 Hello and welcome to this session. This is Professor Farhad and this session we would look at IAS 7 which is the statement of cash flows under the international financial reporting standard. This topic is covered in international accounting course, the CPA exam. They do ask about those items on the CPA exam, the difference between GAP and IFRS statement of cash flows as well the ACCA exam. As always, please connect with me only then YouTube is where you would need to subscribe to my channel. I have 1500 plus accounting, auditing and tax lectures. Please, if you're studying for your CPA, for your ACCA as well as the CMA exam, my YouTube is a free resource. You have plenty of lectures to cover any and every topic you can think of. This is my Instagram account. Please follow me on Instagram as I'm trying to grow my following. This is my Facebook and this is my website. On my website, if you chose to, you can always contribute. It's a greatly appreciated. Also on my website, I do have CPA offer right now. Becker is running a special offer with unlimited access. Please, if you're studying for your exam, check it out. It's worth checking it out. AIS 7 which is the statement of cash flow. Basically, it reiterate the requirement in IAS 1 that says that the company must present a statement of cash flow as an integral part of the financial statement. Simply put, the statement of cash flows is a required. It's an integral part of the financial, basic financial statement. The cash flow statement must be classified as being related to operating, investing and financing. Same thing as GAP, operating, investing and financing, three sections. US GAP, the same thing. Now here's what I need to tell you. If you don't know how to prepare a cash flow statement, if you have any doubts, here we go. You go to my chapter 23, Intermediate Accounting. I have five to six complete lectures, each one of them around 30 minutes that explains with examples how to prepare one. This is just the comparison between IFRS and US GAP. Also, the cash flow statement can be presented when it comes to the operating section. The operating section here can be presented either using the direct or the indirect method. The same thing as US GAP. Under US GAP, you could either present the operating section using the direct or the indirect. Now in the US, the majority of companies use the indirect method, the majority of companies. Now when using the indirect method, reconciliation from income to cash flow must begin with any particular item. Now for IFRS, if you are using the indirect method, what is the indirect method? The indirect method with US GAP, you would start with net income. Then you work backward until you get cash provided or used by operating activities. So you work backward, you start with net income. For the IFRS, you don't have to start with net income. You can start with any income figure, such as net income or operating income. It doesn't have to be necessarily net income. For US GAP, you have to start with net income. When using the direct method, there is no requirement to present a reconciliation of income to cash from operation. Under US GAP, what you have to do if you use the direct method, you still have to prepare a reconciliation. You have to prepare a reconciliation, which is simply put, you have to prepare the indirect method as well. So those two differ. GAP starts with net income and GAP requires a reconciliation if you are using the direct method. Now, I'm going to show you side by side the comparison between US GAP and IFRS, because the majority of it is similar. I'm going to just emphasize the differences. So under US GAP, you have three categories operating activities, investing activities, and financing activities. And here's where they differ. When it comes to interest received, for US GAP, we consider this operating. We consider interest paid operating. We consider dividend received operating. Well, there is no interest or dividend activities reported under investing activities, and dividend paid is financing activity. So I'm going to emphasize on those four items. One, two, three, four. Also taxes differ, but we'll discuss this in a moment. So this is how it's prepared under US GAP, and hopefully you know this. Now, how does it work under IFRS? Let's start with interest paid. Interest paid here under IFRS, it could be under operating activities, or it could be under financing activities. So interest paid could be under operating activities if the company is a financial institution. Financial institution means they lend money and they earn interest and they pay interest on deposit. So interest is part of their operating activities, or it could be considered, if it's not a financial institution, it's cost of raising capital. Therefore, it's a financing activity. So notice under US GAP, interest paid is always operating under IFRS. It could be operating if the company that we are dealing with is a financial institution, or it could be financing activity. So we're done with interest paid. Let's look at dividend received. Dividend received. Dividend received could be operating activities, could be investing activities. So it could be operating, could be investing. Dividend received means if you are a financial institution and that's your business, you invest money in assets and those assets generate dividend. The dividend that you receive is considered operating, part of your operating. If you're not a financial institution like Bank of America, Charles Schwab, Merrill Lynch, and you're just invested money in some stocks and you receive dividend, that dividend is considered investing because the dividend comes from in the investments. So it's considered investing. So we're done with interest paid, dividend received. Now we're going to look at interest received. Interest received is an investing activity. When do you receive interest? You receive interest when you lend money. Therefore, if you lend money, it's an investing activity. Therefore, anything that comes out of this lending when you lend money, it's interest. Interest should be considered investing. Here's the assumption that we make under US GAAP. Under US GAAP, we say the interest that you received and the dividend that you received, you're going to take this money and use it for operating activities. Therefore, we consider it operating activities. Interest paid also, you pay interest on the money so you can use the asset for operating activities. This is the investment. Under IFRS, they differentiate. The interest received and the dividend received, they could be part of your operation. They could be part of your investing depending on the nature of the business. And the interest paid also could be operating, sorry, operating interest paid operating or it could be financing depending on the nature of the business. Now, dividend paid, that's going to be so interest received, could be operating, could be investing. Operating, it means what? That's what you do for a living. You lend money out. And obviously, dividend paid, I'm not mentioning this dividend paid as a financing activity. So dividend paid is the same. Okay, dividend paid is the same. So what differ is those three. And we'll look at an example very shortly. Other items, as I told you, there are other items. Income tax is another item. Income tax generally speaking is an operating activity unless they are specifically identified with an investing or a financing activities. So if you had to pay taxes because you sold a particular asset and you generated a gain or a loss, it's an investing activity, then the taxes related will be listed there. Same thing as if you happen to raise money and pay taxes, that's also will be considered financing. The cash and cash equivalent line item and the statement of cash flow must reconcile with the cash and cash equivalent line on the statement of financial position. So simply put, and hopefully you know this, that once you are done with the statement of cash flow, it should reconcile with a single line on the balance sheet. That's per US gap. Under IFRS, it does not have to reconcile with one item. You might have to add two items on the balance sheet to reconcile. So you might have cash and cash equivalent separately. So component of cash and cash equivalent must be disclosed and reconciled with amount reported on the statement of financial position. However, the total cash and cash equivalent, the statement of cash flow need not to agree with a single line on the balance sheet. So that amount could be broken down in two different places. For US gap, you take the bottom line on the cash flow statement that should reconcile with cash and cash equivalent. For IFRS, it doesn't have to reconcile with one particular line. Now investing and financing transaction are executed from the statement of cash flow, but must be disclosed elsewhere within the financial statements. US gap and IFRS the same thing. What is non-investing and financing activity? It's basically you bought a piece of land, but you issued stocks, or you exchange one asset with another asset, or you issued the debt to buy equipment. Those are non-investing and financing transaction, non-cash, I'm sorry, non-cash, not non-cash investing and financing. So you did not use cash. What do you need to do with these transactions? You will need to disclose them. Also, the IAS 7 make explicit distinction between bank borrowing and bank overdraft. Bank borrowing is lending and bank overdraft is when you go over the money that you have in the bank account. If that amount is considered to be an integral part of the enterprise cash management, which is the overdraft, if that's the case, it might be classified as a component, which is a reduction of cash and cash equivalent. So if you have a bank overdraft and it's part of your regular operating cash activities, then you reduce your cash. Otherwise, they will be part of your operating. Basically, it would reduce your cash. Otherwise, if it's not, bank drafts are classified as financing. Basically, financing means it's a cost of raising money, the cost of doing business. Let's take a look at an example. Let's take a look at an example. StarCist Corporation currently reports USGAP, but it's investigating the effect that the adoption of IFRS might have on its statement of cash flow. For the current year, SKC has interest, SKC has interest received of $500. Well, interest received under USGAP that's operating. Interest paid of $1250, that's also operating under USGAP. Dividend received of $200, that's operating. And dividend paid of $2,700, that's financing under USGAP. So under USGAP, they tell us how to classify them. And this is what it would look like. So interest paid, this is the operating activities. Interest paid, interest received. Simply put, any interest paid, any interest received is operating. And dividend received is also operating, nothing reported under investing. This is USGAP principle. Financing activities, we have dividend paid. Now, if we switch from GAP to IFRS, what's going to happen is this. Now, we are not told that this company is a financial institution. What does that mean? If this company is not a financial institution, the interest paid cannot be operating. This has to be financing. This is how you finance your business. Interest received because you received interest from lending money, that's investing. And dividend received, that's also part of your investments. So those three, they removed from operating to go to investing, which is the interest and the dividend received, and interest paid goes to financing. And this is what it would look like. So no more, nothing in operating activities. Interest received, and interest, and dividend received, this is because you got those from investing money in stocks or lending money, therefore they're investing, that the dividend paid, it's always financing under both methods. But the interest paid is considered financing under IFRS. So hopefully this short session illustrates the difference between USGAP and IFRS. 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