The main amendment proposes adding the following paragraph:
- “An entity shall provide a reconciliation of the amounts in the opening and closing statements of financial position for each item for which cash flows have been, or would be, classified as financing activities in the statement of cash flows, excluding equity items. The reconciliation shall include:
- (a) opening balances in the statement of financial position;
- (b) movements in the period, including:
- (i) changes from financing cash flows;
- (ii) changes arising from obtaining or losing control of subsidiaries or other businesses; and
- (iii) other non-cash changes (for example, the effect of changes in foreign exchange rates, and changes in fair values).
- (c) closing balances in the statement of financial position.”
Another amendment would add this:
- “Additional information may be relevant to an understanding of the liquidity of an entity. An entity shall consider matters such as restrictions that affect the decisions of an entity to use cash and cash equivalent balances, including tax liabilities that would arise on the repatriation of foreign cash and cash equivalent balances. If these, or similar, matters are relevant to an understanding of the liquidity of the entity, those matters shall be disclosed.”
The value of these proposed amendments is likely largely self-evident. In the IASB’s words, the additional information about financing activities can be used to verify an investor’s understanding of the entity’s cash flows; it improves investors’ confidence in forecasting an entity’s future cash flows when used to verify an investor’s understanding of an entity’ cash flows; it provides information about an entity’s sources of finance and how those sources have been deployed over time; and it enables investors to better understand an entity’s exposure to risks associated with financing (according to the basis for conclusions, users’ primary identified interest is in understanding movements in “debt,” but requiring the information for all financing activities seems to the IASB like the best way of satisfying that interest).
The second proposal addresses the concern that “although the cash and cash equivalent balances are available to settle debt or to be used for other purposes, there may be some form of economic restriction in place (for example, the cash and debt are in different jurisdictions and using the cash to settle debt would trigger a tax payment) or there is a legal restriction in place that affects the decision of the entity to use the cash and cash equivalent balances.” Some entities might have disclosed this information in some other form – for example as part of the risk disclosures required under IFRS 7, or perhaps in the MD&A. However, the new disclosure requirement would address the underlying concern more directly.
One member of the IASB voted against the proposals, noting among other things that IAS 7 is being considered more broadly elsewhere on the IASB’s agenda and that “issuing a minor amendment without a clear vision of future overall improvements to IAS 7 shortly before the fundamental reconsideration could give rise to a duplication of the costs required to update systems and could potentially confuse users of financial statements.” One can likely agree with the general point, that if an aspect of the statements is being affected by various aspects of the IASB’s work, it’s usually better to deal with it all at once. It surely shouldn’t be too onerous for any entity to implement these particular proposals though, given that they flow directly from what should be pre-existing information (or put another way, if an entity would have great difficulty implementing the proposals, it’s probably a sign of bigger problems).
But it’s true of course that the proposed changes, incrementally useful as they presumably are, do shine a light on the limitations of what remains the same. The dissenting member also points out that the cash flow statement’s usefulness “is significantly impaired when it is presented as part of consolidated financial statements…because consolidated financial statements do not provide information about the location and the availability of assets and liabilities. For example, if a parent company has debt of CU100 and a 51 per cent controlled subsidiary has cash of CU100, it could be interpreted in the consolidated statement of financial position that the group has sufficient cash and cash equivalent balances to meet the debt. However, this may not be true.” Absolutely correct, although of course this is merely one of many things that consolidated statements can’t convey in themselves, and for which a complete understanding demands greater segmentation, accompanying disclosure and so on. Not to mention the long-standing arguments in favour of the direct rather than indirect method of preparing the cash flow statement, and of requiring reconciliations of changes in all significant asset and liability balances as well. But for now, we’ll assume that the new proposals constitute the single step that begins a long and productive journey…
The opinions expressed are solely those of the author