IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 5 / Cash Flow Statements (lAS 7)

Cash Outflows (a) Payment of dividends to shareholders (b) Repayment of principal port ion of debt , including finance lease ob ligations (c) Repayment of bank borrowings 10. NONCASH TRANSACTIONS

10.1 lAS 7 requires that noncash inve sting and financing activities should be exc luded from the cas h flow statement and reported "elsewhere" in the financial sta teme nts, whe re all relevant infor– mat ion about these acti vities is disclosed . Thi s requireme nt is interpreted as the necessity to dis– close nonc ash activities in the footnotes to financial statements instead of including them in the cas h flow stateme nt. 10.2 Common examples of noncash activities are (a) Conversion of debt (co nverti ble debent ures) to equity (b) Issuance of share ca pital to acquire property, plant, and eq uipment Facts On January I, 2004, Dramatic Inc. issued convert ible bonds with convers ion to take place on or before the expiry of two years from the date of issuance of the debt. On December 15, 2005, the board of di– rectors of Dramatic Inc. decided to convert the bonds at year-end and issue equ ity shares . Required How would Dramatic Inc. treat this transac tion in its cash flow preparation? Solution On conversion of the bonds into equity, it would appear that two types of cash flows have occurred: a cash inflow resulting from increase of share capital and a cash outflow due to repayment of debt. How– ever, these are noncash activities, and no cash flows have occurred. The Standard mandates that such noncash activities be disclosed in the footnotes to the financial stateme nts. 11. DIRECT VERSUS INDIRECT METHOD 11.1 Financi al statement prep arer s have a cho ice between the direct and the indirec t method in presenting the operating act ivities section of the statement of cas h flows. lAS 7 recommends the direct method of present ing net cas h from operating activi ties. In pract ice, however , preparers of financial statements prefer to present the cas h flow statement under the indi rect met hod rather than the recommended direct method (possi bly due to the ease of preparation ). 11.2 The direct method presents the items that affected cas h flow and the amounts of those cas h flows . Ent ities using the direct meth od normally report these maj or classes of cash receipts and cas h payments: (a) Cash collec tions from customers (b) Interest and dividend s received (alternatively, lAS 7 permits interest rece ived and divi– dends received to be classified as investing cash fl ows rather than as ope rating cash fl ows because they are returns on investments) (c) Cash paid toward operatin g expenses including salaries to emp loyees, and so on (d) Payments to suppliers (e) Interest paid (alternatively, lAS 7 permits interest paid to be classified as a fi nancing cash fl ow, because this is the cost of obtaining fi nancing) (f) Income taxes paid Case Study 2