Historic Change in the Entities Cash and Cash Equivalent
Added on - 16 Sep 2019
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What areas of IAS 7 are perceived to be deficient?It is to be noted IAS 7 talks about the reporting requirement of statement of Cash Flow. The researchhas been carried out by the FRC staff UK in relation IAS 7. It is to be noted that currently therequirement of the IAS 7 gives the preparer the choice to follow different practice as per their decision;However it is to be noted that to give the correct picture of the cash area for all the company , onestandard practice need to be followed.-Currently the Objective of the IAS 7 is to present historic change in the Entities cash and cashequivalent, however the it is to be noted that the term Cash and cash equivalent does not give exactcomponent to be included and it is in vague nature.-Currently the Operating activity does not have inclusive definition; rather it includes all activitieswhich do not form part of the investment and financing activity(IFRS Foundation. 2016). I cansay that this is misleading in nature. It is possible that some activity is not in operating naturebut because it does not classify in Financing and investment Activity, it required to be includedin operating nature.-The current IAS 7 allows the prepares to opt choice between two method of cash flow (a) Directmethod and (b) Indirect method(IFRS Foundation. 2016). , However it is to be noted that directmethod is least use and should be eliminated to form the standardization. Currently it giveschoice to preparers.-Despite, the existing requirement there is still confusion in for classification of interest received,interest expense and tax expense. Whether interest paid, received forms part of operatingactivity or financing activity is confusing in nature.-Currently the outflow for purchase of plant & machinery is reported under investment activity(Deloitte. 2016), however ideally as it part of business it should be reported in the operatingactivity section.-The proceed from operating activity make the user confusion, why there is difference in theprofit of financial statement and proceed from the operating activity. It created the point ofconfusion for the user. The operating profit in the financial statement and the operating cashprofit of IAS 7 are different and to make the user understand it need to b reconciled.-Currently cash flow received from the dividend - interest received and paid need to be classifiedunder either Operating, financing or investing activity uniformly. However , it gives open spaceto the preparer to follow the practice which gives best result the eyes of investor , though theactual picture may be different
To conclude I can say that there are few area where the IAS 7 gives an open window to the organizationto follow different practice and hence the principal of uniform disclosure breeches. Accountingstandards main objective is to take all reporting requirement in one bridge so different company’sstatement can be compared.Would, and how would, the changes being discussed better meet userneeds?It is to be noted that the above deficiency has been identified by the RAC staff in research now they have alsosuggested the solution for the same and we are discussing whether this suggestion will help for betterdisclosure and meet the requirement of the users.Deficiency for Open definition of Operating ActivityWe discussed in above section that operating activity contains the residuary activities which do not partof other tow activities, However suggestion has been made to define the operating activity. Theoperating activities with creditors, customers, debtors and regular operation need to be definingpositively. The activity which does not form part of the operating activity should b reported separately(FRC ,2016).The above suggestion will help the user to know the correct cash proceeds from theoperating activity and also come to know which parts are included in the operating activity . It will givecorrect and clear picture to the users.Cash Outflow from acquiring propertyCurrently the acquisition of the plant & machinery is reported under cash outflow from investmentactivity. However FRC members have suggested to include that as operating activity outflow . The subtotal of cash generation from the regular operating activity suggested to be reported before showing thecapital expenditure of the business. I can say that this suggestion will not help the user to have correctunderstanding , though the suggestion is good but users will surely get confused for the question whycapital expenditure include in operating activity , though it is not part of regular activity of theorganization.Cash flow from Interest and dividendCurrent requirement of the cash flow gives the open window to treat the interest and dividend cashflow as financing, operating and investing activity. However suggestion has been made to include thecash flow of financial asset and liability as financing activity and cash flow that is interest from customeras operating activity(FRC ,2016). This suggestion will help to get uniformity in the reporting of theinterest and dividend requirement and will give the correct picture .