Statement of cash flows during coronavirus

During this period of economic uncertainty, cash is as important as ever. Entities will be monitoring cash flows on a more regular basis and it is likely that the users of financial statements will focus on the cash flow statement to understand the movements in and utilisation of cash and cash equivalents over the year.

What does FRS 102 say?

FRS 102 (section 7) provides guidance on the creation of a statement of cashflow stating that it should:

• reconcile the movement in cash and cash equivalents year on year; 
• group cash flows into three headings: operating, investing and financing activities;  
• reconcile a measure of profit to cash flows from operating activities; and  
• consist of two main supporting notes: 
  • a breakdown of the components that make up cash and cash equivalents; and 
  • an analysis of changes in net debt.

There are exemptions available for some small entities and entities applying the reduced disclosure framework.

Practical impact and interpretation for preparers

The main impact on cash flow for entities will be the receipt of money from the various Government schemes. 

Entities will have to decide whether to classify the cash receipts from the government as: 

• operating activities - the principal revenue-producing activities of the entity;
• investing activities - the acquisition and disposal of long-term assets and other investments not included in cash equivalents; or
• financing activities - activities that result in changes in the size and composition of the contributed equity and borrowings of an entity.

Typically, government grants are classified as cash flows for operating activities as they are cashflows used to carry on operations. An example in FRS 102 of an operating cash flow is “a cash advance or loans made to other parties by financial institutions”.

Our advice

• There should not be a significant change in the mechanics preparation of a cashflow statement, but it is likely to be an area of increased scrutiny by users of the accounts.
• Businesses that have furloughed staff members under the government’s job retention scheme will have received a cash inflow from the government. This may have been offset against employment costs in the management accounts but should be shown gross in the financial statements. These cash inflows are likely to be material so it may be most appropriate to make an adjustment to clearly present the cash inflow as a line item in either the cashflow statement or the supporting notes.
• Entities should:
  • separate material, one-off items out in the cashflow statement (for example a significant one-off loan cash inflow) so a user of the accounts can understand these key cash-flows;
  • separate cash inflows and outflows on loan refinancing in the year;
  • consider the impact of interest accruals on loans and financing to ensure any non-cash movement is correctly adjusted and not reflected as an interest cashflows;
  • separate non-cash interest charges from cash interest charges if discounting has been applied through interest; and
  • carefully review foreign exchange movements in the P&L for cash and non-cash movements, especially within international groups.

For more information please contact Paul Merris and Lee Marshall.