business, finance, money, cashflow, cash, flow

Cash Flows

Quick win: Cash Flows

Investors use the cash flow statement to enhance their understanding of the other financial statements and many rely on it when assessing liquidity, solvency and the quality of earnings, as well as for forecasting.

Why cash flow information is important to the CRUF

While the focus of company conference calls and investor presentations may be primarily on items in the income statement, for users to really understand performance we need to be able to refer across all three primary statements. Key information should be made prominent on the face of the statement of cash flows, or should be clearly cross-referenced.

The CRUF sees two main problems with the cash flow statement: inconsistent category definitions across the primary financial statements and excessive aggregation on the face of the cash flow statement. 

It should be possible, in theory, for a user to derive the statement of cash flows from the other primary statements and the notes. However, the usefulness of the statement of cash flows is limited because it is missing information that is necessary to reconcile cash flows with the other primary statements. This means that users cannot forecast the statement of cash flows directly and, as a result, they typically build their own derived cash flow statements based on projected income statements and balance sheets rather than using the company’s reported cash flow statement. We would like the cash flow statement to be more relevant to users.

Some of our suggestions below are consistent with the proposals in the IASB’s Exposure Draft (ED) ‘General Presentation and Disclosures (Primary Financial Statements)’.

The current problem with disclosures and what the CRUF would like to see

Click the tabs below to reveal what CRUF would like to see for each of these current problems

Inconsistent category definitions across the primary financial statements

Having different category definitions between a company’s own primary financial statements and also from company to company causes unnecessary confusion and hinders users’ understanding of performance.

To understand the cash flow statement, users often need to refer to information disclosed in numerous notes. This is time consuming and may lead to some important information being missed.

Consistent categories in the cash flow statement, the income statement and reported alternative performance measures (APMs)

Cash flow from operating profit
Cash flow from operating activities should be clearly linked to the pre-tax cash flow from consolidated operations so that it is comparable to the income statement’s definition of operating profit. 
Cash flow from associates and joint ventures 
Cash flows from associates and joint ventures should be a separate category from cash flows from investing activities. This would help users who value equity method investments separately from consolidated operations. This new cash flow category would be comparable to the share of profit or loss from associates and joint ventures in the income statement. Where material the notes should disclose cash flows by investee.
Income taxes
Because tax relates to many of the line items across the three categories (not just operating activities), the CRUF would prefer tax to be shown as its own separate category. This would be more consistent with how tax is shown in the income statement.  It would also be helpful if companies disclosed cash tax by the year to allow users to compare tax expenses and cash tax in the same period. An analysis of cash tax by geography would also be helpful as it may help users to understand more about the sustainability of and risks associated with the company’s tax strategy.
Free cash flow (FCF)
If FCF is used as an APM then the definition should be reconciled to the subtotals in the cash flow statement, as is required by regulation in some jurisdictions. 
Excessive aggregation on the face of the cash flow statement

The current level of aggregation in the cash flow statement limits users’ understanding of the business’s performance and their ability to forecast future cash flows with sufficient precision.

For example, some activities may require future cash spend on assets, and others may not and without sufficient disaggregation we cannot attempt to predict this accurately.

Disaggregation of line items in the cash flow statement and clearer links to other statements and notes

Depreciation, amortisation and impairment charges
This is often a material line item in cash flows from operating activities, but when it is presented as a single number it is hard to interpret because these relate to different activities. Although most are in the fixed asset notes, it would be helpful to users if companies disaggregated these amounts directly on the face of the statement of cash flows showing: depreciation of owned assets, impairment of owned assets, and depreciation of right of use assets, impairment of right of use assets, amortisation of internally generated intangibles, amortisation of acquired intangibles, impairment of intangible assets and impairment of goodwill. 
Working capital 
This is often a material line item in net cash flow from operating activities but as a single number is hard to interpret. We would like to see a reconciliation with the individual balance sheet line items which would help users understand the non-cash movements, such as foreign exchange movements and changes in provisions, as well as the impact of acquisitions and disposals. We would also like disclosure of cash flows related to transactions with financing intermediaries. This would help users identify companies using factoring or reverse factoring to manage their working capital. Disclosing cash flows with equipment suppliers would help users to monitor trends in payables relating to capital expenditure and payables relating to revenue expenditure separately. 
Pension payments
We would like companies to disclose the cash payments for deficit funding separately from cash payments for ongoing pension contributions. It would also be helpful to disclose the tax impact of deficit funding. This would help users sense check the pension liability in the balance sheet and forecast longer term cash flows. 
Capital expenditure
Additions to fixed assets in the fixed asset note should be disaggregated into cash additions, non-cash additions and additions from acquisitions. We would also like to have information on the amount of capital expenditure that is maintenance capex, as suggested in paragraphs 50(c) and 51 of IAS 7. The amount the business needs to spend to maintain its tangible assets is an important input in the terminal value of a DCF valuation. 
Payments for acquisitions
It is hard to interpret the net cash spent on acquisitions in isolation. A clear cross reference to the purchase price allocation note would help users to see how much of the consideration was cash, as well as the various assets and liabilities acquired. 
Interest paid 
We would like companies to disclose the cash paid on debt interest separately from the cash paid to finance the right of use liabilities. This would enable users to calculate the cash interest on debt and to calculate the total cash outflow relating to a company’s right of use assets.
Cash and cash equivalents
We would like companies to disclose where cash and cash equivalents are held and in which currencies. This would help users identify if cash is ‘trapped’ overseas and apply an appropriate discount in their valuation models. It would also be helpful to know the amount of cash and cash equivalents attributable to non-controlling interests. This would help users assess the economic value of the non-controlling interest claim.

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