Transcription of Thematic review: Cash flow and liquidity disclosures
1 Financial Reporting CouncilThematic review: Cash flow and liquidity disclosuresNovember 2020 Thematic review: Cash flow and liquidity disclosures (Nov 2020)Financial Reporting Council 2 Page1. Executive summary32. Scope and sample43. Key findings Cash flow statement5 Strategic report13 going concern18 Viability statements22 IFRS 7 liquidity risk disclosures244. Next steps32 Key to symbolsRepresents good practiceRepresents an omission of required disclosure or other issueRepresents an opportunity for enhancing disclosuresIncluding some identified from our routine monitoring of corporate reports (marked *).
2 ,inlinewithourfindingsfromroutinereviews ,wechallengedcompanieswhererequirementsd idnotappeartobemet, , ,however,amarkedimprovementingoingconcer n,viabilityandliquiditydisclosuresfollow ingtheinitialeconomicimpactofCovid-19, , ,however,identifythatsomecompaniescouldi mprovetheirdisclosuresofcovenanttesting, 'assessmentsofgoingconcernandlonger-term viabilitybecausethemanagementofcashflows andliquidityriskisanintegralfeatureofthe seassessments, ,weexplainedthatwewouldalsoconsidercompa nies , , ,includingseveralwhichareperceivedtoface greaterrisksconcerningcashflow, ,retailproperty, ;however, review: Cash flow and liquidity disclosures (Nov 2020)Financial Reporting Council 3 Footnotes:1 - - , ,particularlyasaresultoftheimpactofCovid -19, ,weconsideredthecomprehensivenessandqual ityofcashflowandliquiditydisclosuresthro ughouttheannualreportandaccounts,includi ngcompliancewiththerequirementsofIAS7 StatementofCashFlows andIFRS7 FinancialInstruments: disclosures .
3 Wealsoconsideredthefollowingareasthatare linkedtocashandliquidity: Strategicreport,includingtheuseofcashand liquiditybasedalternativeperformancemeas ures( APMs ) Viabilitystatement , , ,including12companieswithDecemberyearend s, , ,withafocusonindustrieswhicharepotential lyfacingparticularliquiditystresssuchast ravelandleisure, ,whicharesubjecttoregulatorycapital, review: Cash flow and liquidity disclosures (Nov 2020)Travel & Leisure20%Industrial Goods & Services13%Retail13%Personal & Household Goods10%Construction & Materials6%Food & Beverage7%Media7%Real Estate7%Technology7%Other10%INDUSTRIES SAMPLEDF inancial Reporting Council 4 Cash flow statementFindingsofpreviousroutinereview sThecashflowstatementhasfeaturedinthetop tenmostfrequentlyraisedtopicsinourcorpor atereportingreviewsinrecentyears, ,fivecompanies(2018/19:4,2017/18.)
4 7) , ,therefore, ,thedefinitionofcashandcashequivalents,t hereconciliationofprofittonetcashflowsfr omoperatingactivities,theacquisitionordi sposalofsubsidiaries, ( ).Othercommonissuesrelatedtotheacquisiti onanddisposalofsubsidiaries, review: Cash flow and liquidity disclosures (Nov 2020)Footnotes:1 of changes in liabilities arising from financing activitiesAcquisition / disposal of subsidiariesInvesting activitiesAdditional liquidity disclosuresDefinition of cash & cash equivalentsInterest presentationOtherIAS 7 DISCLOSURE IMPROVEMENTS BY TOPICI nvesting activitiesDefinition of cash & cash equivalentsReconciliation to operating profitAcquisition / disposal of subsidiariesNon-cash transactionsIAS disclosuresDirect / indirect methodBank borrowings included in cash and cash equivalentsOtherIAS
5 7 DETAILED QUESTIONS BY TOPICF inancial Reporting Council 5 Cash flow statement (2) ,andcorrect, ,asapercentageofthenumberofcases,whether theimpactofthecorrectionledtoanincrease, , (forexamplereclassificationsbetweenopera tingandinvesting,operatingandfinancing,a ndinvestingandfinancing), , ,however,showthaterrorstooperatingandinv estingcashflows(75%ofcasesrequiringresta tement)appeartobemorefrequentthanerrorsi nfinancingcashflows(44%ofcasesrequiringr estatement). review: Cash flow and liquidity disclosures (Nov 2020)31%44%25%Impact on operating cash flows (% of cases)IncreaseDecreaseNone31%44%25%Impac t on investing cash flows (% of cases)25%19%56%Impact on financing cash flows (% of cases)Financial Reporting Council 6 Cash flow statement (3)CompositionofcashandcashequivalentsTh etypesofborrowingswhichcanbeincludedasac omponentofcashandcashequivalents,forthep urposeofthecashflowstatement,wereconside redbytheIFRSI nterpretationsCommittee( theCommittee ) (forexample,14days).
6 Theagendadecisionincludestheobservationt hat ifthebalanceofabankingarrangementdoesnot oftenfluctuatefrombeingnegativetopositiv e,thenthisindicatesthatthearrangementdoe snotformanintegralpartoftheentity scashmanagementand,instead,representsafo rmoffinancing. Examplesofbetterdisclosureincluded:Anacc ountingpolicydetailingwhatconstitutescas handcashequivalents;Analysisofthecompone ntsofcashandcashequivalents,forexample,c ashatbank,shorttermdeposits,moneymarketf unds;Descriptionofthetermsofdeposits,suc hasmaturity,breakclausesandinterestrates ;Whetheroverdraftsareincludedwithincasha ndcashequivalentsand,ifso,thetermsofsuch arrangements.
7 ,wefoundsomecasesofpotentialnon-complian ceandhavewrittentothreecompanies,outofou rsampleof30, cash , ,atacquisition, ,incertaincircumstances,maybeincludedasp artofcashequivalentsinthecashflowstateme nt(seesectionbelowontheCompositionofcash andcashequivalents).Wherethisisthecase, review: Cash flow and liquidity disclosures (Nov 2020)Paragraph6ofIAS7statesthat cashcomprisescashonhandanddemanddeposits .Italsodescribescashequivalentsasshort-t erm, , :1 Paragraph AG3 of IAS 32 sates that Currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements.
8 2 - Reporting Council 7 Cash flow statement (4)CashflowsfromoperatingactivitiesAllco mpaniesinoursampleusedtheindirectmethod, whereprofitandlossisadjustedfortheeffect sofnon-cashitems,showingareconciliationf romprofitbeforetaxtonetcashfromoperating activities,eitheronthefaceofthecashflows tatementorinthenotes, , ReportingbySmallerListedandAIMQ uotedCompanies ,forexample, :Areconciliationtoexplainthecashflowimpa ctofworkingcapitalmovements,wherethiswas notapparentfromthestatementoffinancialpo sition;Alogicalorderingoftheitemspresent ed,forexample,groupingsimilaritemstogeth ersuchasworkingcapitalmovementsandnon-ca shitems; :Changesincashflowsfromworkingcapitalwhi chwereinconsistentwithmovementsinthestat ementoffinancialposition; (cont.)
9 Weidentifiedonecompanywhereaninvoicedisc ountingfacilitywastreatedaspartofcashand cashequivalentsinthecashflowstatement, ,includinginterestrelatingtoleases, ,IAS7compliant, review: Cash flow and liquidity disclosures (Nov 2020) CashandcashequivalentsIncludedwithincash andcashequivalentsareamountsheldbytheGro up (2019: ). ,dependingontheimmediatecashrequirements oftheGroup, Saga plc, Annual Report and Accounts 2020, ,interestpaidandinterestanddividendsrece ivedmaybeclassifiedasfinancingcashflowsa ndinvestingcashflowsrespectively, Reporting Council 8 Cash flow statement (5)AcquisitionanddisposalofsubsidiariesW heretheimpactofacquiringordisposingofasu bsidiaryorbusinessismaterial, ,suchassettlementoftheacquiree ,keyaccountingjudgementsshouldbedisclose d.
10 Forexample, :Referencestonoteswhichagreedtotheamount spresentedinthecashflowstatement; , , , :Referencestonoteswhichagreedtotheamount spresentedinthecashflowstatement; :Materialunexplaineddifferencesinadditio nstoproperty,plantandequipmentbetweenthe cashflowstatementandtheproperty,plantand equipmentnotes; review: Cash flow and liquidity disclosures (Nov 2020) PLC, Annual Report and Accounts 2019*, PLC, Annual Report and Accounts 2019, p194 Financial Reporting Council 9 Cash flow statement (6)CashflowsfromfinancingactivitiesWhile thestandardisnotprescriptive, ;forexample,someincorrectlyincludedderiv ativeassetswhichwerenothedgingrisksrelat i
