Statement of Cash Flows are now considered independent and separate documents in Italy, and companies must prepare them as such for financial statements starting 1 January 2016.
Prior to Italian legislative decree no. 139/15 entering into force, the Italian Accounting Board (Organismo Italiano di Contabilità - OIC) recommended the inclusion of the Statement of Cash Flows – the accounting document that analyses a company’s financial trend – as an additional statement in the notes.
For financial statements starting from 1 January 2016, the Italian Civil Code (article 2425-ter) qualifies the Statement of Cash Flows as an independent and separate document: consequently, the financial statements (art. 2423) now consist of:
- the balance sheet
- the income statement
- the statement of cash flows
- the notes.
OIC 10 identifies and details the two alternative methods to prepare the Statement of Cash Flows:
- direct method
- indirect method.
This method requires the analytical exposure of the financial flows by distinguishing inflows from outflows. It is considered the simplest method from a conceptual standpoint, as well as more effective in terms of presentation, and provides information that may be useful to estimate the future financial flows that are not available with the indirect method.
Though considered the most effective method (its use is also recommended by IAS 7), it is not commonly used because of the limits of this methodology, which actually requires specific “on-balance sheet” accounting.
Through this method the profit or loss for the year are adjusted by the effects of non-cash transactions, by any deferral or allocation of previous or future operating collections or payments and by revenue or cost elements connected with the financial flows deriving from the investment or financing activity.
The inflows and outflows attributed to the various items are synthetically reconstructed based on the changes of the balances of the balance sheet items, detailed and integrated with data from the income statement and off-balance-sheet information.
In practice, as it can be implemented also by subjects outside the company (financial analysts), it is the most used to determine the financial flow of the operational activities, adjusting the result of the year to account for:
a) changes in balances, credits and debits generated by the operational activity taking place in the year
b) non-monetary elements such as amortisation, provisions, deferred taxes, unrealised gains and losses on exchange rates, retained profits of associates and third party minority interests
c) all the other elements whose monetary effects are financial flows of the investment or financing activity.
Impact for companies
Companies that, due to their size and volume, prepare their financial statements in an ordinary form (2435-bis and ter) are now obliged to prepare the Statement of Cash Flows. For companies that prepare their financial statements in a condensed form and for micro-firms, this document is not mandatory, although the Italian Accounting Board continues to recommend its inclusion.