Statement Of Cash Flows Initial UKEB Research Findings

File information

Publication date
28 November 2025
Format
PDF, 792.9 KB
Download original PDF

This document provides a high-level summary of the findings from three research papers developed by the UK Endorsement Board (UKEB):

  1. Statement of Cash Flows and Related Matters: Background and Key Issues
  2. Statement of Cash Flows and Related Matters: Non-mandatory and Voluntary Cash Flow Disclosures Provided by UK Listed Companies
  3. Statement of Cash Flows and Related Matters: UK User and Preparer Perspectives

All three papers are available on the UKEB's website (https://www.endorsement-board.uk/statement-of-cash-flows).

The UK Endorsement Board

1The UKEB is the UK's National Standard Setter, responsible for the endorsement and adoption of IFRS Accounting Standards for use in the UK. The UKEB also leads the UK's engagement with the IFRS Foundation on the development of new international accounting standards, amendments and interpretations.

Which entities use IFRS Accounting Standards in the UK?

Currently, there are approximately 1,500 entities with equity listed on the London Stock Exchange that prepare their financial statements in accordance with IFRS Accounting Standards1. In addition, UK law allows unlisted companies to use IFRS Accounting Standards and approximately 14,000 such companies currently take up this option2.

Why has the UKEB conducted a research project on the statement of cash flows?

2In response to the 2021 International Accounting Standards Board (IASB) Third Agenda Consultation, stakeholders highlighted perceived deficiencies with the current requirements of IAS 7 Statement of Cash Flows, including its presentation requirements. Many respondents to the IASB consultation, including most users of financial statements who commented, rating a project on the statement of cash flows and related matters as a high priority.

3The IASB started a project in September 2024 to gather evidence of the nature and extent of perceived deficiencies in the requirements of IAS 7 and the likely benefits of developing new financial reporting requirements to better meet the needs of IFRS financial statement users.

4In anticipation of an international debate, the UKEB began a research project in November 2024 focused on gathering evidence in the UK context to influence the IASB and to ensure that any future reporting requirements meet the needs of UK stakeholders. The UKEB is building on work already undertaken in the UK, including by UK Regulator, the Financial Reporting Council (the FRC). While previous research identified potential problems with the statement of cash flows and possible solutions, it has generally not been based on direct evidence from users and preparers.

Overall Initial Findings

5Almost all UK stakeholders consider that IASB should undertake targeted improvements to the statement of cash flows to address their priority concerns.

6Specific opportunities identified by stakeholders to enhance the statement of cash flows that the IASB might consider when progressing with the project include:

  1. Improving the cohesiveness between the primary financial statements.
  2. Increasing information on cash flows, and relevant non-cash transactions, including greater disaggregation where appropriate.
  3. Mandating the disclosure of some items that are currently non-GAAP measures, including a reconciliation of net debt.
  4. Improving cash flow requirements in other IFRS Accounting Standards.
  5. Clarifying some requirements to improve consistent application, including improving the definition of cash and cash equivalents and the classifications of cash flows.

7While the IASB might consider the usefulness of the statement of cash flows for banks and insurers, stakeholders indicated that the project scope should focus on improving the requirements for all entities. A later project could examine alternative solutions that would improve the information provided to investors in financial institutions whilst managing the cost to preparers.

8The initial UKEB research findings from outreach with UK stakeholders are generally consistent with the IASB's initial findings. However, it was noticeable that UK companies are already providing useful voluntary disclosures, including information on net debt, that users would like to see mandated to ensure such information is provided consistently by companies, to assist comparability.

9Some more detailed feedback from the UKEB research is provided in the following pages.

UKEB Paper 1: Background and Key issues

10This paper is based on desk-based research and explores:

  1. the background of the Standard IAS 7 Statement of Cash Flows and its relationship with the conceptual framework;
  2. the importance of the statement of cash flows to investors and other users; and
  3. the key perceived issues with the statement of cash flows that have been identified by the IASB.

Key issues identified by IASB

11The IASB identified seven key areas of concern with the current reporting requirements which were explored in the UKEB research:

  1. Classification of cash flows – including revisiting the categories in light of the different definitions in IFRS 18; defining 'operating'; requiring tax cash flows to be reported separately.
  2. Disaggregation of cash flow information – requiring, rather than encouraging, disclosure of maintenance and growth expenditure, segmental cash flows, including cash flows from discontinued operations, and changes in working capital.
  3. Definition of cash and cash equivalents – there is diversity in practice in how the “short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in values” guidance is applied.
  4. Reporting cash flows from operating activities – direct vs. indirect method – whilst IAS 7 encourages the direct method, it provides an option that creates diversity in application, affecting comparability.
  5. Effects of non-cash transactions – excluding all non-cash transactions from the statement of cash flows does not result in comparable information for similar transactions with the same economic effect.
  6. Cash flow measures and other disclosures – standardising definitions of some cash flow measures (such as Net Debt and Free Cash Flow).
  7. Statement of Cash Flows for financial institutions – either removing the requirement for financial institutions or developing a statement of cash flows specifically for financial institutions.

UKEB Paper 2: Non-mandatory and Voluntary Cash Flow Disclosures Provided by UK Listed Companies

12This paper examines existing reporting practices in relation to cash flow information included in the annual reports of a sample of 30 UK companies listed on the London Stock Exchange (including the Alternative Investment Market (AIM)). The key observations from a review of disclosures reported by the sample are summarised below.

Key findings

13There is diversity in disclosure of cash flow and related information.

14The IASB has an opportunity to improve disclosure requirements by leveraging existing practices, whilst also enhancing the cohesiveness of the financial statements and assisting user understanding.

Disaggregation of cash flow information

15Notwithstanding the disclosures encouraged by IAS 7, the disclosure of segmental cash flows was uncommon, and no company distinguished between growth and maintenance cash flows.

16Where exceptional, non-recurring or infrequently recurring items were reported in the statement of profit or loss, few companies reflected these items in the statement of cash flows, or explained the timing differences.

17Few companies disclosed the aggregate cash and non-cash impact of merger and acquisition activities in a single note in the financial statements.

Definition of cash and cash equivalents

18Most companies included only passing references to defining cash and cash equivalents. The guidance in the standard 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" is usually treated as a rule.

19Accounting policies and related disclosures lacked sufficient detail to clearly explain the nature of restricted cash balances.

Reporting cash flows from operating activities

20All sampled companies adopted the indirect method for presenting cash flows from operating activities, despite IAS 7 encouraging the direct method.

Cash flow measures and other disclosures

21Most companies voluntarily reported a net debt measure, in the form of a net debt reconciliation. Free cash flow was commonly disclosed although its measurement and its location within the annual report varied.

22Very few companies sampled provide cross-references from the statement of cash flows to notes in the financial statements.

UKEB Paper 3: UK User and Preparer perspectives

23This paper is based on semi-structured interviews with 24 UK stakeholders, including both users with an interest in, and preparers of, financial statements produced in accordance with IFRS Accounting Standards.

Key findings in response to issues identified by IASB

24UK stakeholders highlighted the following priority areas that they consider the IASB should address. These are not listed in order of priority, but in response to the specific issues identified by the IASB.

Classification of cash flows

25Assisting preparers in applying the requirements – improve the definitions for the classifications of cash flows, and provide more application guidance.

Disaggregation of cash flow information

26It is important for users to have transparent information and sufficient disaggregation for material items, including non-recurring or infrequently recurring items, such as mergers and acquisitions (M&A), disposals, discontinued operations.

27However, disaggregation of growth and maintenance expenditure, as encouraged by IAS 7, is not a priority for users. Preparers would find it challenging and potentially arbitrary to provide, where it is not already disaggregated for internal management purposes.

Reporting cash flows from operating activities

28Users prefer the indirect method of presenting the operating cash flows, despite the direct method being encouraged in IAS 7. UK preparers are not keen to change their current disclosures under the indirect method and are concerned with the potential cost implications of any changes to the requirements.

Effects of non-cash transaction

29Importance of non-cash information – ensure that companies are required to disclose transparent information about economically similar transactions that do not involve cash. Such information would include leases, and the impact of unrealised gains or losses, changes in fair value and foreign exchange movements. If provided, this information 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.

Cash flow measures and other disclosures

30Importance of non-GAAP measures – provide a standard definition of net debt, requiring companies to reconcile net debt to the statement of cash flows. 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.

Statement of Cash Flows for financial institutions

31Limited usefulness of the statement of cash flows for banks and insurers – non-GAAP measures and regulatory information are perceived to be more relevant and comparable. The IASB project scope should focus on first improving the requirements for all entities.

Other UKEB key findings

32Cohesiveness between the primary financial statements –specify an overarching “information principle” to ensure that the financial statements provide sufficient information to enable users to link items included in the statement of cash flows to the other primary financial statements3.

33Interconnectivity between IFRS Accounting Standards – enhancing the requirements in other IFRS Accounting Standards on how the relevant cash flows might be disclosed in the financial statements (e.g. IFRS 8 Operating Segments or IFRS 16 Leases), would improve transparency and comparability for users.

34Almost all stakeholders considered that there is scope for targeted improvements to the requirements for cash flows in IAS 7 and other IFRS Accounting Standards, which could improve the usefulness of the statement of cash flows. Some preparers acknowledged that recent changes to IFRS Accounting Standards, such as the introduction of IFRS 18 and other recent changes to IAS 7, were all significant improvements.

35Users also 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.

UKEB User Poll: A survey of users' views

36Users of IFRS financial statements were invited to complete a survey designed by the UKEB to assess the usefulness of the statement of cash flows and potential improvements. 32 responses were received from a variety of users, including analysts and investors (60%), lenders and credit-rating agencies (6%) and other users (34%).

Key findings

37The results of the user poll are consistent with the feedback from the interviews included in the third research paper. They provide strong evidence for the need to enhance the statement of cash flows and notes to the financial statements, by requiring companies to provide a net debt reconciliation. The responses also highlight the need for more granular and transparent disclosures, to improve the cohesiveness of the primary financial statements.

Usefulness of the Statement of Cash Flows

3890% of survey respondents said that the statement of cash flows is very or quite important, with the remainder saying it was somewhat important. Most respondents noted that the statement of cash flows is as important as the income statement and balance sheet, and the three primary statements are used collectively to understand the financial position of a company.

39Most respondents used the cash flow statement to:

  • Analyse cash movements.
  • Evaluate cash conversion (profit to cash).
  • Evaluate working capital management.

Chart: Uses of the statement of cash flows (no. of respondents out of 32 indicated on each bar)

The bar chart illustrates the uses of the cash flow statement among respondents. The highest uses were: Evaluate working capital management (25), Evaluate cash conversion (profit to cash) (25), and Analyse cash movements (23). Other uses included Assess solvency/financial stability (21), Assess a company's ability to generate future cash flows (19), Assess liquidity (19), Evaluate quality of earnings (18), Validate the other primary financial statements (17), Estimate sustainable cash flows (16), Evaluate cash management (14), Assess operational efficiency (14), Evaluate changes in net assets of a company (11), and Evaluate potential for future growth (9).

Improvements to the Statement of Cash Flows

40Respondents were asked for their feedback on a number of potential improvements to the statement of cash flows and notes. A ranking of potential improvements is shown in the chart below:

Chart: Possible improvements to the Statement of Cash Flows

This bar chart, "Rating of Possible Improvements To The Statements Of Cash Flows," shows stakeholder views on various improvements, categorized by "Not at all useful," "Somewhat useful," "Useful," and "Very useful."

Key insights from the chart include: * Net debt to be reconciled to the Statement of Cash flows: 56% Very useful, 28% Useful. * Reconciliation to other primary financial statements: 56% Very useful, 31% Useful. * Commentary to disclose how much cash is distributable: 50% Very useful, 22% Useful. * Breakdown in Business Combinations note: 47% Very useful, 34% Useful. * Working capital movements specifically broken down: 44% Very useful, 28% Useful. * Single note disclosure for exceptional, one-off, or infrequently recurring items/transactions: 41% Very useful, 31% Useful. * Segmental 'operating' cash flows: 41% Very useful, 34% Useful. * Line items in 'Operating profit' note, split between cash and non-cash elements: 38% Very useful, 25% Useful. * Single-note disclosure of non-cash transactions that are economically similar to cash transactions: 38% Very useful, 38% Useful. * Breakdown in leases note: 44% Useful, 28% Very useful. * Breakdown in share-based payments note: 59% Useful, 25% Very useful. * Breakdown in derivatives note: 44% Useful, 22% Very useful. * Breakdown in provisions note: 47% Useful, 22% Very useful. * Tax payments reconciled to a tax liabilities note: 34% Useful, 22% Very useful. * Breakdown of fixed asset additions: 31% Useful, 19% Very useful. * Tax payments disclosed outside of operating, financing, and investing categories: 25% Useful, 19% Very useful. * Disaggregation of growth versus maintenance 'operating' cash flows: 28% Useful, 19% Very useful. * Direct 'operating' cash flows for key 'operating' activities: 25% Useful, 13% Very useful.

The legend indicates: * Not at all useful * Somewhat useful * Useful * Very useful

41The two potential improvements that respondents considered most useful are:

  1. Reconciliation to other primary financial statements of amounts disclosed on the face of the statement of cash flows.
  2. A Net debt disclosure, reconciled to the statement of cash flows.

42Other items that respondents considered higher priority in terms of usefulness are:

  1. Movements in working capital;
  2. Single-note disclosure of exceptional, non-recurring or infrequently recurring items;
  3. Segmental cash flows; and
  4. Non-cash transactions

43When questioned about alternative cash flow measures, like Free Cash Flow and Net Debt, many respondents think that, relative to the statement of cash flows, these alternative measures are:

  • More useful than the statement of cash flows – Net Debt (16%) and Free Cash Flow (25%).
  • Very useful - Net Debt (44%) and Free Cash Flow (38%).

Therefore 60% of respondents consider a net debt reconciliation to be very useful.

44There was also support for the IASB to provide a standardised definition for both these cash flow measures, in particular for net debt.

45The presentation of direct cash flows for key operating activities (direct method presentation) was considered the least useful potential improvement by respondents to the poll. Disaggregation of growth versus maintenance cash flows was also considered by respondents as lower priority in terms of usefulness.

Conclusions and next steps

UK stakeholders have identified targeted improvements to the reporting of cash flows, including more transparent and granular information for non-cash items.

46Overall, the UKEB findings show that users want improvements to the statement of cash flows, with a focus on improving the cohesiveness between the primary financial statements.

47This project provides the IASB with the opportunity to holistically review the information provided to users about cash flows and related non-cash transactions. By enhancing the connections between the statement of cash flows and the other primary financial statements users will have better information upon which to base their decisions.

Cash flow information is of significant importance to investors, yet the current accounting standard is not always leading companies to provide the information that users need.

The IASB already recognises the need to revisit the reporting requirements following feedback from the Third Agenda Consultation. It has started its own research to understand investors' concerns and to assess what additional or alternative information investors and other users need.

The UKEB's research will provide an important foundation for the UK to contribute to the international debate to develop comprehensive improvements to the reporting of cash flow information. It will ensure that any proposals are viable for UK stakeholders.

UKEB Chair, Pauline Wallace

Contact Us

UK Endorsement Board 13th Floor | 1 Harbour Exchange | Harbour Exchange Square | London | E14 9GE www.endorsement-board.uk

Stay up to date: Subscribe to stay up to date on UKEB news and events

The UKEB does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.

© (2025) All Rights Reserved

Footnotes

  1. UKEB calculation based on LSEG and Eikon data, December 2024. This calculation includes companies listed on the Main market as well as on the Alternative Investment Market (AIM). ↩

  2. UKEB estimate based on FAME, Company Watch and other proprietary data. ↩

  3. Paragraphs 44A–44E of IAS 7 (added in 2016) set out the disclosure requirements for changes in liabilities arising from financing activities. Paragraph 44D sets out an information principle specifically for that disclosure, requiring a company to “provide sufficient information to enable users of the financial statements to link items included in the reconciliation to the statement of financial position and the statement of cash flows”. ↩