generate such a high-level cash flow statement, as it seems that except in the most simple cases (such as where an entity did nothing except spend money on operating expenses out of a pre-existing bank balance), this could only possibly mask clarity and leave a pile of unanswered questions. Even when completely complying with IAS 7, the cash flow statement often leaves plenty of doubt about what actually came in and out, especially when an entity prepares the operating section using the indirect method (maybe at this point we can pause in respectful memory of the IASB and FASB’s forgotten financial statement presentation project, which would have moved comprehensively toward the direct method, and toward more disaggregation in various other ways).

More generally, the fact this discussion even had to take place seems only to add fire to those who doubt whether the fact of multiple jurisdictions adopting IFRS is at all the same thing as claiming they speak in a common accounting language. If an entity takes such an unprogressive, grudging approach to such a basic aspect of its financial reporting, it seems inevitable that other aspects of its compliance (most of which of course wouldn’t be as obvious on the surface) will be equally as dismal. IFRIC dealt with the issue in the cool dispassionate way that’s no doubt required of it, but since I’m under such no such constraints here, I can’t help summing it up more colourfully: some people, for the sake of our collective good, just need a big kick up their self-serving asses.

The opinions expressed are solely those of the author

One thought on “Cash flow statements in interim reporting – a dismal issue

  1. I think the real issue is actually about enforcement here. If there is even the slightest potential ambiguity ESMA and the national enforcers are not willing to issue enforcement notices until the issue has been considered by the IFRS IC (even if all the IFRS IC do is publish an agenda rejection notice that effectively says ‘don’t be stupid’).

    The approach taken by ESMA is pretty much a legalistic (rules-based) approach, rather than a principles-based approach that would appear sensible under IFRS. In other words – yes, you should be depressed about compliance and enforcement.

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