Statement of Cash Flows: IFRS® vs. US-GAAP (2023)

From the IFRS Institute - March 5, 2021

The cash flow statement is a key part of a company's financial statements and provides important information about its financial health and its ability to generate cash flows. Despite similar objectives, IAS 71and ASC2302have different requirements, such as B. the composition of cash and the classification of interest, dividends, and lease payments into different cash flow categories. These differences can significantly affect comparability between IFRS standards and US GAAP preparers. Here we summarize our picks for the top 10 GAAP differences related to the statement of cash flows.

The statement of cash flows prepared in accordance with IAS 7

A company must provide a cash flow statement showing how its cash and cash equivalents changed during the period. Cash flows are classified as operating, investing or financing activities according to their nature.

Description

operational activities

The Company's primary revenue-generating activities and activities other than investing or financing activities.

investment activity

Correspond to the acquisition and disposal of non-current assets and other investments not included in cash equivalents.

financing activity

lead to changes in the size and composition of the firm's contributed capital and borrowed funds.


How is IAS 7 different from ASC 230?

IFRS and US GAAP contain similar general principles in preparing the statement of cash flows, including:

  • the requirement to classify cash flows by operating, financing or investing activities; Y
  • Entities may choose to report cash flows from operations using the direct method (collections from customers, payments to suppliers, etc.) . 🇧🇷

According to IFRS standards, the main consideration in classifying cash flows is the type of activity to which they refer. Under US GAAP, the classification of an item on the balance sheet and related accounting generally informs the appropriate classification on the statement of cash flows. Therefore, a different classification and accounting treatment of an underlying item on the US GAAP balance sheet could result in differences in the statement of cash flows. In addition, there are certain differences between the requirements detailed in IAS 7 and ASC 230 that may affect dual preparers. Consult the KPMG manual,cash flow statementfor more information on US GAAP requirements.

Here we summarize our selection of the top 10 differences.

1. Cash flow statement always required by IFRS standards; There are exceptions under US GAAP

There are no exceptions to the scope of IFRS standards and all entities are required to present a statement of cash flows in the full financial statements.

US GAAP Defined Benefit Pension Plans Reporting Financial Information in accordance with ASC 9603and certain investment entities within the scope of ASC 9464may be exempt from presenting the statement of cash flows.

2. The starting point of the statement of cash flows varies according to IFRS standards; Net income is the starting point under US GAAP

Under IFRS, entities may use different starting points to report operating cash flows using the indirect method, for example, profit or loss, profit or loss from continuing operations, profit or loss before tax or profit or loss operational.

In practice, diversity may have developed because IAS 7 talks about 'profit or loss', but an example in the standard starts with a different number (earnings before tax). We believe it is more appropriate to follow the pattern (ie, start with a win or a loss) as the example is illustrative only and does not have the same status as the pattern.

see theproposed changesthis would require operating profit or loss as a starting point and would align IFRS standards with US GAAP.

3. IFRS standards provide options for classifying interest, dividends and income taxes; no US GAAP

The table summarizes the ranking differences.

Norm IFRS

US GAAP

interested payment

operation or financing

(usually working for financial institutions)

Operative (less capitalized interests).5)

dividend payments

operation or financing

financing

Interest and dividends received

operation or inversion

(usually working for financial institutions)

operating

paid taxes

General operating activities, unless it is practicable to identify taxes with investing or financing activities

operating


see theproposed changesthat would affect these classifications under IFRS.

4. Cash can be adjusted for bank overdrafts in accordance with IFRS standards; not under US GAAP

Under IFRS standards, bank overdrafts reduce cash and cash equivalents in the statement of cash flows if they are repayable daily and are an integral part of the company's liquidity management. However, there are usually overdrafts on the balance6reported as passive. The components that make up the opening and closing balances of total cash and cash equivalents in the statement of cash flows are disclosed and reconciled with the corresponding balance sheet items.

Under US GAAP, bank overdrafts are, and generally are, considered a form of short-term financing.6presented as a liability with changes to it classified as a financing activity (separate repayment sachets) in the statement of cash flows.

5. Cash may exclude restricted cash under IFRS; included in US GAAP

Under IFRS, "restricted cash" is not defined and there is no specific guidance on whether restricted amounts should be included in an entity's opening or closing balances of cash and cash equivalents on its statement of cash flows. However, to meet the definition of cash and cash equivalents, the amounts must, among other criteria, be available, readily withdrawn without penalty, or readily convertible into a known amount of cash. A primary criterion for "cash equivalents" is that they are held to meet short-term payment obligations and not for investment or other purposes. When significant amounts are not available for group use, IAS 7 requires disclosure of the amount and comment on the restriction.

Under US GAAP, although the restricted amounts are presented separately from cash and cash equivalents on the balance sheet, the amounts are included in total cash and cash equivalents in the statement of cash flows. The entity then discloses a reconciliation between the two totals of cash and cash equivalents.

Although none of GAAP provides a specific definition of restricted cash, US GAAP is generally understood to include cash and cash equivalents whose withdrawal or use is restricted for certain purposes, for example, escrow deposits held as offset funds for short-term borrowings. , contracts entered into with third parties, letters of intent for specific deposits. This uncertainty may, in practice, result in differences between amounts reported as restricted cash under IFRS and US GAAP.

6. Operating lease payments are primarily financing activities under IFRS standards; Business operations under US GAAP

According to IFRS 167Does the lessee classify cash payments for the principal portion of a lease liability as a financing activity in the statement of cash flows? Interest installment payments are classified as operating or financial activities consistent with the Company's policy for interest payments (see the difference #3🇧🇷 (Unlike US GAAP, IFRS 16 does not distinguish between operating and finance leases for lessees.)

Under US GAAP, a lessee classifies operating lease payments as operating activities. Finance lease payments are classified in the same way as all lease payments under IFRS.

Both GAAP classify the following as operating cash flows: short-term lease payments and leases on low-value assets and variable lease payments that are not included in the lease liability (measured in accordance with applicable GAAP).

7. The classification of deferred or contingent consideration in a business combination may differ under IFRS and US GAAP

Under IFRS standards, contingent and deferred cash payments in a business combination require judgment to determine the appropriate classification based on the type of activity to which the cash flows relate. Although US GAAP does not address the classification of deferred consideration payments in a business combination, it does provide prescriptive guidance on the classification of contingent consideration payments.

The table summarizes the ranking differences.

Norm IFRS

US GAAP

deferred consideration

We believe that, in general, it is appropriate to classify payments as follows.

  • Payment that reflects a financing expense consistent with the choice of policy for the interest paid (see the difference #3).
  • Payment that reflects the settlement of the fair value of the consideration recognized on initial recognition in financing or investing activities.
    Judgment is required to determine whether the payment is from obtaining control (an investment activity) or is financing provided by the seller.
    Factors that may be relevant include: (1) the time between initial recognition of the liability and settlement; (2) whether the settlement period reflects a normal payment period; and (3) whether the liability is discounted to reflect its deferred settlement (which would indicate a financing element of the arrangement).
  • Contingent consideration paid that exceeds the fair value of the consideration recognized on initial recognition, either in the course of operating activities or in accordance with the interest paid policy decision (see the difference #3).
  • No specific instructions.
conditional consideration
  • Payments made “shortly after” the acquisition date are classified as investing activities; We believe that three months or less is a reasonable interpretation of "soon after".
  • Payments not made "shortly after" the acquisition date are allocated between operating and financing activities; Payments up to the fair value of consideration recognized on initial recognition are classified as financing activities and any excess as operating activities.


8. US GAAP requires the classification of certain cash flows; IFRS standards do not

Unlike IAS 7, US GAAP explicitly specifies the classification of certain cash flows:

  • Cash payments for early debt payments or amortization costs: Financing activities;
  • Cash payments to settle a zero coupon bond or a negligible interest rate bond: operations (portion attributable to accrued interest) and financing activities (portion attributable to original principal);
  • Proceeds from the settlement of an insurance claim: according to the type of claim;
  • Distributions from investees using the equity method: accounting policy choices between operating activities (where distributions do not represent a return on capital) or based on the facts and circumstances of the distribution; Y
  • Proceeds from payments of a cedant's right-of-use asset for securitized receivables: investment activities.

In the absence of specific guidance in IAS 7, we believe that judgment is required, particularly considering the nature of the activity (rather than the classification of related balance sheet items).

9. There is no primacy principle in IFRS; exists in US GAAP

Under IFRS, an entity classifies each of the separate components of a single transaction as a transaction, investment or financing because IAS 7 does not allow classifying a transaction based on its predominant feature. IAS 7 provides specific guidance on buying and selling equipment held for lease to third parties.

US GAAP contains similar principles, but when a transaction has characteristics of more than one class of cash flows and each separately identifiable source or use of cash cannot reasonably be separated, then an entity applies the primacy principle to determine the classification. corresponding cash flow. cash flows to be determined.

Example:Company A generally purchases equipment that is leased to third parties and then sold.

Under IFRS standards, payments for the purchase of equipment and revenues from leases and final sales are classified as operating activities. This classification is required by specific guidance in IAS 7 in relation to the purchase and sale of equipment held for lease to third parties.

Under US GAAP, rental income is also classified as an operating activity. However, the classification of cash flows from buying and selling equipment depends on the predominant activity: renting or selling.

  • If the rental period is significant and the selling price is modest, the rental activity is likely to be the dominant source of cash flows. In this case, cash flows from purchases and sales of equipment are classified as investing activities, in line with other purchases and sales of manufacturing assets.
  • If the lease is short-term and the sale price is significant, the sale activity is likely to be the dominant source of cash flows. In this case, the cash flows from the purchase and sale of equipment are classified as operating activities, consistent with the purchase and sale of inventories.


10. IFRS and US GAAP have different disclosure requirements

The following are the main disclosure differences between IFRS and US GAAP.

  • Both IFRS and US GAAP require a company to disclose cash flow information for discontinued operations. However, US GAAP permits an entity to disclose depreciation, amortization, capital expenditures and significant non-monetary operating and investment items from discontinued operations in lieu of disclosing total cash flows from activities.
  • Cash flow per share may be presented in accordance with IFRS, but not in accordance with US GAAP.
  • Additional disclosures are required by IAS 7 for changes in liabilities for financing activities; US GAAP has no such requirement.

proposed changes

In December 2019, the International Accounting Standards Board published its draft,General Presentation and Disclosures - Main Financial Statements,which proposed a new standard for the presentation of financial statements in order to improve their usefulness and relevance. While the main proposals focused on the income statement, the following specific improvements were also proposed to reduce diversity in the classification and presentation of cash flows and improve comparability across companies:

  • Use operating profit or loss as a starting point to present operating cash flows using the indirect method (see the difference #2).
  • Present separately the cash flows from investments in “integrated” and “non-integrated” associates and joint ventures.
  • Eliminate interest and dividend sorting options for most companies (see the difference #3).

our article,IFRS Perspectives: Proposed Amendments to the IFRS Financial Statements, gives an overview of the most important proposals. For a more detailed discussion of the exposure draft, including further implications for the statement of cash flows, see KPMG's publication,New on the horizon: presentation and dissemination.

take it off

The cash flow statement is a central part of a company's financial statements and provides users with important information for evaluating a company's financial performance for investment or other decisions. However, cash flows may be classified differently under IFRS and US GAAP due to differences in accounting for the underlying item to which a cash flow relates, as well as the different requirements of IAS 7 and ASC 230 Therefore, preparers and users of financial statements should develop a clear understanding of these classification differences when analyzing and using statements of cash flows prepared in IFRS or US GAAP.

You can find more explanation about the differences between IFRS and US GAAP standards in our postIFRS versus US GAAP.

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