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IPASS TRAINING AND CONSULTANCY 1

IPSAS 2- Overview
• Objective and scope
• Cash flows
• Reporting operating cash flows
• Reporting investing cash flows
• Reporting financing cash flows
• Specific items
• Disclosures

IPASS TRAINING AND CONSULTANCY 2

 DISCUSSION QUESTIONS

Why should we produce statement of Cash

Flows?
as long as the cash balance is presented on
statement of financial position

IPASS TRAINING AND CONSULTANCY 3

 BENEFITS OF CASH FLOW INFORMATION
• A statement of cash flows provides information that enables
users to evaluate
• the changes in net assets of an entity,
• its financial structure (including its liquidity and solvency-
able to pay debt) and
• its ability to affect the amounts and timing of cash flows in
order to adapt to changing circumstances and opportunities.
opportunities
• Cash flow information is useful in assessing
• the ability of the entity to generate cash and
• cash equivalents

IPASS TRAINING AND CONSULTANCY 4

 IPSAS 2– OBJECTIVE AND SCOPE
Objective: to provide a statement to help
investors
assess the prospects for future cash flows,
flows and
to confirm their past expectations
Statement provides
historical information on the entity’s operating,
investing and financing cash flows and
how its cash balances have changed in the period as
a result

IPASS TRAINING AND CONSULTANCY 5

 DEFINITION (TERMS ARE USED IN THIS
STANDARD)
• Operating Activities –are the activities of the entity that are not
investing or financing activities

• Financing Activities- are activities that are result in changes in the

size and composition of the contributed capital and borrowings of
the entity

• Investing Activities- are the acquisitions and disposal of long –term

assets and other investment not included in cash equivalent

IPASS TRAINING AND CONSULTANCY 6

 CASH AND CASH EQUIVALENTS
• Cash equivalents are held for the purpose of meeting
short-term cash commitments rather than for
investment or other purposes. Operating
• For an investment to qualify as a cash equivalent it must
be readily convertible to a known amount of cash and be
subject to an insignificant risk of changes in value.
• Therefore, 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. 28, 56,
91, 180day….

IPASS TRAINING AND CONSULTANCY 7

 IPSAS 2 – CASH FLOWS
Cash and cash equivalents:
Cash on hand and on deposit and
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”
Can include bank overdrafts if
part of cash management activities and
balance fluctuates between positive and negative amounts

IPASS TRAINING AND CONSULTANCY 8

 BANK OVERDRAFTS
Bank borrowings are generally considered to
be financing activities.
However, in some countries, bank overdrafts
which are repayable on demand form an
integral part of an entity's cash management.
In these circumstances, bank overdrafts are
included as a component of cash and cash
equivalents.

IPASS TRAINING AND CONSULTANCY 9

 CASH AND CASH EQUIVALENT
 Currency, coins,
 checks received but not yet deposited,
 checking accounts,
 petty cash,
 savings accounts,
 marketable securities, and
 Treasury bills.

IPASS TRAINING AND CONSULTANCY 10

 Components
Components of
of Cash,
Cash, cash
cash equivalent,
equivalent,
non-cash
non-cash components
components
Cash
Excluded from Cash
Included in Cash • Certificates of deposit- TB=issued by
• Coins and currency bank –short term Investment
• Checking accounts • Commercial paper-TB= issued by
corporation.
• Savings accounts
• Postdated checks (future check –
• Bank drafts check Receivable)
• Postage stamps – Supplies

IPASS TRAINING AND CONSULTANCY 11

 PRESENTATION OF A STATEMENT OF CASH
FLOWS
The statement of cash flows shall report
cash flows during the period classified by
operating,
investing and
financing activities
Why????

IPASS TRAINING AND CONSULTANCY 12

 ANSWER
 Classification by activity provides information that allows
users to assess the impact of those activities on the financial
position of the entity and the amount of its cash and cash
equivalents.
 This information may also be used to evaluate the
relationships among those activities.
activities

IPASS TRAINING AND CONSULTANCY 13

 REPORTING OPERATING CASH
FLOWS
Operating activities are
• the principal revenue-producing activities; and
• those that are not investing or financing activities
Operating cash flows are important:
The amount of cash flows arising from operating activities is a key
indicator of the extent to which the operations of the entity have
generated sufficient cash flows to
 repay loans,
 maintain the operating capability of the entity,
 pay dividends and
 make new investments without recourse to external sources of

IPASS TRAINING AND CONSULTANCY 14

 OPERATING CASH FLOWS
a) Cash received from customers for the sale of goods and
provision of services, or on account of royalties, fees, or
commissions

b) Cash payments to suppliers for goods and services

provided; and to and on behalf of employees for their
services

c) Cash received from or paid for financial instruments (A/R

or A/P) held specifically for dealing or trading purposes

IPASS TRAINING AND CONSULTANCY 15

 CONT’D….
• Some transactions, such as the sale of an item of plant,
may give rise to a gain or loss that is included in recognised
profit or loss.
• The cash flows relating to such transactions are cash flows
from investing activities.
activities
However, cash payments to
 manufacture or
 acquire assets held for rental to others and subsequently
held for sale are cash flows from operating activities.
Thus, the cash receipts from rents and subsequent sales of
such assets are also cash flows from operating activities.
activities

IPASS TRAINING AND CONSULTANCY 16

 CONT’D…
 An entity may hold securities and loans for dealing or trading
purposes, in which case they are similar to inventory acquired
specifically for resale.
 Therefore, cash flows arising from the purchase and sale of
dealing or trading securities are classified as operating activities.
 Similarly, cash advances and loans made by financial
institutions are usually classified as operating activities since
they relate to the main revenue-producing activity of that entity.

IPASS TRAINING AND CONSULTANCY 17

 REPORTING OPERATING CASH
FLOWS
Two methods:
• Direct method
• Indirect method

Either allowed although preference for direct method

IPASS TRAINING AND CONSULTANCY 18

 REPORTING OPERATING CASH FLOWS
• The Direct Method – Where by major classes of gross cash
receipts and gross cash payments are disclosed : or

• The Indirect Methods- where by surplus or deficit 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 , and items of revenues or expense associated
with investing or financing cash flows

IPASS TRAINING AND CONSULTANCY 19

DIRECT METHOD

IPASS TRAINING AND CONSULTANCY 20

 INDIRECT METHOD
Common adjustments to convert profit or loss to cash
from operations:
• Changes in working capital accounts
• Elimination of non-cash items
• Elimination of investing and financing items

IPASS TRAINING AND CONSULTANCY 21

INDIRECT METHOD

IPASS TRAINING AND CONSULTANCY 22

 INVESTING ACTIVITIES
 “The acquisition and disposal of long-term assets
and other investments not included in cash
equivalents”

 Importance-Is the entity maintaining its capacity

and increasing the potential for increased operating
cash flows in the future?

IPASS TRAINING AND CONSULTANCY 23

 EXAMPLES OF INVESTING CASH FLOWS
 Cash payments to acquire
• property, plant, and equipment;
• intangibles; and
• other long-term assets, including capitalized development
costs
 Cash receipts from the disposal of items
 Cash payments to acquire debt and equity instruments of
other entities or interests in joint ventures;
 Cash receipts from the disposal of items
 Cash advances and loans to other parties and their cash
repayments

IPASS TRAINING AND CONSULTANCY 24

 FINANCING ACTIVITIES
“result in changes in the size and composition of the
contributed equity and borrowings of the entity”

Importance:
Financing cash flows change the capital structure of the firm
and affect the relative interests of those with claims to future
cash flows of the entity

IPASS TRAINING AND CONSULTANCY 25

 DISCUSSION QUESTIONS

How do you treat

Income tax payments
Interest
Dividend

IPASS TRAINING AND CONSULTANCY 26

 IPSAS 2– SPECIFIC ITEMS
 Interest and dividends received and interest and dividends
paid – choice of operating, investing or financing flows as
appropriate
 Income tax cash flows – generally operating flows
 Non-cash transactions – not included in statement; disclosed
instead

IPASS TRAINING AND CONSULTANCY 27

 FOREIGN CURRENCY CASH FLOWS

• Cash flows arising from transactions in a foreign currency

shall be recorded in an entity’s functional currency by
• applying to the foreign currency amount the exchange rate
between the functional currency and the foreign currency
at the date of the cash flow.
flow
• The cash flows of a foreign subsidiary shall be translated at
the exchange rates between the functional currency and the
foreign currency at the dates of the cash flows

IPASS TRAINING AND CONSULTANCY 28

 INTEREST AND DIVIDENDS
• Cash flows from interest and dividends received and paid shall
each be disclosed separately.
• Each shall be classified in a consistent manner from period to
period as either operating, investing or financing activities
• An entity chooses its own policy for classifying each of
• interest and dividends paid as operating or financing activities, and
• interest and dividends received as operating or investing activities.

IPASS TRAINING AND CONSULTANCY 29

 CONT….
• Interest paid and interest and dividends received
may be classified as
• operating cash flows because they enter into the
determination of profit or loss/ surplus or deficit.
• Alternatively, interest paid and interest and
dividends received may be classified
• as financing cash flows and
• investing cash flows respectively, because they are
costs of obtaining financial resources or returns on
investments.
investments

IPASS TRAINING AND CONSULTANCY 30

 TAX
 Income taxes paid are classified as operating activities unless it
is practicable to identify them with, and therefore classify them
as, financing or investing activities.

• Cash flows arising from taxes on income shall be separately

disclosed and shall be classified as cash flows from operating
activities unless they can be specifically identified with
financing and investing activities.

IPASS TRAINING AND CONSULTANCY 31

 CONT……

• While tax expense may be readily identifiable with

investing or financing activities,
• the related tax cash flows are often impracticable to
identify and may arise in a different period from the cash
flows of the underlying transaction.

• Therefore, taxes paid are usually classified as cash flows

from operating activities.

IPASS TRAINING AND CONSULTANCY 32

 NON-CASH TRANSACTIONS

• Investing and financing transactions that do not require the

use of cash or cash equivalents shall be excluded from a
statement of cash flows.
• 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.

IPASS TRAINING AND CONSULTANCY 33

 DISCLOSURES
• An entity shall disclose the components of
• cash and cash equivalents and
• shall present a reconciliation of the amounts in its
statement of cash flows with the equivalent items reported
in the statement of financial position.
• In view of the variety of cash management practices
and banking arrangements and
• in order to comply with IPSAS 1 Presentation of Financial
Statements, an entity
• discloses the policy which it adopts in determining the
composition of cash and cash equivalents.
equivalents

IPASS TRAINING AND CONSULTANCY 34

 DISCLOSURES
 Operating, investing, financing flows
 Change in cash and cash equivalents
 Components of cash and cash equivalents
 Explanation of significant cash balances not
available for use

IPASS TRAINING AND CONSULTANCY 35

 COMPARISON OF IPSAS 2 WITH IAS 7
• IPSA 2- to clarify the applicability of the standards to accounting by public
sector entities

• IPSAS 2 Uses different terminology e.g. Revenue, statement of Financial

performance and net assets /equity where as IAS 7 income, SPLOCI and
Equity

• In common with IAS 7, IPSAS 2 allows either the direct or indirect method
to be used to present cash flows from operating activities .Where the direct
method is used to present cash flows from operating activities, IPSAS 2
encourages disclosure of a reconciliation of surplus or deficit to operating
cash flows in the notes to the financial statements.

IPASS TRAINING AND CONSULTANCY 36

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