John Chan from Accounting Consulting Services brings us up to speed on the narrow-scope amendment to IAS 7 Statement of cash flows and shows how entities might fulfil the new disclosure requirement.
Borrowings form a major part of nearly every business and operation. Information about changes in borrowings helps users of financial statements evaluate the financial health of an entity.
Even though IAS 7 and IFRS 7 require some disclosures, users still remarked that they find it difficult to understand changes of borrowings across periods. The IASB has thus amended IAS 7 as part of its Disclosure Initiative to address those concerns.
What is the additional disclosure required?
Objective and scope
The objective of the revised disclosures is to help users evaluate changes in borrowings.
As neither borrowings nor ‘net debt’ are defined in IFRS, the IASB requires that the disclosures apply to liabilities arising from financing activities.
The disclosure requirements also apply to:
- Financial assets arising from financing activities (for example derivative assets that hedge long-term borrowings).
- Other assets and liabilities. Entities should also include other assets and liabilities that might be included in other categories within the cash flow statement if that would meet the disclosure objective (for example, cash and cash equivalents and interest payments that are classified as operating activities).
Entities should disclose changes of the items above arising from cash flows and non-cash changes (for example, acquisitions, disposals and exchange differences).
The amendment does not mandate any specific format and management should consider the disclosure that best meets the objective based on their circumstances. Different ways of meeting the disclosure objective are described below.
The amendment suggests a reconciliation between the opening and closing balances of the items above would meet the disclosure requirement. This may be the best way of meeting the disclosure objective where entities have several different items to be disclosed or where non-cash changes arise from different transactions or events. A tabular reconciliation could look as follows:
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- The amendment requires that the link between the reconciliation and the balances and amounts presented in balance sheet and cash flow statement is explained. Management should consider the balance sheet and disclosure objective when deciding how much detail to disclose.
- The amendment requires separate disclosure of changes in assets and liabilities classified in financing activities from changes on other assets and liabilities included in other categories.
- The example assumes that the bank overdraft is repayable on demand and forms an integral part of the entity’s cash management.
Narrative disclosures might be appropriate when there are only few items to be disclosed or where there are limited noncash changes, for example:
During the year ended 31 December 20x7, the non-cash changes on long-term bank borrowings amounted to USD 3 million arising from unrealised foreign exchange differences.
Some preparers may already make similar disclosures in accordance with local guidance or on a voluntary basis. Such existing disclosures may not fully align with the revised requirements, so management should examine the items included in the disclosures for completeness, proper segregation of other assets and liabilities and linkage to the balance sheet and cash flow statement.
Effective date and transition
The amendment is effective for annual periods beginning on or after 1 January 2017. Earlier application is permitted. When an entity first applies the amendment, it is not required to provide comparative information in respect of preceding periods.
Who is affected?
The amendment will affect every entity preparing IFRS financial statements. However, the information required should be readily available. Preparers should consider how to best present the additional information explaining the changes in liabilities arising from financing activities.