Accounting Guideline

Accounting Guideline GAP 2 Cash Flow Statements All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of the National Treasury of South Africa. Permission to reproduce limited extracts from the publication will not usually be withheld. Though National Treasury (NT) believes reasonable efforts have been made to ensure the accuracy of the information contained in the guideline, it may include inaccuracies or typographical errors and may be changed or updated without notice. NT may amend these guidelines at any time by posting the amended terms on NT's Web site. Note that this document is not part of the GAP standard. The GAP takes precedence while this guideline is used mainly to provide further explanations on the concepts already in the GAP

Contents 1 INTODUCTION... 3 2 SCOPE... 4 3 THE BIG PICTUE... 5 4 PESENTATION OF A CASH FLOW STATEMENT... 6 4.1 Operating activities... 8 4.2 Investing activities... 10 4.3 Financing activities... 11 4.4 Cash and cash equivalents... 11 5 NOTES TO THE CASH FLOW STATEMENT... 13 5.1 Cash and cash equivalents... 13 6 GUIDANCE ON OTHE CASH FLOW ITEMS... 14 6.1 Interest and dividends or similar distributions... 14 6.2 Non-cash transactions... 14 6.3 Investments in controlled entities, associates and joint ventures... 14 6.4 Acquisitions and disposals of controlled entities and other operating units... 16 6.5 Foreign currency cash flows... 17 7 ILLUSTATIVE EXAMPLE... 18 8 ENTITY-SPECIFIC GUIDANCE... 25 8.1 Municipalities... 25 8.2 Public entities and constitutional institutions... 26 9 SUMMAY OF KEY PINCIPLES... 27 9.1 Preparing and presenting a cash flow statement... 27 January 2014 Page 2

1 INTODUCTION This document provides guidance on the identification and disclosure of information about the historical changes in cash and cash equivalents of an entity by means of a cash flow statement, which classifies cash flows during the period from operating, investing and financing activities. The contents should be read in conjunction with GAP 2 (issued February 2010) and includes any changes made by the board in terms of the Improvements to Standards of GAP. For purposes of this guide, entities refer to the following bodies to which the standards of GAP relate to, unless specifically stated otherwise: Public entities Constitutional institutions Municipalities and all other entities under their control Parliament and the provincial legislatures Explanation of images used in manual: Definition Take note Management process and decision making Example January 2014 Page 3

2 SCOPE GAP 2 is applicable to all entities preparing their financial statements on the accrual basis of accounting. Entities will comply with GAP 2 for the preparation of a cash flow statement which should be presented as an integral part of the financial statements for each period for which financial statements are presented. January 2014 Page 4

3 THE BIG PICTUE Cash Flow Statements Direct Method Disclose Interest and Dividends Separately Exclude Non-Cash Movements Disclose Tax On Surplus Separately Cash Flows From Operating Activities Cash Flows From Investing Activities Cash Flows From Financing Activities E.g. Cash FlowsTo/ From Suppliers/Customers E.g. Acquisition/Disposal Of Long Term Assets E.g. Cash Flows From Borrowings Figure 1 January 2014 Page 5

4 PESENTATION OF A CASH FLOW STATEMENT The cash flows during the period reported in the cash flow statement should be classified as cash flows from operating, investing and financing activities. Direct method cash flow statement (paragraph.196) ENTITY CONSOLIDATED CASH FLOW STATEMENT FO YEA ENDED 31 DECEMBE MACH 20X2 (in thousands of currency units rands) 20X2 20X1 CASH FLOWS FOM OPEATING ACTIVITIES eceipts Taxation x x Sales of goods and services x x Grants x x Interest received x x Other receipts x x Payments x x Employee costs x x Suppliers x x Interest paid x x Other receipts x x Payment Employee costs (x) (x) Suppliers (x) (x) Interest paid (x) (x) Other payments (x) (x) Net cash flows from operating activities x x CASH FLOWS FOM INVESTING ACTIVITIES Purchase of plant and equipment (x) (x) Proceeds from sale of plant and equipment x x Proceeds from sale of investments x x Purchase of foreign currency securities (x) (x) Net cash flows from investing activities (x) (x) CASH FLOWS FOM FINANCING ACTIVITIES Proceeds from borrowings x x epayment of borrowings (x) (x) Distribution/dividend to government (x) (x) Net cash flows from financing activities x x Net increase/ (decrease) in cash and cash equivalents x x Cash and cash equivalents at beginning of period x x Cash and cash equivalents at end of period x x January 2014 Page 6

Notes to the cash flow statement (a) Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks and investments in money market instruments. Cash and cash equivalents included in the cash flow statement comprise the following statement of amounts indicating financial position: 20X2 20X1 Cash on hand and balances with banks x x Short-term investments x x x x The entity has undrawn borrowing facilities of X, of which X must be used on infrastructural projects. (b) Property, plant and equipment During the period, the economic entity acquired property, plant and equipment with an aggregate cost of X, of which X was acquired by means of capital grants by the national government. Cash payments of X were made to purchase property, plant and equipment. (c) econciliation of net cash flows from operating activities to surplus/(deficit) Surplus/(Deficit) x x Non-cash movements Depreciation x x Amortisation x x Increase in provision for doubtful debts impairment of debtors x x Increase in payables x x Increase in borrowings x x Increase in provisions relating to employee costs x x (Gains)/losses on sale of property, plant and equipment (x) (x) (Gains)/losses on sale of investments (x) (x) Increase in other current assets (x) (x) Increase in investments due to revaluation (x) (x) Increase in receivables (x) (x) Net cash flows from operating activities (x) (x) January 2014 Page 7

4.1 Operating activities Operating activities are the activities of the entity that are not investing or financing activities. Example 1: Cash flows from operating activities Cash flows from operating activities are derived from the main cash-generating activities of the entity, for example: Cash receipts from charges for goods and services; Cash receipts from grants (operating and capital); or transfers made by national government or other entities; Cash receipts from taxes, levies and fines; Cash payments to suppliers for goods and services; Cash payments to and on behalf of employees; and Cash receipts or payments in relation to litigation settlements. Cash flows from operating activities should be reported by using only the direct method, whereby the entity s significant classes of cash receipts and cash payments are disclosed. Example 2: Direct method Extract from Cash Flow Statement Note 20x1 20x0 CASH FLOWS FOM OPEATING ACTIVITIES eceipts XX XX Taxation XX XX January 2014 Page 8

Sale of goods and services XX XX Transfers and subsidies XX XX Interest received XX XX Other receipts XX XX Payments Employee cost (XX) (XX) Suppliers (XX) (XX) Interest paid (XX) (XX) Other payments (XX) (XX) Net cash flows from operating activities x XXX XXX The entity should disclose a reconciliation between the surplus/deficit and the cash flows from operating activities. This reconciliation may form part of the cash flow statement or be included in the notes to the financial statements. Example 3: econciliation of net cash flows from operating activities to surplus/(deficit) Extract from Notes to the Cash Flow Statement 20x1 20x0 Surplus/(deficit) XX (XX) Non-cash movements Depreciation XX XX Amortisation XX XX Increase in impairment of receivables XX XX (Gain)/loss on sale of property (XX) XX Increase in provisions relating to employee cost Movement in working capital XX XX Increase in inventory (XX) (XX) Decrease in receivables XX XX Increase in unspent conditional grants XX XX Increase in consumer deposits XX XX January 2014 Page 9

Decrease in VAT payable (XX) (XX) Net cash flow from operating activities XXX XXX 4.2 Investing activities Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. Example 4: Cash flows from investing activities Examples of cash flows arising from investing activities: Cash payments to acquire and cash receipts from the sale of property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and equipment; emember that: o o Proceeds from the sale of property, plant and equipment or similar assets, as disclosed in the cash flow statement, represents only the cash flow in the transaction. If an asset is sold for 100 and the carrying value is 65 then the gain will be 35 but the proceeds to be disclosed in the cash flow statement are 100. The gain of 35 will be a non-cash item to be included as part of the reconciliation of net cash flows from operating activities and the surplus/deficit for the period in the notes. When an asset is exchanged for another asset and there is no cash flow, even if a gain or loss is made, then no proceeds on the sale will be disclosed in the cash flow statement. If an asset with a carrying value of 70 is exchanged for an asset with a market value of 60 then the effective gain on the exchange is 10. No cash has flowed in this transaction and thus no proceeds on sale of assets should be disclosed in the cash flow statement. Cash payments to acquire and cash receipts from sale of equity or debt instruments of other entities and interest in joint ventures (other than those instruments considered to be cash equivalents or those held for trading or dealing); o o The most commonly known equity instrument is shares in an entity. The SA Government etail Bond is an example of a debt instrument, January 2014 Page 10

where an entity invests with the government of South Africa. These bonds can be traded, in the market, similarly to equity instruments. Cash advances and loans made to other parties, or cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a public financial institution). As indicated in the example above, cash payments to acquire property, plant and equipment are classified as investing activities. There is, however, an exception to this rule. When an entity, in the course of its ordinary activities, acquires an asset for rental to others which is subsequently held for sale, then the initial cash payments, as well as all rental income and the proceeds from the sale of these assets should be classified as operating activities and not investing activities. 4.3 Financing activities Financing activities are activities that result in changes in the size and composition of the contributed capital and borrowings of the entity. Example 5: Cash flows from financing activities Examples of cash flows arising from financing activities: Cash repayments of amounts borrowed; Cash repayments of finance leases; and Cash proceeds from short- or long-term borrowings. 4.4 Cash and cash equivalents Cash and cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash equivalents are cash held for the purpose of meeting the entity s short-term cash commitments rather than for investment purposes, thus the intention of management should be considered when determining what qualifies as cash equivalents. January 2014 Page 11

For an investment to qualify as a cash equivalent it must be readily convertible into cash, it must have a short maturity date, and be subject to an insignificant risk of changes in value. There is no guideline as to what is considered a short investment period, however the standard mentions a period of three months or less as an example. Bank overdrafts form part of cash and cash equivalents; they are repayable on demand and may form an integral part of an entity s cash management activities. Generally excluded from cash and cash equivalents are: Equity, unless it is in substance a cash equivalent; and Borrowings from the bank (excluding a bank overdraft) as it is considered a financing activity. January 2014 Page 12

5 NOTES TO THE CASH FLOW STATEMENT 5.1 Cash and cash equivalents Entities should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the cash and cash equivalents in the statement of financial position. An entity should also disclose the amount of significant cash and cash equivalent balances that are not available for use by the entity. Some additional information may be relevant to the users of the financial statements in order to understand the financial position of the entity. Disclosure of this information, together with commentary by management, is encouraged and may be included. For example: The amount of undrawn borrowing facilities, indicating any restrictions on the use of these facilities; The total amount of cash flows from each of operating, investing and financing activities relating to a joint venture which is accounted for using the proportionate consolidation method; and The amount and nature of restricted cash balances. Example 6: Example of disclosure requirements Extract from Note to the Cash Flow Statement 20x1 20x0 Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balances with banks and investments in money market instruments. Cash and cash equivalents included in the cash flow statement comprise of the following amounts indicated in the statement of financial position: Cash on hand XX XX Bank balance XX XX Short-term investment XX XX Overdraft (XX) (XX) XXX XXX The entity has undrawn borrowing facilities of x, of which x must be used on infrastructure projects. January 2014 Page 13

6 GUIDANCE ON OTHE CASH FLOW ITEMS 6.1 Interest and dividends or similar distributions Interest and dividends or similar distributions received and paid should be disclosed separately. These amounts may differ from those recognised in the financial statements. E.g. where borrowing costs are capitalised, it may differ to actual amounts paid. Interest paid and interest and dividends (or similar distributions) received may be classified as either operating, investing or financing activities. The classification of interest paid and interest and dividends (or similar distributions) received should be driven by the source. Guidance for classification: Interest paid and interest and dividends received from working capital (e.g. bank, receivables and payables) should be classified as operating cash flows; Interest and dividends (or similar distributions) received may be classified as investing cash flow if they are returns on investments; Interest or similar distributions paid on borrowings may also be classified as financing cash flow because they are a cost of obtaining finance; and Interest paid on finance leases should rather be classified as financing cash flow together with the movement in the liability. This classification should be consistent from period to period. 6.2 Non-cash transactions Many operating, investing and financing activities do not require the use of cash and must be excluded from the cash flow statement. Example 7: Non-cash transactions Examples of non-cash transactions are: Depreciation and amortisation; Increase or decrease in impairment provisions; Year-end adjustment to the bonus and leave provision; Purchases of an asset by exchanging another asset; and Acquiring an asset by means of a finance lease. 6.3 Investments in controlled entities, associates and joint ventures When an entity has an investment in an associate or a controlled entity accounted for by use of the equity or cost method, only the cash flows between the entity and the investee will be January 2014 Page 14

reported in the cash flow statement. These cash flow transactions include, for example, dividends or interest paid or received. When an entity has an investment in a joint venture and it accounts for that investment by using the proportionate consolidation method, then the entity's proportionate share of the joint venture s cash flows should be included in the consolidated cash flow statement of the entity. Example 8: The entity has a 50% share in the joint venture and the proportionate consolidation method is used Extract from joint venture s cash flow statement CASH FLOWS FOM OPEATING ACTIVITIES eceipts Note 20x1 50% share to be included in entity s consolidated cash flow statement Sale of goods and services 1,000 500 Other receipts 250 125 Payments Employee cost (670) (335) Net cash from operating activities CASH FLOWS FOM INVESTING ACTIVITIES Purchase of plant and equipment Proceeds from sale of investment Net cash from investing activities CASH FLOWS FOM FINANCING ACTIVITIES 580 290 (10,000) (5,000) 20 10 (9,980) (4,990) Proceeds from borrowings 10,000 5,000 Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents and the beginning of the period 10,000 5,000 600 300 200 100 January 2014 Page 15

Cash and cash equivalents at end of the period 800 400 6.4 Acquisitions and disposals of controlled entities and other operating units The total cash flows from acquiring or selling an interest in a controlled entity or an operating unit should be classified as investing activities. The entity should disclose in the cash flow statement, and in the notes to the cash flow statement, the total cash flows from acquiring or selling a controlled entity and other operating units, and other relating information. Below is an illustration of the disclosure requirements (refer to the standard for detail). Example 9: Disclosure extract for purchase of controlled entity Extract from Cash Flow Statement Note 20x1 20x0... CASH FLOW FOM INVESTING ACTIVITIES Purchase investment in controlled entity x 100 XX... Extract from Notes to the Cash Flow Statement 20x1 20x0... Total purchase price 120 XX Portion of purchase price discharged by means of cash and cash equivalents Assets (20) XX Property, plant and equipment 18 XX Investment property 80 XX eceivables 7 XX Liabilities Payables (5) XX Net assets excluding cash and cash equivalents 100 XXX Cash and cash equivalents 20 XX January 2014 Page 16

Total net asset value 120 XXX 6.5 Foreign currency cash flows Cash flows from transactions in a foreign currency should be recorded in the entity s functional currency by applying to the foreign currency amount the exchange rate at the date of the cash flow. The cash flows from foreign controlled entities should also be converted to the entity s functional currency at the date of the cash flow. Example 10: Converting foreign currency at cash flow date The entity purchased equipment for 100 US dollars on 3 February 20x1; payment was made on the 28 February 20x1. The entity s functional currency is South African ands. The exchange rate on 3 February 20x1 was 10 for 1 US dollar and on payment date the exchange rate was 10.50 for 1 US dollar. Extract from Cash Flow Statement Note 20x1 20x0... CASH FLOW FOM INVESTING ACTIVITIES Purchase of equipment (100US$ @ 10.5) x 1,050 XX... efer to the accounting guideline GAP 4 on the effects of changes in foreign exchange rates for detail on these calculations. January 2014 Page 17

7 ILLUSTATIVE EXAMPLE Example A direct method cash flow for an entity other than a financial institution Extract from Statement of Financial Position Assets Note 20x1 20x0 Current assets Inventory 30,000 23,000 Other receivables 350,000 450,000 eceivables from the sale of goods/services 1 1,450,000 1,690,000 VAT receivable 10,000 9,000 Cash and cash equivalents 2 175,000 150,000 2,015,000 2,322,000 Non-current assets Property, plant and equipment 3 12,230,000 10,250,000 Investment in controlled entity 3,000 3,000 Investments 60,000 67,000 Long-term receivables 120,000 220,000 12,413,000 10,540,000 Total assets 14,428,000 12,862,000 Liabilities Current liabilities Finance lease obligation 561,000 1,139,000 Payables 4 1,095,000 1,077,000 Unspent conditional grants 7,000,000 6,000,000 Bank overdraft 2 35,000 32,000 8,691,000 8,248,000 Non-current liabilities January 2014 Page 18

Finance lease obligation - 571,000 Long-term borrowings 840,000 870,000 840,000 1,441,000 Total liabilities 9,531,000 9,689,000 4,897,000 3,173,000 Net assets Accumulated surplus 4,897,000 3,173,000 Extract from Statement of Financial Performance evenue Note 20x1 20x0 Sales 2,427,000 2,277,000 Interest eceivables from the sale of goods/services 110,000 102,000 Interest Investments 2,000 5,000 Transfers and subsidies 1,393,000 1,308,000 Dividends 300 200 Other income 37,000 305,800 Total revenue 3,969,300 3,998,000 Expenditure Personnel 890,000 810,000 Depreciation 35,000 32,000 Impairment loss on receivables 1 40,000 62,000 Finance cost Bank overdraft 800 500 Finance cost Borrowings 1,200 900 Finance cost Finance lease 1,000 1,100 epairs and maintenance 99,000 91,000 General expenditure 1,178,300 1,146,500 Total expenditure 2,245,300 2,144,000 January 2014 Page 19

Surplus for the period 1,724,000 1,854,000 Extract from Notes to the Annual Financial Statements 1. eceivables from the sale of goods/services 20x1 20x0 eceivables from the sale of goods/services 2,640,000 2,840,000 Less: Allowance for impairment (1,190,000) (1,150,000) econciliation of Impairment allowances 1,450,000 1,690,000 Balance at the beginning of the period 1,150,000 1,088,000 Contribution to provision 40,000 62,000 2. Cash and cash equivalents Cash and cash equivalents consist of: 1,190,000 1,150,000 Bank balance 5,000 - Short-term investments 170,000 150,000 Bank overdraft (35,000) (32,000) 3. Property, plant and equipment econciliation of property, plant and equipment 140,000 118,000 Opening balance 10,250,000 10,082,000 Additions 2,015,000 200,000 Depreciation (35,000) (32,000) Closing balance 12,230,000 10,250,000 4. Payables Payables from purchase of goods/services 1,070,000 1,042,000 Bonus provision 13,000 10,000 Sundry payables 12,000 25,000 Closing balance 1,095,000 1,077,000 January 2014 Page 20

ENTITY CASH FLOW STATEMENT FO THE PEIOD ENDED 31 MACH 20x1 Cash flow from operating activities Note 20x1 20x0 eceipts Taxation - XX Sale of goods and services (2,427,000+240,000-40,000-7,000) 2,620,000 XX Transfers and subsidies (1,393,000+1,000,000) 2,393,000 XX Interest eceivables from the sale of goods/services 110,000 XX Dividends received 300 XX Other receipts (37,000+100,000) 137,000 XX Payments Employee cost (890,000-3,000) (887,000) (XX) Suppliers (99,000+1,178,300-15,000) (1,262,300) (XX) Finance cost Bank overdraft (800) (XX) VAT paid (1,000) (XX) Net cash flow from operating activities 16 3,109,200 XXX Cash flow from investing activities Purchases of property, plant and equipment 3 (2,015,000) (XX) Proceeds from sale of property, plant and equipment Proceeds from sale of investments (60,000-67,000) - XX 7,000 XX Interest Investments 2,000 XX Proceeds from long-term receivables (120,000-220,000) 100,000 XX Net cash flow from investing activities (1,906,000) XXX Cash flow from financing activities January 2014 Page 21

epayments of finance lease (561,000-1,139,000-571,000) (1,149,000) (XX) Finance cost Finance lease (1,000) (XX) epayment of long-term borrowings (840,000-870,000) (30,000) (XX) Finance cost Borrowings (1,200) (XX) Net cash flow from financing activities (1,181,200) XXX Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at end of the period 22,000 XXX 118,000 XXX 15 140,000 118,000 Notes to the cash flow statement Note 20x1 20x0 15. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balances with banks and investments in money market instruments. Cash and cash equivalents included in the cash flow statement comprise the following amounts included in the statement of financial position: Cash on hand and balance with banks 5,000 - Short-term investments 170,000 150,000 Bank overdraft (35,000) (32,000) 140,000 118,000 16. econciliation of net cash flow from operating activities to surplus/(deficit) Surplus/(deficit) for the period 1,724,000 XX Non-cash movements Depreciation 35,000 XX Impairment loss on receivables 40,000 XX Increase in provisions relating to employee cost (13,000-10,000) 3,000 XX Items shown separately on the face of cash flow statement January 2014 Page 22

Interest received - Investments (2,000) XX Finance cost Borrowings 1,200 XX Finance cost Finance lease 1,000 XX Movement in working capital Increase in inventory (30,000-23,000) (7,000) XX Decrease in other receivables (350,000-450,000) 100,000 XX Decrease in receivables from the sale of goods/services (1,450,000-1,690,000) Increase in allowance for impairments (1,190,000-1,150,000) 240,000 XX (40,000) XX Increase in VAT receivable (10,000-9,000) (1,000) XX Increase in payables (1,095,000-1,077,000)+(-13,000+10,000) 15,000 XX Increase in unspent conditional grants (7,000,000-6,000,000) 1,000,000 XX Net cash flow from operating activities 3,109,200 XXX Non-cash items Non-cash items should be taken out of the surplus/deficit for the period. evenue: As revenue increased the surplus (or decreased the deficit), it should be deducted (negative) in the reconciliation. Expenses: As expenses decreased the surplus (or increased the deficit), it should be added (positive) in the reconciliation. Working capital movements emember that a positive figure represents an inflow of cash and a negative figure represents an outflow of cash. Assets: Decreases in assets from prior period to current period represent a cash inflow for the entity. o For receivables it is an indication that the accounts were paid, which results in a cash inflow for the entity; January 2014 Page 23

o A decrease in inventory is an indication that inventory was sold and sales are a cash inflow for an entity. o A decrease in investments (investment that does not form part of cash and cash equivalents) is the result of funds that were withdrawn from the investments or investments that were sold, which are cash inflows. Increases in assets from prior period to current period represent a cash outflow for the entity. o An increase in debtors indicates that additional credit was given which represents a cash outflow. o An increase in inventory means the entity purchased more stock than what it sold and the net effect being an outflow of cash. o Increase in short term investments (investments that do not form part of cash and cash equivalents) indicates additional funds were invested which is a cash outflow. Liabilities: A decrease in liabilities from prior period to current period represents an outflow of cash for the entity. The decrease indicates that liabilities were paid which is an outflow of cash. When a liability increases from period to period, it represents a cash inflow as you are effectively receiving additional cash. January 2014 Page 24

8 ENTITY-SPECIFIC GUIDANCE Entity-specific guidance has been included where appropriate to provide specific guidance on a subject that only relates to those types of entities. 8.1 Municipalities Disclosure requirements in terms of the Municipal Finance Management Act 56, 2003 The following additional compulsory disclosures are required in terms of the Municipal Finance Management Act 56, 2003. Note to the financial statements Disclosure requirements Cash and cash equivalents For each bank account held by the municipality or the municipal entity during the financial year: o o The name of the bank where the account is or was held and the type of account and; The period opening and period closing balances in each of these bank accounts. Example 11: Compulsory disclosure requirements by the MFMA Extract from the Notes to the Financial Statements Cash and cash equivalents ABSA Bank Current account 20x1 20x0 Cash book balance at the beginning of the period XX XX Cash book balance at the end of the period XX XX Bank statement balance at the beginning of the period XX XX Bank statement balance at the end of the period XX XX January 2014 Page 25

8.2 Public entities and constitutional institutions Taxes on surplus Cash flow arising from taxes should be separately disclosed and should be classified as cash flows from operating activities unless the cash flow from the tax can be specifically identified with a financing or investing activity. Entities are generally exempt from taxes on surpluses. Example 12: Taxes on surplus An entity paid taxation to the amount of 55, 000 during the period (20x1). The 55, 000 is made up of 49, 000 income tax on the net profit for 20x0 and 6, 000 capital gains tax on a building sold in 20x0. The total cash flow in 20x1 for taxes on surplus is 55, 000. 49,000 of the cash flow should be disclosed under operating activities as the tax was a result of operating activities and 6,000 under investing activities as buildings are classified as investing activities. Extract from Cash Flow Statement Note 20x1 20x0 CASH FLOW FOM OPEATING ACTIVITIES Payments Taxation (49,000) XX... CASH FLOW FOM INVESTING ACTIVITIES Taxation (6,000) XX... January 2014 Page 26

9 SUMMAY OF KEY PINCIPLES GAP 2 sets out the principles for preparing a cash flow statement. Each entity presents its cash flow from operating, investing and financing activities in a manner which is most appropriate to its activities. 9.1 Preparing and presenting a cash flow statement All cash flow items should be classified into one of 3 main categories: 1. Operating activities 2. Investing activities 3. Financing activities Cash flows from operating activities should be reported by using the direct method. An entity should include a reconciliation of the surplus or deficit presented in the statement of financial performance with the net cash flow from operating activities reflected in the cash flow statement. Components of cash and cash equivalents and the amount of cash and cash equivalents not available for use by the entity should be disclosed. Cash and cash equivalents are part of the cash management of an entity and thus the movement in cash and cash equivalents are excluded from cash flow. Interest paid and interest and dividends or similar distributions received should be classified into the different activities based on the source. All non-cash transactions should be excluded from the cash flow statement. Cash flow from taxes, if practical, should be allocated to the different activities based on the source, if not practical then it should be classified as an operating activity. Cash flows from transactions in a foreign currency should be converted to the entity s functional currency at the date of the cash flow in accordance with GAP 4 - The Effects of Changes in Foreign Exchange ates. Legislation may require additional disclosure with regards to cash and cash equivalents. January 2014 Page 27