K-IFRS 1007: Statement of Cash Flows

1. Introduction

K-IFRS 1007 ‘Statement of Cash Flows’ plays a crucial role in understanding changes in a company’s cash and cash equivalents. This standard provides essential information for evaluating an entity’s liquidity, solvency, and financial flexibility.

This guide offers the following benefits:

1. Understanding the structure and principles of cash flow statements
2. Learning the classification criteria for operating, investing, and financing activities
3. Mastering the disclosure requirements for cash flow information for practical application

2. Overview

The objective of K-IFRS 1007 is to provide information about historical changes in an entity’s cash and cash equivalents through the cash flow statement. This standard applies to all types of entities and requires the preparation of a cash flow statement for each accounting period as an integral part of financial statements.

Key terms of Statement of Cash Flows:

• Cash: Cash on hand and demand deposits
• Cash equivalents: Short-term, highly liquid investments
• Operating activities: Principal revenue-generating activities
• Investing activities: Acquisition and disposal of long-term assets and investments not included in cash equivalents
• Financing activities: Activities that result in changes in the size and composition of contributed equity and borrowings

3. Accounting Principles

The fundamental principle of K-IFRS 1007 is to report cash flows classified by operating, investing, and financing activities.

Recognition criteria:

• Cash flows are recognized when cash inflows and outflows actually occur
• Non-cash transactions are excluded from the cash flow statement and disclosed in the notes

Measurement criteria:

• Cash flows should be reported on a gross basis, though net reporting is permitted in specific cases
• Foreign currency cash flows are translated using exchange rates at the dates of the transactions

4. Related Accounts of Statement of Cash Flows

Major account items:

• Cash and cash equivalents
• Trade receivables and payables
• Property, plant and equipment, and intangible assets
• Borrowings and bonds
• Share capital and share premium

The relationship between these accounts can be illustrated as follows:

[Cash and Cash Equivalents]
    │
    ├─ Operating Activities ─── [Trade Receivables, Trade Payables]
    │
    ├─ Investing Activities ─── [PP&E, Intangible Assets]
    │
    └─ Financing Activities ─── [Borrowings, Bonds, Share Capital, Share Premium]

5. Accounting Treatment and Reporting

General accounting steps:

1. Define the scope of cash and cash equivalents
2. Classify cash flows into operating, investing, and financing activities
3. Present operating cash flows using either direct or indirect method
4. Present investing and financing cash flows by major categories on a gross basis

Special circumstances:

• Interest and dividends: Classify consistently, with financial institutions classifying them as operating activities
• Income taxes: Generally classified as operating activities, unless specifically identifiable with investing or financing activities

Disclosure requirements:

• Components of cash and cash equivalents
• Reconciliation of amounts when using direct method for operating activities
• Significant non-cash transactions
• Restricted cash and cash equivalents with details of restrictions

6. Recent Amendments and Future Outlook

Recent updates:
In September 2024, the IASB initiated a comprehensive review of cash flow statement requirements in response to investor feedback. Initial research findings are expected to be evaluated by Q1 2025.

Future prospects:
Additional guidance is expected to enhance transparency and consistency in cash flow reporting, particularly regarding non-cash transaction disclosures.

7. Practice Questions and Discussion Topics

Multiple choice questions:

1. Which of the following is classified as an operating activity in the cash flow statement?
   a) Acquisition of fixed assets
   b) Dividend payments
   c) Decrease in trade receivables
   d) Bond issuance
   e) Disposal of investments
2. Which is not a method for reporting operating cash flows?
   a) Direct method
   b) Indirect method
   c) Mixed method
   d) Gross method
   e) Net method
3. Which can be classified as a cash equivalent?
   a) 6-month bonds at acquisition
   b) Common stock investments
   c) 3-month time deposits at acquisition
   d) Physical gold
   e) One-year corporate bonds

Discussion topics:

1. Compare the advantages and disadvantages of direct and indirect methods for reporting operating cash flows
2. Discuss the additional value that non-cash transaction disclosures provide to financial statement users

8. Conclusion

K-IFRS 1007 ‘Statement of Cash Flows’ provides vital information about an entity’s cash-generating ability and cash usage. The standard requires cash flows to be classified into operating, investing, and financing activities, providing a foundation for evaluating financial position and liquidity. The cash flow statement complements accrual accounting and is essential for understanding actual cash movements.

Additional resources:

• Korea Accounting Standards Board website
• IFRS Foundation’s IAS 7 ‘Statement of Cash Flows’ implementation guidance

K-IFRS 1001: Presentation of Financial Statements