AASB 107 - Statement of Cash Flows - August 2015

Who this affects

• Preparers of general purpose financial statements: the obligation to prepare and present a statement of cash flows applies to an "entity" as defined in accounting standards (para 1). Appendix A notes that entities preparing general purpose financial statements under the Tier 2 simplified disclosures framework (AASB 1060) are outside the application of this Standard (AusA1).

• Users of financial statements: investors, creditors, analysts and others who rely on historical cash flow information to assess liquidity, solvency and the ability to generate cash (Objective; paras 4–5).

Why it matters (official rationale and mechanical effect)

• The Standard’s stated objective is to give users a basis to assess an entity’s ability to generate cash and cash equivalents and the timing and certainty of their generation (Objective). It explains that cash flow information complements the rest of the financial statements for evaluating financial structure, liquidity, solvency and the relationship between profit and cash flow (paras 4–5).

Analyst’s practical lens — who pays, who decides, incentives, trade-offs and implementation points

• Who pays: preparers (entities) bear the direct compliance costs of preparing the statement and the related disclosures (para 1; paras 44A–44H; paras 45–50). Those costs include gathering gross cash-receipt/payments detail under the direct method (paras 18–19) and producing reconciliations of financing liabilities and supplier finance information (paras 44A–44H).

• Who decides: management/preparers choose presentation options permitted by the Standard (for example, direct vs indirect method (para 18), classifications of interest/dividends (paras 31–34), whether certain items qualify as cash equivalents (para 7), and whether overdrafts qualify as cash equivalents in specific banking arrangements (para 8)). These choices must be disclosed where required (paras 45–47; para 46).

• Incentives and behaviour changes: because the Standard allows choice in classification (e.g. whether interest and dividends are operating, investing or financing — paras 31–34) and allows some net presentation (paras 22–24), preparers can influence how cash generation and financing appear in the statement. That changes the information available to users and may affect credit and investment decisions that rely on operating cash flow metrics (paras 13–14; para 19). The Standard encourages the direct method because it provides gross cash-flow detail useful for forecasting (para 19).

• Compliance burden and implementation risks: the Standard introduces specific, potentially detailed disclosure requirements that increase preparer workload — for example, reconciliations of liabilities from financing activities (paras 44A–44D) and supplier finance arrangement disclosures (paras 44F–44H). Some practical difficulties are recognised in the text: tax cash flows are usually classified as operating because it is often impracticable to identify tax cash flows with individual investing or financing transactions (para 36). The Standard permits approximations when translating foreign-currency cash flows (para 27), which reduces operational burden at the cost of some precision.

• Bureaucratic discretion and cross-standard reliance: the Standard references and depends on other accounting Standards for classification and measurement guidance (see front matter and paras referring to AASB 101, AASB 108, AASB 10, AASB 121, AASB 123 and others). Preparers must apply those cross-referenced standards when implementing classification, hedging and consolidation rules (front matter; paras 27; para 42A; para 59–65).

• Trade-offs and opportunity costs: the Standard seeks to increase user insight (paras 4–5) while preserving preparer flexibility. The result is a trade-off: greater transparency where specific reconciliations and supplier-finance disclosures are required (paras 44A–44H), versus continued optionality in classification that reduces immediate comparability across entities (paras 18; 31–34; para 22). The Standard explicitly requires disclosure of policies (for example, the composition of cash and cash equivalents) to help users understand those choices (paras 46–47).

Key implementation points and examples in the Standard

• Method choice: direct or indirect for operating cash flows (paras 18–20). The direct method requires major classes of gross cash receipts and payments; the indirect method reconciles profit or loss to cash flows (paras 18–20).

• Financing-liability reconciliation: entities must disclose changes in liabilities arising from financing activities including cash flows, non-cash changes, foreign-exchange effects and fair-value changes; a reconciliation linking opening and closing balances is one acceptable approach (paras 44A–44D).

• Supplier finance: entities using supply-chain finance or reverse-factoring must disclose terms, carrying amounts as at period start and end, amounts already paid to suppliers by finance providers, and ranges of payment due dates for those liabilities and comparable trade payables (paras 44F–44H).

• Non-cash transactions: excluded from the cash flow statement but required to be disclosed elsewhere (para 43).

Where to look in the Standard for the rules cited above

• Core requirement to prepare a statement of cash flows: para 1.
• Classification of activities: paras 10, 13–17.
• Direct vs indirect methods: paras 18–20.
• Cash equivalents and short-maturity guidance: paras 6–9.
• Reconciliation of liabilities from financing activities: paras 44A–44E.
• Supplier finance disclosures: paras 44F–44H.
• Disclosures about components and policies for cash and cash equivalents: paras 45–47.
• Restrictions on cash balances and encouraged additional disclosures: paras 48–51.

This Standard consolidates presentation and disclosure rules that require preparers to provide both a classified statement of cash flows and a suite of supporting disclosures intended to help users evaluate liquidity and financing position, while preserving some preparer choice on classification and presentation whose exercise affects reported measures (paras 1; 10; 18; 31–34; 44A–44H).