ABSTRACT
Financial Reporting standard No 1 – ‘Cash Flow Statements’ is issued by the Accounting Standards Board in respect of its application in the United Kingdom and by the Institute of Chartered Accountants in Ireland in respect of its application in the Republic of Ireland.
Financial Reporting Standard No 1 – ‘Cash Flow Statements’ (the FRS) establishes standards for cash flow reporting. It supersedes Statement of Standard Accounting Practice No 10 – ‘Statements of Source and Application of funds’ (SSAP 10) and requires reporting entities which fall within its scope to prepare a cash flow statement as part of their financial statements setting out on a standard basis their cash generation and absorption for a period. The FRS sets out the required structure of the cash flow statement and minimum level of disclosure.
The Statement of Principles for Financial Reporting being developed by the Accounting Standards Board (the Board) recognises that users of financial statements need information on the liquidity, viability and financial adaptability of the entity concerned. Deriving this information involves the user in making assessments of the future cash flows of the entity. Accruals accounting, used in producing profit and loss (or income and expenditure) accounts and balance sheets, adjusts cash flows to measure results for a period and this is the primary basis for projections. Nevertheless, long-term provisions and other allocations associated with accruals accounting need to be eliminated in order to reveal the leads and lags in historical cash flows, thereby improving understanding of a reporting entity’s cash generating or cash absorption mechanisms and providing a basis for the assessment of future cash flows.
In order to promote understanding and to help to achieve the objectives of cash flow reporting by securing the useful presentation of information, the FRS requires that individual cash flows should be classified under certain standard headings according to the activity that gave rise to them. The standard headings required in a cash flow statement are:
operating activities; returns on investments and servicing of finance; taxation; investing activities; and financing.
In addition, the FRS requires that the cash flow statement should show a total giving the net cash inflow or outflow before financing. The FRS specifies particular cash flows to be separately reported under each of the standard headings apart from operating activities. Analysis of net cash flow from operating activities on the so-called ‘direct method’ is encouraged but not required.
In order to ensure that it reflects clearly the substance of a reporting entity’s cash management, the cash flow statement deals with flows of cash equivalents as well as with cash flows.
A reconciliation between the operating profit reported in the profit and loss (or income and expenditure) account and the net cash flow from operating activities should be given as a note to the cash flow statement. This reconciliation should disclose separately the movements in stocks, debtors and creditors related to operating activities and other differences between cash flows and profits. A reconciliation of the amounts shown in the balance sheet of the reporting entity in respect of items reported within the financing section of the cash flow statement with the equivalent figures in the previous year’s balance sheet, disclosing separately the movements resulting from cash flows, differences arising from changes in foreign currency exchange rates and other movements, should also be given as a note to the cash flow statement. Small reporting entities
The FRS exempts most small reporting entities from the requirement to include a cash flow statement as part of their financial statements. The exemption does not extend to public companies, banking companies, insurance companies, authorised persons under the Financial Services Act 1986, or members of a group containing one or more of the above mentioned entities. Wholly owned subsidiary undertakings
A wholly owned subsidiary undertaking of a parent undertaking established under the law of a member State of the European Community is exempt from the requirements of the FRS if:
the parent undertaking publishes, in English, consolidated financial statements which include the subsidiary undertaking concerned, drawn up in accordance with United Kingdom or Republic of Ireland companies legislation or the EC Seventh Company Law Directive; and
those consolidated financial statements include a consolidated cash flow statement dealing with the cash flows of the group; and
that cash flow statement gives sufficient information to enable a user of the financial statements to derive the totals of the amounts required to be shown under each of the standard headings set out in the FRS.
