IAS 7 Deficiencies and Proposed Changes

This case study delves into the perceived deficiencies of IAS 7, the accounting standard for the statement of cash flows, as identified by the Financial Reporting Council (FRC) staff in the UK. It highlights issues such as the vague definition of 'cash and cash equivalents,' the lack of a clear definition for operating activities, the optional use of direct and indirect methods, and inconsistencies in classifying interest and dividend cash flows. The study also discusses proposed changes, including a more precise definition of operating activities, reclassification of capital expenditures, standardized treatment of interest and dividends, and a reconciliation between operating profit and cash flow from operating activities. The analysis evaluates whether these changes would better meet user needs by providing more consistent and transparent financial reporting.

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 research
has been carried out by the FRC staff UK in relation IAS 7. It is to be noted that currently the
requirement 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 , one
standard practice need to be followed.
-Currently the Objective of the IAS 7 is to present historic change in the Entities cash and cash
equivalent, however the it is to be noted that the term Cash and cash equivalent does not give exact
component to be included and it is in vague nature.
- Currently the Operating activity does not have inclusive definition; rather it includes all activities
which do not form part of the investment and financing activity (IFRS Foundation. 2016). I can
say that this is misleading in nature. It is possible that some activity is not in operating nature
but because it does not classify in Financing and investment Activity, it required to be included
in operating nature.
- The current IAS 7 allows the prepares to opt choice between two method of cash flow (a) Direct
method and (b) Indirect method(IFRS Foundation. 2016). , However it is to be noted that direct
method is least use and should be eliminated to form the standardization. Currently it gives
choice 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 operating
activity 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 operating
activity section.
- The proceed from operating activity make the user confusion, why there is difference in the
profit of financial statement and proceed from the operating activity. It created the point of
confusion for the user. The operating profit in the financial statement and the operating cash
profit 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 classified
under either Operating, financing or investing activity uniformly . However , it gives open space
to the preparer to follow the practice which gives best result the eyes of investor , though the
actual picture may be different

To conclude I can say that there are few area where the IAS 7 gives an open window to the organization
to follow different practice and hence the principal of uniform disclosure breeches. Accounting
standards main objective is to take all reporting requirement in one bridge so different company’s
statement can be compared.
Would, and how would, the changes being discussed better meet user
needs?
It is to be noted that the above deficiency has been identified by the RAC staff in research now they have also
suggested the solution for the same and we are discussing whether this suggestion will help for better
disclosure and meet the requirement of the users.
Deficiency for Open definition of Operating Activity
We discussed in above section that operating activity contains the residuary activities which do not part
of other tow activities, However suggestion has been made to define the operating activity. The
operating activities with creditors, customers, debtors and regular operation need to be defining
positively. 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 the
operating activity and also come to know which parts are included in the operating activity . It will give
correct and clear picture to the users.
Cash Outflow from acquiring property
Currently the acquisition of the plant & machinery is reported under cash outflow from investment
activity. However FRC members have suggested to include that as operating activity outflow . The sub
total of cash generation from the regular operating activity suggested to be reported before showing the
capital expenditure of the business. I can say that this suggestion will not help the user to have correct
understanding , though the suggestion is good but users will surely get confused for the question why
capital expenditure include in operating activity , though it is not part of regular activity of the
organization.
Cash flow from Interest and dividend
Current requirement of the cash flow gives the open window to treat the interest and dividend cash
flow as financing, operating and investing activity. However suggestion has been made to include the
cash flow of financial asset and liability as financing activity and cash flow that is interest from customer
as operating activity(FRC ,2016). This suggestion will help to get uniformity in the reporting of the
interest and dividend requirement and will give the correct picture .

Cash flow as Cash and Cash Equivalent
It is suggested that rather than defining cash as cash and cash equivalent, the management of the
liquid source of organization should be presented. Also organization needs to disclose he policy for
management of liquid source(FRC ,2016).This will help the users to know the management of the readily
convertible liquidity.
Reconciliation between Operating Profit and Cash flow from Operating Activity
Often the profit from the operating activity and proceed from operating cash activity lead the user
confusion why both are different. Which one to be relied and why they are differ are the big two
question for normal users. To avoid the same FRC has suggested present reconciliation between this
two profits so users can know the reason for difference in the profit and can help them to take informed
decision. (Lennard, A. & Knubley, R. 2016)

Reference
IFRS Foundation. 2016. Joint CMAC and GPF minutes June 2016. Online at: http://www.ifrs.org/About-
us/IASB/Advisory-bodies/GPF/Documents/CMAC-GPF-June-2016-meeting-notes.pdf. Last accessed 17
November 2016.
Lennard, A. & Knubley, R. 2016. Staff Paper: Primary Financial Statements – Improving the Statement of
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