UKEB Research Paper 3. Statement of Cash Flows UK User and Preparer Perspectives.

March 2025

Background

Purpose of research paper

C1. This paper is the third in a series of research papers as part of the UKEB's proactive research project on the Statement of Cash Flows and Related Matters.

C2. The paper builds on the two previous papers:

1. Statement of Cash Flows and Related Matters: Background and key issues, presented to the Board in December 2024 – based on desk-top research. This paper provided background on IAS 7 Statement of Cash Flows, and perceived issues concerning cash flow reporting identified by the IASB and others (including the UK's Financial Reporting Council (FRC)); and
2. Statement of Cash Flows and Related Matters: Non-mandatory and Voluntary Cash Flow Disclosures Provided by UK Listed companies, presented to the Board in February 2025 – based on a sample review of financial statements. This paper highlighted cash flow related disclosures that UK listed companies include in their financial statements beyond the requirements of IAS 7 and other IFRS Accounting Standards.

C3. This third paper is based on interviews with UK preparers and UK users¹ of financial statements and sets out their perspectives on the perceived issues with the reporting of cash flows identified in the first research paper. It includes the key messages received during those interviews that the IASB could consider when making any changes to cash flow reporting requirements.

C4. In addition, it provides UK preparers' and users' suggestions on how to resolve some of the identified issues. Resolving these issues would improve the quality of cash and non-cash information by enhancing transparency for users and assist them in their decision-making.

C5. The UK preparers' and users' views described in this paper do not necessarily represent UKEB opinions regarding the issues identified, or the relevance or desirability of suggested improvements.

Stakeholder interviews

C6. This phase of the research comprised one-to-one interviews with 24 stakeholders (12 users and 12 preparers of financial statements), between December 2024 and the March 2025. Participants comprised a broad range of users and preparers from a number of different industry sectors, including financial institutions.

C7. The tables below show the ownership type and industry sector of the preparers that participated in the interviews:

C8. The table below summarises the categories of the users that participated in the interviews.

C9. In this paper, the following terms are used to give a broad indication of prevalence of the comments raised²:

C10. The interviews were semi-structured with specific questions on the usefulness of the statement of cash flows, their experiences with the perceived deficiencies and challenges (as identified by the IASB), further issues identified by interviewees, how issues could be resolved, and the priority that should be given to resolving the issues from a UK perspective.

C11. Interviewees were also asked whether the IASB's project should:

1. focus on targeted improvements;
2. carry out a fundamental review of the cash flow reporting requirements in IAS 7 and other IFRS Accounting Standards; or
3. undertake a phased approach (comprising short term targeted improvements and a longer-term fundamental review of cash flow reporting requirements).

C12. In addition to the interviews, feedback was sought from both the UKEB Investor Advisory Group (in November 2024 and February 2025)³, and the UKEB Preparer Advisory Group (in October 2024 and March 2025)⁴. Advisory Group members were consulted on the IASB perceived issues in the first of the meetings. During the latter meetings, preparers were asked to comment on the feedback received from investors, and investors were asked to comment on the feedback received from preparers.

Key messages

C13. This paper makes no recommendations. However, some high-level observations include:

1. The statement of cash flows is useful for users of financial statements for non-financial institutions, although the use of the statement varies.
2. Users do not prefer the 'direct' method of presenting the operating cash flows, despite its encouragement in IAS 7. UK preparers said they are not asked for any information that would be provided if the direct method was presented, and are not keen to change their current disclosures under the 'indirect' method, being concerned with the potential cost implications of any changes.
3. Users suggest that qualitative disclosure, through commentary on the statement of cash flows, including a company's own assessment of its liquidity, would enhance its usefulness.
4. Users would like to see more cohesiveness between the statement of cash flows and the other primary financial statements, and any improvements should aim to enhance this.
5. It is important for users to have transparent information and sufficient disaggregation about material items, including non-recurring or infrequently recurring items, such as merger and acquisitions (M&A), disposals, discontinued operations. However, disaggregation of growth and maintenance expenditure, as encouraged by IAS 7 is not a priority for users and preparers would find it challenging.
6. Non-cash information is very important to users (including both transactions that have the same economic benefit as cash transactions, such as leases, and the impact of unrealised gains or losses, changes in fair value and foreign exchange (FX) movements). This information needs to be more transparent and connected. It is often scattered throughout the financial statements, so it would be useful to have a single location where the information is referenced in order to improve accessibility.
7. Non-GAAP measures, in particular net debt, are important disclosures for investors and other users.
   1. Most interviewees agree that it would be useful if the IASB provides a definition for net debt. Some suggest that the net debt information could be elevated to the primary financial statements and integrated into the statement of cash flows, due to the importance of net debt in determining a company's liquidity.
   2. Whilst free cash flow is a useful metric, it is more important for users to have transparent information to prepare their own free cash flow metrics, than a standardised definition or a mandated free cash flow disclosure.
8. There are cross-cutting issues relating to the lack of explicit disclosure requirements in IAS 7 and other IFRS Accounting Standards. In particular, most preparers suggest that inconsistencies with IFRS 18 Presentation and Disclosure in Financial Statements need to be addressed.
9. Preparers would find more guidance and illustrative examples useful on some aspects of the requirements, including cash and cash equivalents, classification of cash flows and offsetting/netting. Whilst providing more guidance, as suggested by preparers, could reduce diversity in application of the requirements in IAS 7, identifying why the application difficulties arise and making suitable revisions to the main text of the standard may be a better solution.
10. Field-testing should be carried out for any proposed changes to ensure that the benefit to users exceeds any cost burden on preparers. Preparers are concerned about the incremental cost of applying any changes to the requirements; the application of the current requirements are already costly given that for most companies the preparation of the statement of cash flows is not automated.
11. The statement of cash flows for banks and insurers provides little to no incremental value to users. Non-GAAP measures and regulatory information are perceived to be more relevant and comparable.

C14. Each of the observations are covered in more detail in the relevant sections of this paper:

1. Usefulness of the statement of cash flows for non-financial institutions (paragraphs C16–C72).
2. Cohesiveness between the primary financial statements (paragraphs C73–C78).
3. Importance of non-cash information (paragraphs C79–C110).
4. Importance of non-GAAP measures (paragraphs C111–C139).
5. Interconnectivity with other IFRS Accounting Standards (paragraphs C140–C145).
6. Challenges for preparers (paragraphs C146–C169).
7. Usefulness of the statement of cash flows for financial institutions (paragraphs C170–C178).
8. Concluding observations (paragraphs C179–C183).

C15. Whilst the IASB identified seven areas of perceived deficiencies in the requirements of IAS 7, as covered in the first research paper, this research paper is based on the key messages received during the UKEB outreach. (The outreach approach is explained in paragraphs C6–C12 of this paper).

Usefulness of the Statement of Cash Flows for non-financial institutions

C16. The first research paper Statement of Cash Flow and Related Matters: Background and key issues described the usefulness of the statement of cash flows, as set out in IAS 7⁵.

C17. Interviews confirmed that, for most UK stakeholders, the statement of cash flows is useful, however the extent to which they consider it useful varies. Some users went so far as stating that the statement of cash flows is the most important primary financial statement.

C18. Users explained that they use it for a variety of reasons, including to validate information in the other primary financial statements, to assess a company' ability to generate future cash flows, and to assess a company's ability to return cash to investors through dividends or share buybacks.

C19. One credit rating agency noted that several financial ratios used to assess credit quality are based on the statement of cash flows, including 'funds from operations'⁶. They also noted, however, that “there could be more disclosures and disaggregation of key information” to allow them to undertake their own additional analyses.

"The statement of cash flows is more important than the statement of profit and loss".
Credit-rating agency

C20. A perceived impediment to the usefulness of the statement of cash flow identified by almost all users was the lack of commentary provided by companies, despite IAS 7 paragraph 50 suggesting "additional information may be relevant to users in understanding the financial position and liquidity of an entity. Disclosure of this information, together with a commentary by management, is encouraged".

“The statement of cash flows is not as well understood as the other primary financial statements".
Preparer

C21. One user suggested that companies should be required to provide a qualitative disclosure explaining how much cash at the end of the reporting period is distributable, whether there are any constraints in a company's ability to distribute cash and what such factors are, and to explain the impact of the constraints. This would include any restrictions on a parent company's ability to access cash of any of its subsidiaries.

“Improvements should focus on integration, better classification, and reconciliation to net debt".
Analyst

C22. A few preparers, by contrast, were not as convinced of the usefulness of the statement of cash flows. Companies generally do not use the statutory statement of cash flows format required by IAS 7 for internal treasury or liquidity management purposes, which may explain the perceived low priority given to its preparation, which most companies see as a compliance exercise.

“Companies approach the statement of cash flows as a compliance exercise rather than a valuable financial tool".
“enhanced reconciliations, cross-references and narrative explanations would improve transparency".
Preparer

C23. One preparer also specifically suggested that management commentary could be more useful for predicting future cash flows.

“It does not and cannot communicate the manner in which companies think about and use cash" ... "it is too condensed and prescriptive".
Preparer

“It is useful for showing how a company has performed and managed its business in the short term and should not be used to project into the long term".
Preparer

“A well-prepared cash flow statement conveys useful information that reconfirms information included in the other primary statements. The statement is less useful and may even be completely unhelpful if it is treated as an afterthought."
Preparer

C24. Overall, most preparers and users interviewed concur that statement of cash flows for non-financial institutions is useful and does not require a fundamental overhaul, but targeted improvements to improve clarity and transparency could enhance its usefulness.

Direct versus indirect method for operating cash flows

C25. IAS 7 paragraph 19 encourages companies to report cash flows from 'operating' activities using the 'direct' method, stating "the direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method". However, it is not clear on what that information is and not clear on how it is used. As noted in the second research paper⁷, very few UK companies report 'net cash flows from operating activities' using the 'direct' method.

C26. During the interviews, one preparer noted that it uses the 'direct' method information internally but does not report that information externally, and one preparer with a US listing noted it discloses both methods.

C27. None of the UK users interviewed stated that they prefer companies to report 'net cash flows from operating activities' using the 'direct' method. Some explicitly stated that they prefer the information presented by the 'indirect' method.

C28. The rationale for users preferring the ‘indirect' method is that they use operating profit as the basis for predicting sustainable future cash flows and future profitability. The disclosure of the adjustments to eliminate the non-cash elements of operating activities assist the user in identifying timing differences and non-cash elements of the profit or loss where management judgement has been used. These include accounting policy choices, accrued or deferred income and expenses, and provisions.

“The downside of the 'direct' method is the working capital movements are not shown on the statement of cash flows."
Credit rating agency

C29. The 'indirect' method provides more transparent information about changes in working capital that enables investors to understand a company's cash and liquidity management practices. One rating agency user noted that 'funds from operations' is derived from operating cash flow after deducting working capital. Where the 'direct' method is used, identifying the working capital movements from the statement of financial position and the notes can be challenging, especially when there has been M&A activity or disposals during the period.

C30. Some users were explicitly asked if they needed information on cash flows from 'operating' activities that would be provided by the 'direct' method (e.g. cash received from customers, cash paid to suppliers and employees). Only a few suggested they would welcome selected figures based on the direct method, though did not identify the critical information or how they would use it. One user did suggest that they needed more disaggregation, providing an example of 'cash from customers' broken down between 'grants or customer contributions' and 'other cash from customers'.

C31. The most important issue for users is to have transparent information about material items, including one-off items such as disposals, discontinued operations⁸, M&A activity, as well as information about non-cash transactions that have the same economic benefit as cash transactions (e.g. leases).

C32. Some preparers stated that if companies were required to provide all, or some of, the information that would be disclosed using the 'direct' method, it would be costly, as their current systems and processes do not allow the information to be readily extracted. They also questioned the usefulness of disclosing cash flows required when the 'direct' method is used, since users do not currently ask for this information. One user suggested that they want to see how revenue recognised is ultimately converted into cash collected and also suggested that roll forwards for certain items might be an alternative to providing the direct method (see paragraphs C90–C92 for more details on roll forwards).

C33. A number of preparers and one analyst suggested that the 'old UK GAAP' requirements under SSAP 10⁹ to produce a 'statement of source and application of funds' (SSAF) or 'funds flow statement' in the annual report, was a more intuitive way to provide information. It showed how a company's business activities were financed (sources) and how the funds were used (applications). One preparer noted the SSAF presented information in a way which added to the understanding of the data in the other two primary financial statements. The analyst noted that the categories¹⁰ were more useful than the current requirements that separate only 'operating', investing, and 'financing'.

Classification of cash flows

Inconsistencies with IFRS 18 Presentation and Disclosure in Financial Statements

C34. The opening paragraph of IAS 7 sets out that the objective of the Standard "is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities". IAS 7 paragraph 11 requires that "An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business".

C35. One preparer commented that the definitions of ‘operating', 'investing', and 'financing' cash flows are not prescriptive enough, leading to inconsistencies in classification.

C36. Most preparers noted that IFRS 18 introduces categories and sub-totals in the statement of profit or loss. Income and expenses in the statement of profit and loss are classified into operating, investing, financing, income taxes and discontinued operations, where operating is a residual category.

C37. Some preparers commented that while IAS 7 and IFRS 18 use the same names for categories (operating, investing and financing), the definitions are not aligned¹¹. In addition, the statement of cash flows does not currently have separate categories for tax and discontinued operations. The IASB has previously suggested that it will consider alignment of the definitions as part of its research project into the statement of cash flows.

C38. IFRS 18's classification of income and expenses is largely driven by the nature of the underlying assets and liabilities, rather than the nature of the income or expense itself. This change in approach may require significant changes to existing systems and processes, and this will also impact the statement of cash flows¹².

C39. Most preparers and users considered that aligning the definitions of the categories was an important step and would avoid confusion.

C40. A few preparers commented that when applying IAS 7 to prepare the statement of cash flows, cash utilised to acquire property, plant, and equipment (PP&E) that will be used in the company's operations must be classified in the 'investing' category. However, when applying IFRS 18, income and expenses generated from the use of PP&E in the company's operations (depreciation and amortisation) must be included in the 'operating' category in the statement of profit or loss. These preparers consider that the categorisation in the statement of cash flows should align with the classification of the related charges in the statement of profit and loss.

C41. By contrast, one preparer commented that cash inflows and outflows are different concepts to income and expenditure, and therefore they do not see an overriding need to align their presentation. The interviewee provided an example, where they include 'revenue associated with contributions received' within operating profit in the income statement but include the related cash inflows in 'investing' activities in the statement of cash flows. They believe that gives a more meaningful representation of how the cash receipts benefit the business in the longer term and are utilised¹³.

C42. Users seem less concerned with the categorisation of cash flows and are more focused on whether the statement of cash flows and other primary financial statements and notes include sufficient details about where the cash flows are classified, to facilitate their analyses.

C43. Other investors said aligning the classification between IFRS 18 and IAS 7 for investments in associates and joint ventures and income taxes would be useful. IFRS 18 requires companies to classify all items of income and expenses into one of the five categories: operating, investing, financing, income taxes, and discontinued operations i.e.

1. Under IFRS 18, income and expenses from associates and joint ventures are generally classified as investing activities, whereas IAS 7 may classify some of them as operating activities, depending on the nature of the business.
2. Under IAS 7, income tax expenses are typically classified as part of operating cash flows, unless they can be specifically identified with financing or investing activities and classified accordingly. Under IFRS 18, taxes are treated as a distinct category in the statement of profit or loss, separate from operating, investing, and financing activities.

C44. Some users suggested that cash flows (and profit) from discontinued operations would be more useful if presented in a segmental format. Feedback on IAS 7 encouraged disclosures (which include segmental cash flows) is covered later in the paper in paragraphs C62–C69.

C45. No mention of discontinued operations is made in IAS 7. However, paragraph 33 of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requires:

1. income and expenses from discontinued operations to be presented separately from continuing operations in the statement of profit or loss and other comprehensive income, and
2. net cash flows attributable to the operating, investing and financing activities of discontinued operations to be presented separately in the statement of cash flows or the notes.

Other than continue to require a separate line item disclosure, the IASB decided not to consider discontinued operations (or segmental reporting) in the IFRS 18 project, because doing so would widen the scope of the project¹⁴.

Tax

C46. All interviewees who commented on tax cash flows, agreed that presenting tax cash flows in a separate category, rather than disaggregating them between operating, financing and investing activities, was the most appropriate disclosure. They held the view that there would be little benefit to users if preparers made potentially arbitrary and highly judgemental allocations.

C47. Having a separate category for tax cash flows would align with the categories introduced for the statement of profit or loss under IFRS 18 (as noted in paragraph C36).

Disaggregation of information

C48. As noted in the first research paper¹⁵, IAS 7 provides limited guidance on what cash flow information might be disaggregated.

C49. IFRS 18 paragraphs 41–43 does however provide disaggregation principles, which will be relevant to all primary financial statements, when the Standard comes into force. The general principle is that items are aggregated based on shared characteristics. Items should be disaggregated when the resulting information is material.

C50. One preparer acknowledged that disaggregation should be required where cash flows had different characteristics, since dissimilarities are material to understanding performance.

C51. IAS 7 does encourage some disaggregated disclosures, including segmental cash flows and growth versus maintenance cash flows, but as identified in the second research paper¹⁶, few UK listed companies provide this information.

C52. Having sought views on the encouraged disclosures, segmental cash flows seemed to be potentially more useful to users than the separate disclosure of 'maintenance' and 'growth' cash flows, due to the arbitrary nature of the latter. However, preparers noted challenges with providing the encouraged disclosures, which goes some way to explaining why such encouraged disclosures are not often provided.

Growth versus maintenance cash flows

C53. IAS 7 paragraphs 50 and 51 encourage "the separate disclosure of cash flows that represent increases in operating capacity and cash flows that are required to maintain operating capacity" noting it "is useful in enabling the user to determine whether the entity is investing adequately in the maintenance of its operating capacity. An entity that does not invest adequately in the maintenance of its operating capacity may be prejudicing future profitability for the sake of current liquidity and distributions to owners".

C54. Users observed that disaggregating 'growth' and 'maintenance' expenditure would be useful, but that this is not the most important information they need.

C55. One user noted that capital expenditure (capex) is not embedded in a specific cash flow measure, but it helps in understanding a company's funding requirements (i.e. whether the intrinsic operational funding is sufficient to fund all the maintenance, what is needed to fund growth, and whether the company has the capacity to raise further funding). Therefore, disaggregation of capex supports analyses into whether there is enough capability to fund each type of capex. The analyst commented that 'maintenance' capex should ideally be funded intrinsically through depreciation (i.e. through revenue) and the 'growth' capex might not be funded immediately.

C56. The same user also noted that for some industries, such as utilities, ‘maintenance' and 'growth' capex information might be obtained from regulatory accounts in the UK. However, this is dependent on the regulator distinguishing between allowances for general maintenance and allowances for enhancements.

C57. Most preparers and users noted that requiring a standard definition of 'growth' and 'maintenance' would not be practical, due to the different nature of businesses and judgements made.

C58. Users also acknowledged that while it may be a useful insight for companies to disclose such disaggregation, together with how the company defines the split internally for their business, it would not increase comparability between companies. This is because management judgements would be unique to each company.

C59. In addition, while analysts adjust free cash flow, most said they adjust all capex, and do not necessarily need a split between 'growth' and 'maintenance' capex; some use depreciation as a proxy for 'maintenance' expenditure.

C60. Almost all preparers noted that it would be challenging, time-consuming and costly, to disaggregate 'growth' expenditure from 'maintenance' expenditure. They do not think that the effort in doing so would provide useful information to users.

C61. Some preparers commented that often capex will comprise elements of both 'growth' and 'maintenance'. One preparer gave an example of the motor industry and questioned whether investing in electric is 'growth', or a necessary 'maintenance cost of sustaining the business.

Segmental cash flows

C62. IAS 7 paragraphs 50 and 52 encourage "the disclosure of segmental cash flows” noting that it "enables users to obtain a better understanding of the relationship between the cash flows of the business as a whole and those of its component parts and the availability and variability of segmental cash flows".

C63. IFRS 8 Operating Segments paragraph 23 requires companies to report a measure of profit or loss for each reportable segment along with total assets and liabilities if this is regularly provided to the chief operating decision maker. The fact that segmental disclosure is not explicitly required for cash flow information, even if regularly provided to the chief operating decision maker, is notable.

C64. Given that segmental measures are those reviewed by management rather than IFRS measures, they would likely differ to the definitions under IAS 7 for what is cash and cash equivalents, classified as operating, investing or financing, etc. So segmental cash flows may not function as an analysis of the statement of cash flow. The IASB has stated it will decide whether to look at segmental reporting as a separate project, as it was considered out of scope for IFRS 18. Understanding how useful the income statement management-basis segment information is for users, would be beneficial before contemplating how useful segmental cash flow information might be.

C65. Some users confirmed that cash flows for different business segments would be useful, where segments have differing cash generation and usage profiles, or differing working capital absorption. However, some users noted that this information was not always relevant, particularly where cash flows and working capital in different business segments were not materially different.

C66. One user said that cash flows by currency would be useful, due to the complexity of FX clouding the consolidated statement of cash flows which is presented in the reporting currency. Another user suggested that cash balances by jurisdiction would be useful.

C67. As mentioned in paragraph C44 above, one user noted that cash flow information for discontinued operations would be useful if presented as a segment. This would mean that cash flows within operating, investing and financing activities (not just the total for each category) in relation to the discontinued operation are transparent, as opposed to disclosing the total discontinued cash flows for each category.

C68. While some preparers questioned the usefulness of segmental cash flows, other preparers interviewed acknowledged that segmental information may be useful to users. However, some of the preparers noted that the information may not always be available, since some segments may share assets, and the cash flows are not always distinguishable between segments.

C69. One preparer suggested that segmental reporting of cash flows should be considered as a separate project.

Accessibility of information

“It would be desirable to have all cash flow-related information in one place as it is currently dispersed throughout the financial statements".
Credit rating agency

C70. Most users suggested that they would benefit from have a single note disclosure to provide more transparency on material cash and non-cash information, cross-referenced to other notes in the financial statements.

Suggestions for improving the usefulness of the statement of cash flows

C71. Any targeted improvements to the statement of cash flows, or proposed changes made following a comprehensive review, should consider how the statement of cash flows is used by the primary users. However, despite different users having different objectives and uses for the statement of cash flows, most were seeking similar information.

C72. Below are a number of suggested targeted improvements that stakeholders consider the IASB should consider making:

1. Clarify more specifically why the 'direct' method is preferred, or remove that explicit preference from the standard, whilst retaining the two presentation options for companies, direct and indirect. The IASB might also consider introducing a connectivity principle, which would require, where the direct method is presented, a reconciliation between the ‘operating profit' subtotal presented in the income statement with the 'net cash flows from operating activities' shown in the statement of cash flows, to retain the connectivity between the primary financial statements.
2. As noted in paragraph C21, one investor suggested companies should be required to provide commentary on what cash is available for distribution, and if there are any constraints with distributing cash, and the impact of such constraints on the distributable amount. This would include any restrictions on a parent company's ability to access cash of any of its subsidiaries¹⁷.
3. Most users said that it was not helpful when companies included a significant line item simply called 'other' in any of the categories in the statement of cash flows. As a minimum there should be qualitative information of the types of transactions that are included in 'other' and a requirement to explicitly disclose that there are no material offsetting amounts included in that figure.

Cohesiveness between the primary financial statements

Importance of cohesiveness

C73. Cohesiveness improves the usefulness of the information provided to users, as noted in the second research paper¹⁸.

C74. Some users specifically noted that they use the statement of cash flows to reconcile the other primary financial statements. Others used specific information in the statement of cash flows, but noted they often assess a company's performance holistically by considering the statement of cash flows alongside other primary financial statements. This holistic view of the primary financial statements was also noted by some preparers.

“The balance sheet and income statement doesn't tell a user how much is due to fair value changes, foreign exchange impacts or other items; by tying the income statement, balance sheet and cash flow statement together, users can understand how much cash is changing hands versus how much of a company's performance and balance sheet movements are due to accounting adjustments or valuation changes".
Preparer

C75. Many users noted that the lack of cross-referencing can make it challenging to clearly understand the connectivity between the statement of cash flows and other sections of the financial statements¹⁹, necessary for users to understand the impact of non-cash movements. Some users stated that it is not helpful when the line items on the face of the statement of cash flows (and the reconciliation of profit to operating cash flows, where presented in a note) are not cross-referenced to specific notes to the financial statements.

"Financial statements are becoming increasingly technical, and excessive disclosure requirements may make them harder to understand rather than more useful. Analysts frequently request information that is already disclosed".
Preparer

C76. Many preparers noted that whilst opportunities to provide more information existed, they highlighted that it was challenging to gather some information that might assist users in fully reconciling between the financial statements, such as certain non-cash items.

C77. The misalignment of categories between IFRS 18 and IAS 7 (as mentioned in paragraphs C34–C45) has the potential to add further complexity and reduce the ability to reconcile between the information in the statement of profit or loss and the statement of cash flows.

Suggestions for improving the cohesiveness of financial statements

C78. Interviewees provided the following suggestions on potential improvements to the cohesiveness between the primary financial statements:

1. One preparer suggested that 'similar in nature' non-cash adjustments reported in the 'indirect' method, could be aggregated, such as depreciation and amortisation. A cross-reference provided to the respective notes to the financial statements would provide the transparency needed by users, for any amounts aggregated, whilst simplifying and shortening the length of the statement of cash flows, making it more readable.
2. Where the 'indirect' method is used, direct cash flows for material items are not easily found in the financial statements and are scattered. One suggestion is to show in an 'operating profit' note to the financial statements, the cash and non-cash element of the respective profit or loss items disclosed in that note.
3. A few users suggested that the metric chosen as the starting point²⁰ for the 'indirect' method for presenting operating cash flows should clearly state whether the metric is before or after exceptional items. If the starting point includes exceptional items, an adjustment should be disclosed for the P&L effect of such one-off, or infrequently recurring, items and separate disclose of the cash impact of such, so that the cash and non-cash elements of the exceptional items are transparent.
4. Roll forward of certain balance sheet line items, as mentioned in paragraphs C90–C92, might also assist with cohesiveness between the primary financial statements.

Importance of non-cash information

C79. The first research paper in this series commented on the effects of non-cash transactions and the perceived issues²¹.

C80. One of the most common points of feedback received during user interviews, was a request for more information on non-cash movements. Users noted that non-cash information is important to assessing a company's ability to generate cash and cash equivalents, comparing companies using different accounting treatments for similar transactions, and assessing management's general performance.

C81. During the interviews it was apparent that users were interested in two different types of non-cash information:

1. non-cash transactions – financial transactions that do not impact a company's cash balance, but impact a company's assets, liabilities, and equity (such as an acquisition not paid for with cash); and
2. non-cash items – these include amounts that are outside a company's control (such as FX gains or losses) or within a company's control (such as judgements and estimates related to fair value accounting, and provisions).

Non-cash operating activities

C82. Most users interviewed said it would be helpful to disaggregate key-non-cash items and provide contextual information on what they relate to.

C83. IAS 7 paragraph 18(b) notes that where the ‘indirect' method is used for presenting cash flows from operating activities, "profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments.....". IAS 7 paragraph 20(b) also states that "under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of: ......(b) non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign currency gains and losses, and undistributed profits of associates".

C84. Therefore, the non-cash impact of ‘operating' items is generally reflected on the statement of cash flows. However, IAS 7 is not prescriptive about the level of disaggregation required; the transparency of such information is dependent upon the level of granularity the company provides in the statement of cash flows and related notes.

C85. As noted in paragraph C49 above, IFRS 18 will require companies to disaggregate information in financial statements based on their characteristics. Most stakeholders interviewed provided no comment on the impact of IFRS 18 on disaggregation. However, when questioned, most preparers acknowledged that the disaggregation principles, which apply to all primary financial statements, might help to ensure that material information is not obscured. At the time of the interviews, not all preparers had fully assessed the impact of IFRS 18.

C86. Some users noted that, in addition to the explicit requirement to disclose changes in liabilities arising from financing activities²², it would be useful to have similar disclosures for other assets and liabilities showing cash and non-cash movements. Users also suggested more explicit requirements for provisions (such as bad debt, litigation claims), trade receivables, capitalised interest, non-cash interest for pensions, non-cash accretion on inflation-linked debt²³. One user suggested that roll forwards be provided for working capital.

Non-cash investing and financing activities

C87. Per IAS 7, financing and operating cash flows should be disclosed on the face of the statement of cash flows by showing only cash inflows (receipts) and cash outflows (payments). IAS 7 paragraph 43 states that "investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows". It goes on to say that "such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities”.

C88. Examples of non-cash transactions that relate to investing and financing activities per IAS 7 paragraph 44 "are:

1. the acquisition of assets either by assuming directly related liabilities or by means of a lease;
2. the acquisition of an entity by means of an equity issue; and
3. the conversion of debt to equity."

C89. Such transactions may involve a financing component (for example, using a loan to buy PP&E).

C90. Many users indicated that they wanted more roll forwards²⁴ disclosed in the financial statements. Roll forwards are usually disclosed for fixed assets (i.e. PP&E, and accumulated depreciation), but are rarely provided for other balance sheet accounts. Even where roll forwards are provided, companies do not always separate movements arising from cash flows and non-cash changes. For example, paragraph 84 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, whilst requiring information necessary for a roll forward for each class of provision, if does not require disclosure of cash and non-cash changes.

C91. Roll forwards can provide more transparency for users by providing more reliable and complete information on the effects of M&A, leases, and FX rates, that help them reconcile information between the primary financial statements. However, roll forwards would need to separately disclose cash and non-cash movements, to facilitate such cross-referencing. This detailed view gives users a comprehensive understanding of a company's financial position, fostering confidence in the financial management.

C92. A few preparers acknowledged that users might want such roll forward information, but suggested that, whilst auditors frequently use roll forward analysis to check for discrepancies and ensure the completeness of financial records, such disclosures should not be required in the financial statements.

C93. A few users noted that non-cash information for M&A activity may be disclosed not only in separate notes to the financial statements, but also in different places in the statement of cash flows, or indeed there may be non-cash elements in the transaction (as noted in the second research paper²⁵).

C94. One credit rating agency noted that effects of M&A activity or disposals also makes it hard for analysts to extract working capital movements from the statement of financial position, when there are insufficient disclosures about such transactions.

Effective offsetting cash flows

C95. Some transactions result in a zero cash flow, for example they comprise two offsetting 'effective' flows which, had they been transacted separately, each would have appeared in the statement of cash flows. For example, a purchase could be undertaken as a single transaction, or as a separate equity issue followed by a cash purchase. The approach taken does not affect the underlying economics but does produce very different disclosures in the statement of cash flows.

C96. Interviewees noted situations to which this applies, include, M&A activity, a new capitalised lease²⁶ and supplier finance arrangements. Considering solely cash flows reported in the statement of cash flows can lead to incomplete analyst metrics (such as free cash flow), that are unsuitable for use in equity valuation, as explained in the example below (see paragraph C98).

“The problem with the statement of cash flows is that it only includes cash flows".
Analyst

C97. Given that the purpose of statement of cash flows is simply to report cash movements, it may seem counterintuitive to expect them to include anything other than cash flows. However, most cash flow analysis is focused on metrics like free cash flow, and therefore offsetting flows arising from non-cash transactions are important²⁷.

C98. For example, when a company undertakes a new capitalised lease²⁸, it reports an increase in fixed assets (specifically a right of use asset) and an increase in lease obligations, but there is no cash movement. The subsequent lease payments would be split between the interest and principal repayment components, with the interest flow included in operating²⁹ and the capital element in financing. If instead the company purchases the asset by increasing its borrowings (and not via a lease), whilst the transaction is economically similar to a new capitalised lease, there would be two cash flows: a financing cash inflow from the additional borrowing and an investing outflow to purchase the asset. In this instance, the analyst would reduce free cash flow by the additional capex arising from the purchase.

C99. Therefore, when analysts focus on a metric where only one of these cash flows would be included, such as free cash flow, then the offsetting 'effective' flows are important considerations (see the illustration below):

Illustration: Cash flow subtotals adjusted for effective flows from capitalised leases

C100. One preparer commented that “leases under IFRS 16 potentially degrade the statement of cash flows by hiding capex".

C101. Another preparer interviewed, specifically pointed out their enhanced voluntary disclosure in the form of an additional explanatory note to the statement of cash flows, in order to enable a user to perform a full reconciliation between PP&E additions and cash outflows in respect of the purchase of PP&E included in the consolidated statement of cash flows. This included IFRS 16 right-of-use asset additions and accrued capex.

C102. Other examples given by users of effective cash flows where they suggest more transparent information be required include pension service costs, share-based payments, restructuring costs, divestitures, business combinations where the consideration is non-cash, and reverse factoring.

C103. Derivatives (both economic and hedge accounting) were mentioned by most users during the interviews. One credit rating analyst noted that they have to make sweeping assumptions when doing their credit analysis, since it is not easy to break out the impact of unrealised gains or losses, the change in fair value and FX movements.

C104. Some preparers noted that the new disclosure requirements for supplier finance arrangements effective for reporting periods starting 1 January 2024, should provide more transparency for users about such transactions. However, they also acknowledged that there was opportunity to provide more transparent disclosure for other non-cash transactions too.

Suggestions for improving the disclosure of non-cash information

C105. Although companies do not report the 'effective' investing and financing flows arising from finance leases in the actual statement of cash flows, IAS 7 does require that significant non-cash transactions are disclosed. Ideally, analysts would like to see these on the same page as the statement of cash flows, or at least the location of this information clearly cross-referenced in that statement³⁰.

C106. Users noted that recently introduced disclosures help provide transparency for effective cash flows that involve financing activities³¹. One preparer specifically commented that, in order to meet the disclosure requirements in IAS 7 paragraphs 44A–44E to disclose changes in liabilities arising from financing activities, most UK companies apply the option³² in IAS 7 paragraph 44E to provide a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities, including the changes identified in paragraph 44B³³, which include non-cash items, such as the effects of changes in fair value and FX rates.

C107. Some preparers acknowledge that such requirements could be mandatory and also extend to other balance sheet movements, where the information is imperative to users' analyses.

C108. Other suggested disclosures provided by interviewees, which might improve connectivity between the statement of cash flows and the other primary financial statements and notes, and improve accessibility for users to non-cash information include:

1. Roll forwards for key items, disclosing separately cash and non-cash items (similar to the suggestion in paragraphs C90–C92 above).
2. Single note disclosure, listing significant non-cash items by the various categories (operating, investing and financing) and cross-referencing to other notes to the financial statements, where more detail is provided.
3. Line items in an 'operating profit' note, disaggregated between cash and non-cash elements, and cross-referenced to other notes to the financial statements (similar to the suggestion in paragraph C78b) above).
4. Single-note disclosure of non-cash transactions that are economically similar to cash transactions, to show effective offsetting flows (e.g. leases, pension service costs, reverse factoring, and certain M&A where consideration is non-cash), similar to the example in paragraph C99 above – this might also assist analysts not to double count i.e. because non-cash transactions can have later real cash flows. For example, it would be important for analysts not to include in free cash flow measures, both the effective capex and the lease rental payments in respect of capitalised leases.
5. Working capital movements specifically broken down for each major component, sub-totalled and reconciled to respective balance sheet notes, including disclosure of non-cash items (e.g. FX effects).
6. Breakdown of fixed asset additions to separately identify cash transactions, cash-timing differences (e.g. accrued capex) and non-cash transactions (e.g. leased assets, transfer of assets, etc)
7. Breakdown in provisions note to disaggregate 'amounts utilised' between cash utilisation (e.g. paid) and non-cash utilisation (e.g. transferred to a liability).

C109. Introducing a principle of interconnectivity between the primary financial statements, might lead to improved cross-referencing between the primary financial statements and notes, and some additional disclosures, similar to those listed above, being provided.

C110. One credit rating agency noted the importance of disclosure of cash and non-cash effects of movements in regulatory assets and regulatory liabilities will be needed when forthcoming standard, IFRS 20 Regulatory Assets and Regulatory Liabilities, is introduced³⁴.

Importance of non-GAAP measures

C111. In both the previous research papers, it was noted that free cash flow³⁵ and net debt³⁶ were two of the most common cash flow alternative performance measures (APMs) among UK companies.

C112. One preparer added that based on discussion with its Investor Relations Department, "the primary focus of investors is on free cash flow and net debt rather than the statement of cash flows itself, and therefore the primary function of the statement of cash flows is to explain how free cash flow is generated".

Free cash flow

C113. As noted in the second research paper³⁷, free cash flow plays an essential role in valuation, as it demonstrates the cash flow a company can potentially distribute, after making reinvestments in the business via capex and working capital. However, IAS 7 does not define free cash flow.

C114. Most users interviewed commented on free cash flow, noting their preference to calculate their own free cash flow measures, using information disclosed in the statement of cash flows and elsewhere in the financial statements. Therefore, there was little appetite amongst users for the IASB to define ‘free cash flows'.

“It is not necessary to have a standardised or prescribed definition of free cash flows as there is variability on how free cash flow is defined, depending on the information that is being focused on".
Credit rating agency

C115. It is more important for companies to disclose transparent information needed for analysts to calculate their own measures of free cash flow, which can vary by industry sector or other criteria. Such disclosures that are important to users are included elsewhere in this paper, such as non-cash transactions, better disaggregation, cohesiveness between the primary financial statements and roll forwards.

C116. One preparer noted that the company was highly leveraged, so investors' attention was focused on the borrowings. As a result, the company now discloses 'free cash flow before dividend' to show the company's ability to pay the borrowings and still invest.

Net debt

C117. Most UK preparers (except those in banks and insurers), disclose a net debt measure, with most including net debt in their financial statements, and a few including net debt in the front half of the annual report, within the key performance indicator (KPI) disclosures required by UK Companies Act 2006.

C118. In contrast to the view on free cash flow, almost all users interviewed (excluding those focused on financial institutions), said that net debt information was as important as the statement of cash flows.

C119. Users rely upon the information that companies provide for net debt (current interest-bearing debt on its statement of financial position minus its liquid assets i.e. cash and cash equivalents), as a financial liquidity metric. It allows them to determine how much cash would remain if all debts became due immediately and measure the company's capacity to take on more debt.

C120. A private investor commented that net debt is commonly used in valuations and noted that the main focus and use for the statement of cash flows is to ascertain Enterprise Value (EV). Since EV is the sum of equity value, net debt, preferred stock and minority interest, a net debt reconciliation is extremely useful.

C121. As with free cash flow, calculation methods for net debt vary, primarily depending on whether analysts include or exclude certain items from net debt, such as leases, investments, debt-related derivatives, and other derivatives not related to debt.

C122. However, unlike with free cash flow, almost all users and preparers commented that a standard definition for ‘net debt' provided by the IASB would be useful. Mandatory reporting of a net debt metric would enable comparability between companies. If net debt was defined, then any variations e.g. provided as a KPI, would lead to disclose of 'adjusted net debt' metric as a management performance measure (see paragraph C135), together with a reconciliation to the standard definition of 'net debt'.

C123. Some users interviewed went further and suggested that information about a company's net debt position should be more prominent in a company's financial statements. Some of those users specified that the metric be elevated to the face of the primary financial statement and integrated into the statement of cash flows, due to the importance of net debt in determining a company's liquidity.

“If I could make one change it would be to turn the statement of cash flows into a net debt statement".
Preparer

C124. Some users suggested that the net debt should be reconciled to the cash and cash equivalents figure to enhance transparency, and should be reconciled to free cash flow, where the company provides a free cash flow metric.

C125. Examples of different company approaches to presenting 'net debt' and reconciling the metric to the statement of cash flows (cash and cash equivalents) were presented in the February 2025 research paper³⁸. Two of the examples included were provided by two companies that were interviewed. One of those preparers noted that to provide more useful information, it extends the mandatory net debt information (which they provide in the form of a reconciliation), to show ‘net debt' as defined internally by management – this includes removing fair value movements in derivatives.

C126. One user noted that in some sectors, such as utility companies, there are highly covenanted financing transactions, where the company has financial ratio limits, and it is helpful if companies provide a reconciliation of the covenanted debt amount in their net debt disclosure.

Working capital movements

C127. As noted in the first research paper in this series³⁹, changes in working capital can help explain how a company uses its assets and liabilities, which in turn can allow investors to predict changes in company value.

C128. IAS 7 paragraph 21 requires that 'under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of: (a) changes during the period in inventories and operating receivables and payables". IAS 7 does not include additional presentation or disclosure requirements related to these movements.

C129. Whilst the second research paper did not specifically refer to changes in working capital, through the analysis of financial statements it was apparent that companies often refer to the above-mentioned adjusting items in the 'operating cash flows' section of the statements of cash flows as 'changes in working capital'. It was also observed that some companies include changes in other current assets and liabilities, within 'changes in working capital'. Differing levels of granularity regarding the assets and liabilities are included in 'changes in working capital'. There is no standard definition of ‘working capital', and specific components could depend upon the nature of the business. Most companies provide:

1. increase/decrease in trade receivables;
2. increase/decrease in trade payables; and
3. increase/decrease in inventory.

C130. As noted in paragraph C19 above, one credit rating agency advised that many financial ratios used to assess the credit quality of companies are based on the statement of cash flows, such as 'funds from operations', which is essentially 'cash flows from operating activities less working capital'. Hence working capital is an important metric. It is necessary to understand the individual components of the company's definition of working capital to decide which should be included in the adjustments to operating cash flows.

C131. That user also commented that working capital movements can be volatile, so the volatile element of the ratio needs to be removed. Therefore, it is important for users to be able to understand what components are in working capital that are driving the overall change, which can be difficult to understand from the financial statements. Individual components of working capital can be subject to different forces and may give different signals for user analysis, for example impairments of receivable balances versus management of trade payables.

C132. A few users said that that they need appropriate disclosure and disaggregation of what comprises the working capital and its movements. Such information may be transparent when the movement in working capital is disaggregated on the face of the statement of cash flows (or in the related 'operating cash flows' note) and cross-referenced to the related notes for the statement of financial position movements. This reinforces that the cohesiveness between the statement of cash flows and the statement of financial position is important. However, such transparency is not always evident when there is M&A activity, disposals, non-cash transactions, and non-cash items, such as FX effects. See paragraphs C79–C110 of this paper for more information on non-cash items.

C133. Many preparers acknowledged that it was not transparent how the movements in working capital relate to the opening and closing balances of the related trade receivables or trade payables. Most noted that this would often be due to the effect of FX rate differences that was not apparent in the notes, since roll forwards are not required to be provided for such balances.

C134. One preparer noted that they provide commentary to their balance sheet note to state the difference between the balance sheet movement and the statement of cash flows relates to the effects of FX. However, another preparer noted that this information was not disclosed as they would have difficulty proving the FX difference to their auditors, even though they know that FX was the 'balancing item'.

Alignment with IFRS 18

C135. IFRS 18 significantly impacts Alternative Performance Measures (APMs) by introducing specific disclosure requirements for a subset of APMs called "Management-defined Performance Measures" (MPMs). This will mean companies are more transparent about how they use certain non-GAAP metrics to present their financial performance and improve the reliability and comparability of financial information for users by providing greater insight into management's perspective on a company's performance.

C136. One preparer noted that cash flow APMs are out of scope of IFRS 18. They suggested these should be introduced by any project on the statement of cash flows, as only the APMs in scope of the standard will be required in the financial statements and audited. This would provide more transparent information about internally used cash flows metrics to help users perform their analyses.

Suggestions for improving disclosure of important non-GAAP measures

C137. As noted above, most preparers and users agreed that a standard definition of net debt would be useful, with some suggesting it be elevated to the primary financial statement and be required to reconcile to the statement of cash flows ‘cash and cash equivalents' figure.

C138. Improvements to working capital disclosures are important to enable users, such as credit rating agencies, to remove the volatility, when calculating important ratios, such as 'funds from operations’⁴⁰. It may be useful if the IASB provides more guidance on the level of granularity required in the statement of cash flows, requires a sub-total to be provided for 'movements in working capital', and requires a company to disclose how the balance sheet movements reconcile to the amounts shown in the statement of cash flows.

C139. The IASB could consider what sub-totals would be useful to be disclosed in the statement of cash flows. This would facilitate the reconciliation of cash flow MPMs to specific subtotals within the statement of cash flows.

Interconnectivity with other IFRS Accounting Standards

Issues raised concerning other IFRS

C140. Whilst paragraphs 54–65 of IAS 7 refer to the consequential changes made to IAS 7 because of amendments to other standards, IAS 7 makes few other cross-references to cash flow disclosures required by other standards.

C141. There is a notable lack of guidance in other IFRS accounting standards on related requirements for the statement of cash flows. It is apparent that most IFRS accounting standards make more reference to the other primary financial statements i.e. the statement of profit or loss and the statement of financial position.

C142. Users highlighted challenges in finding certain information related to cash flows (and non-cash information), and preparers noted they would welcome more guidance on a number of areas that are covered by other IFRS accounting standards. Areas mentioned by interviewees relate to the following standards:

1. IFRS 18 Presentation and Disclosure in Financial Statements.
2. IFRS 16 Leases.
3. IFRS 2 Share-based payments.
4. IAS 21 The Effects of Changes in Foreign Exchange Rates.
5. IFRS 3 Business Combinations / IFRS 12 Disclosure of Interests in Other Entities.
6. IAS 37 IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
7. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
8. IFRS 7 Financial Instruments: Disclosures / IFRS 9 Financial Instruments | IAS 39 Financial Instruments: Recognition and Measurement.
9. IFRS 8 Operating Segments.

C143. Other cross cutting issues already mentioned earlier in this paper include:

1. Unrealised gains and losses, such as fair value adjustments.
2. Exceptional, one-off or unusual (recurring but volatile, or infrequently recurring) items, with different characteristics.
3. IFRS 20 Regulatory Assets and Regulatory Liabilities.

C144. One preparer noted the reduced disclosures under UK GAAP (FRS 101) in respect of the statement of cash flows, and suggested similar reduced disclosures be applied in IFRS 19 Subsidiaries without Public Accountability: Disclosures.

Suggestions for improving the interconnectivity with other IFRS

C145. Whilst it is recognised that the other primary financial statements do not specifically have their own standard, albeit IAS 1 (to be replaced by IFRS 18) sets out the main requirements, most accounting standards have been issued since IAS 7⁴¹. So, although IAS 7 set out the principles, some additional guidance in other standards as to how information should be disclosed in the statement of cash flows would be useful.

Challenges for preparers

C146. During the interviews, it became apparent that there are lower priority areas for users, which are of higher priority for preparers, due to challenges the current requirements in IAS 7 present, including:

1. Inconsistencies with IFRS 18 Presentation and Disclosure in Financial Statements (see paragraphs C34–C45 and paragraphs C135–C136).
2. Cash and cash equivalent definitions – perceived to be too prescriptive (see paragraphs C147–C151).
3. Classification of cash flows – lack of guidance for some items e.g. transaction costs, grants and contributions, capitalised interest (see paragraphs C152–C158).
4. Systems restrictions and cost implications – the time burden and resulting cost of any additional disclosure proposals, whilst acknowledging the need of relevant information for users (see paragraphs C159–C162).
5. Aggregation/netting (see paragraphs C163–C167).

Cash and cash equivalents

C147. Per IAS 7 paragraph 6 "cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value'. IAS 7 paragraph 7 states that "an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition". IAS 7 does not provide additional guidance to determine whether an item meets the definition of cash equivalents.

C148. Users interviewed did not raise any concerns with regards to the definition of cash and cash equivalents, although it was noted that not all users were aware of the definitions in IAS 7. This may be because most of the users interviewed focussed on net debt rather than on cash and cash equivalents, so whether an investment is classified as a cash equivalent may not be so important to their analyses.

C149. However, many preparers said the guidance on cash and cash equivalents could be enhanced. Some preparers said that investments they would classify internally as cash equivalents would not satisfy the definition in IAS 7, even though these investments are used as part of the company's cash management activities. One preparer said the three-month ‘rule' was arbitrary and companies should be given more discretion.

C150. Some preparers suggested the current guidance is driving management behaviour to adjust their liquidity management approach and place surplus cash on shorter term deposits close to the reporting date, so that such investments can be included in cash equivalents. Some of those preparers suggested it would be useful to have a closer alignment between the definitions used for internal and external reporting because it might reduce costs and better reflect how a company is managing its liquidity.

C151. Some preparers and one credit agency said liquid assets are more aligned to how companies manage their cash and referred to the source and application of funds statement previously required under UK GAAP (FRS 1 Revised). This was mentioned earlier in this paper in paragraph C33.

Classification of cash flows

C152. IAS 7 paragraph 11 simply states that "an entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business".

Transaction costs

C153. One preparer pointed out that IAS 7 is silent on how transaction costs should be treated in the statement of cash flows and suggested that more guidance and illustrative examples would be useful on whether classification is operating or investing. IAS 7 might benefit from introducing clearer principles in the main body of the standard on how such costs might be classified.

Grants and contributions

C154. Under the heading of 'Presentation of grants related to assets' paragraph 28 of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance states that "the purchase of assets and the receipt of related grants can cause major movements in the cash flow of an entity. For this reason and in order to show the gross investment in assets, such movements are often disclosed as separate items in the statement of cash flows regardless of whether or not the grant is deducted from the related asset for presentation purposes in the statement of financial position". However, IAS 20 is silent on how cash flows should be treated under the heading of 'Presentation of grants related to income'.

C155. One preparer specifically noted that IAS 7 is silent on how to account for 'grants and contributions received from customers' and noted diversity in practice in their industry. While IAS 7 paragraph 16 states that "only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities", no mention is made of contributions received that are intended to fund such expenditure. Given the linkage of contributions to the PP&E created, and in the absence of specific IFRS requirements to the contrary, the preparer interviewed noted they classify grants and contributions within investing activities, as they believe it provides the most meaningful and relevant information to users.

Capitalised borrowing cost / interest

C156. The core principle in paragraph 1 of IAS 23 Borrowing Costs states that "borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense". Paragraph 32 of IAS 7, states that "the total amount of interest paid during a period is disclosed in the statement of cash flows whether it has been recognised as an expense in profit or loss or capitalised in accordance with IAS 23 Borrowing Costs". IAS 7 currently permits such interest paid to be classified as operating or financing cash flows.

C157. One preparer and one user specifically commented on capitalised interest. The preparer noted that it voluntarily enhanced the disclosure of capitalised interest costs in the finance expense note to break down the amount capitalised under IAS 23 into amounts added to PP&E and amounts added to intangible assets, and set out in their accounting policies how interest is treated in the statement of cash flows.

C158. One user commented that it is not always clear where a company has disclosed capitalised interest in the statement of cash flows⁴², and it would be helpful to users if connectivity in the financial statements was improved, such that interest cash flows can be reconciled back to the interest expense and asset notes accordingly.

Systems restrictions and cost implications

C159. With respect to practical issues, only three preparers interviewed had systems that allowed the statement of cash flows to be produced automatically. All three presented 'operating cash flows' using the indirect method, but one presented 'operating cash flows' using both the indirect and direct method. All those preparers noted that, although their systems are automated, a small number of manual adjustments are still necessary, noting the accuracy of the automated statement of cash flows relied on the quality of the data entered. Only one of those preparers said the statement of cash flows was embedded into the company's budget and forecasting software and continuously updated.

C160. Other preparers do not have sophisticated ways of producing the information required from their systems and the production of the statement of cash flows was a manual exercise, often using spreadsheets, and generated late in the reporting process. Only a few preparers produced the statement of cash flows at the same time as the other primary financial statements. The fact that the IAS 7 statement of cash flows is rarely used by companies in their day-to-day treasury function and liquidity management, may explain why companies do not invest time and money into automating the preparation of an IAS 7 statement of cash flows, as the internal benefits would be unlikely to exceed the cost of doing so.

C161. Other than preparers from financial institutions, most preparers do not want to see a significant change to the requirements in IAS 7 due to the potential cost implications. However, given the manual nature of the preparation of the statement of cash flows for most companies, a change in the requirements may not necessarily lead to expensive system changes, albeit there might be some new information to be collected outside the system (that would have an associated cost), but mostly the existing information gathered through the manual process may be presented in a different way (with potentially no incremental cost).

C162. Preparers recognise that there might be more transparent ways to provide information that users need on both cash flows and non-cash items.

Aggregation/netting

C163. IFRS 18 paragraph 42 does not permit offsetting/netting, except where expressly required or permitted by an IFRS Accounting Standard, however this requirement is only expressed in relation to net assets and liabilities or income and expenses, and not expressed in relation to cash inflows and cash outflows.

C164. IAS 7 paragraphs 22 states that "cash flows arising from the following operating, investing or financing activities may be reported on a net basis:

1. cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and
2. cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short".

C165. Examples are provided in IAS 7 paragraphs 23–23A. IAS 7 paragraph 24 permit cash flows arising from certain activities of a financial institution to be reported on a net basis.

C166. One preparer suggested that the standard is too prescriptive and that it should permit the netting of cash inflows and outflows for items such as short-term investments. The gross amounts of receipts and payments may vary year on year, whilst the net amount may be consistent.

“Disclosing £5bn outflows and £6bn inflows for the reporting period, rather than a net inflow of £1bn, does not provide useful information to users."
Preparer

C167. No feedback was received from users interviewed with regards to aggregation or netting (except as noted in paragraph C78a)).

Suggestions to assist preparers in applying the requirements

C168. In addition to addressing inconsistencies with IFRS 18, many preparers commented that more guidance and illustrative examples would be useful on some aspects of the requirements in IAS 7, including cash and cash equivalents, classification of cash flows and aggregation/netting. Identification of the application difficulties and introducing clearer principles in the main body of the standard may be helpful.

C169. It would be useful if certain note disclosures, such as interest, show where the related cash flows have been accounted in the statement of cash flows, not just the interest credited or charged in statement of profit or loss, i.e. show the cash flows categories related for all interest payments.

Usefulness of the statement of cash flows for financial institutions

C170. In contrast to non-financial institutions, most users and preparers believe that the statement of cash flows for banks and insurers provides little to no significant incremental value in addition to other primary financial statements and related disclosures. With banks and insurers typically managing portfolios of liquid assets beyond what is included within cash and cash equivalents, the statement of cash flows only represents a subset of such portfolios and therefore does not align with how the overall business is managed.

C171. Preparers also expressed that it was rare to receive questions from users on cash flows.

C172. One user noted that for insurers, they cannot easily assess whether a company can distribute cash, so regulatory surplus is used as a proxy.

C173. When explicitly asked about the usefulness of the risk management disclosures required by IFRS 7 Financial Instruments: Disclosures, there were mixed views on the extent to which the required disclosures were useful. One preparer and one user expressed that the information provided was typically not cohesive, making it difficult to understand the impact of the risks to the business as a whole.

C174. Due to the above issues, preparers and users place greater focus and reliance on the information provided using non-GAAP measures and within regulatory reporting. Information contained within regulatory reporting was noted to be more standardised and disclosures around liquidity and capital management were noted to be more extensive, resulting in enhanced comparability and relevance. Moreover, regulatory capital requirements are a key factor when considering whether there is capacity to pay out dividends.

C175. An asset manager noted that the information provided by the statement of cash flows is more useful for their users than for banks and insurers, opting to include a condensed and simplified statement of cash flows within the Chief Financial Officer's review in the Strategic Report. This is consistent with the feedback received from a private investor who had the same valuation model for both asset managers and non-financial institutions but had different valuation models for banks and insurers.

Suggestions to improve usefulness of information provided for some financial institutions

C176. Whilst there is general consensus that the statement of cash flows is not particularly useful for banks and insurers, there are a variety of views around how this could be addressed. Suggestions received during the interviews ranged from retaining the current requirements to exempting certain financial institutions. Other interviewees suggested possibly replacing the statement of cash flows with regulatory information, providing a bridge between the primary financial statements and regulatory required information.

C177. Whilst alternative solutions should be explored before addressing the question of whether to exempt certain financial institutions from preparing a statement of cash flows, some preparers acknowledged that it was difficult to appropriately scope out banks and insurers, especially in the context of consolidated groups which may have other ancillary business.

1. One preparer from an insurer suggested that the IASB could refer to Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)⁴³, where the concept of activities predominantly connected with insurance was introduced.
2. One preparer from a bank suggested scoping based on whether other regulatory reporting was required.

C178. Lastly, some users suggested that roll forwards of some balance sheet line items could be disclosed, to include both cash and non-cash movements. However, one preparer and one user noted that while IFRS 17 Insurance Contracts requires a similar disclosure for (re)insurance contract assets and liabilities, the information is currently not used. With the implementation of IFRS 17 requirements being so recent, this may be due to the users needing more time to incorporate the additional information.

Concluding Observations

C179. This paper makes no recommendations. The key messages received during the interviews with UK users and preparers are noted in paragraph C13 and C182 of the paper.

C180. Feedback from UK users and UK preparers suggests that the statement of cash flows is useful for non-financial institutions and is less useful for banks and insurers.

“IAS 7 is generally fit for purpose but there are areas where guidance is needed and areas where preparer discretion is necessary".
Preparer

C181. Some preparers acknowledged that recent changes to IFRS Accounting Standards, such as the introduction of IFRS 18 (see paragraphs C34–C45 in this paper) and other recent changes to IAS 7⁴⁴, were all significant improvements, but there is still scope for further improvements.

C182. As identified through the key messages, there is an overlap between the topics outlined in this paper and that should be a consideration for the IASB when progressing with the project on the Statement of Cash Flows and Related Matters. In summary the most important areas that the IASB could consider are:

1. Cohesiveness between the primary financial statements – the project could consider how such cohesion might be improved. This might include:
   1. adding an internal connectivity principle, requiring the financial statements and notes to clearly show how the figures in each of the primary financial statements, including the statement of cash flows, relate to the other primary financial statements;
   2. more requirements for disclosing cash flow information in other IFRS Accounting Standards; and
   3. improving the requirements in IAS 7, similar to those for disclosing the changes in financing liabilities, which require both cash flows and non-cash items in the movement of the opening and closing balances to be shown.
   Such requirements might lead to more transparent disclosure in the notes about how the information for specific items (such as M&A, derivatives, share-based payments, leases) link to all the primary financial statements.
2. Importance of non-cash information – the project could consider information about economically similar transactions that do not involve cash, to ensure that companies are required to disclose transparent information about such transactions.
3. Importance of non-GAAP measures – the project could consider the benefits to users of providing a standard definition of 'net debt', requiring companies to reconcile net debt to the statement of cash flows.
4. Interconnectivity between IFRS Accounting Standards – the project could consider the benefits to preparers of specifying, for all IFRS Accounting Standards, an internal connectivity principle between the primary financial statements, which should assist in guiding how the relevant cash flows and non-cash information might be disclosed in the financial statements, to improve transparency of information and comparability for users.
5. Assisting preparers in applying the requirements – the project could consider the benefits to both preparers and users from improving the definitions for the classifications of cash flows, potential alignment with categories and definitions in IFRS 18, and providing more guidance to assist preparers in applying the requirements in IAS 7 (such as cash and cash equivalents). The project might also consider:
   1. which of the disclosures encouraged in IAS 7 paragraph 50 should be retained, and if some should be made mandatory; and
   2. whether to retain the encouragement in IAS 7 paragraph 19 to use the direct method for reporting cash flows from operating activities.
6. Usefulness of the statement of cash flows for banks and insurers – the project scope could focus on first improving the requirements for all entities and then consider at a later stage if there is any loss of information to users from potentially providing an exemption for some entities, or if there are alternative solutions that would reduce the cost to preparers whilst improving information for users.

C183. There is a clear desire for the IASB to carry out sufficient field testing to ensure that any proposed changes to the requirements are practicable for preparers, provide relevant and reliable information, and are proportionate to any increased benefits for users.

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