As part of its multi-faceted disclosure initiative, the IASB has finalized its amendments to Statement of Cash Flows, effective for annual periods beginning on or after January 1, 2017.
The amendment adds the following requirement:
- “An entity shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
- To the extent necessary to satisfy the requirement (the above), an entity shall disclose the following changes in liabilities arising from financing activities:
- (a) changes from financing cash flows;
- (b) changes arising from obtaining or losing control of subsidiaries or other businesses;
- (c) the effect of changes in foreign exchange rates;
- (d) changes in fair values; and
- (e) other changes.”
The most obvious way to address this will usually be by providing a formal reconciliation; however, this format isn’t mandatory. The requirement covers all liabilities for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. The new disclosure requirements also applies to changes in financial assets (for example, assets that hedge liabilities arising from financing activities) if cash flows from those financial assets were, or future cash flows will be, included in cash flows from financing activities.
In its exposure draft, the IASB had also proposed adding the following paragraph to IAS 7:
- “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 Board isn’t proceeding with this for now, concluding: “further work is needed before it can determine whether and how to finalize requirements arising from that proposal.”
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 check an investor’s understanding of the entity’s cash flows; it improves investors’ confidence in forecasting an entity’s future cash flows when they can use a reconciliation to check their understanding of its cash flows; it provides information about an entity’s sources of finance and how those sources have been used 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).
One member of the IASB voted against the amendments, noting among other things that the changes may provide incomplete information about an entity’s management of liquidity. For example, “Because IAS 7 permits an entity to classify some cash flows (such as interest payments) as either operating or financing, the understanding of what constitutes changes in liabilities arising from financing activities may vary among preparers.” He also believes: “providing the disclosure may require excessive work and hence may be inefficient from a preparer’s point of view.” Further: “He notes that the Board may conduct research regarding the effectiveness of IAS 7. Because he regards IAS 7 as having some significant shortcomings, he believes that issuing amendments based on the existing statement of cash flows is not a worthwhile endeavour.” One can likely agree with the general point, that if an element of the statements is likely to be 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 changes, incrementally useful as they presumably are, do shine a light on the limitations of what remains the same. In his comments on the original exposure draft, the dissenting member had pointed 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 amendments constitute the single step that begins a long and productive journey…
The opinions expressed are solely those of the author