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IPSAS 2 is based on IAS 7 Cash Flow Statements.


IPSAS 2 Cash Flow Statements requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method for operating cashflows), investing activities or financing activities, with the latter two categories generally presented on a gross basis.


IPSAS 2 was issued in May 2000 and applies to annual periods beginning on or after 1 January 2008.


History of IPSAS 2











Effective date

Annual periods beginning on or after 1 July 2001.


Full text

Refer to IFAC website here


Summary of IPSAS 1 Presentation of Financial Statements

Objective

The objective of IPSAS 2 is to prescribe the presentation of information about the historical changes in the cash and cash equivalents of an entity as at the reporting date. In the cash flow statement an entity classifies cash flows during the period according to operating, investing, and financing activities.


Scope

This standard should be applied by entities that prepare and present financial statement under the accrual basis of accounting. IPSAS 2 applies to all public sector entities other than GBEs [IPSAS 2.1-3].


Main principle of IPSAS 2

The cash flow statement analyses changes in cash and cash equivalents during the reported period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. An investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition [IPSAS 2.9]. Equity investments are excluded, unless they are in substance a cash equivalent [IPSAS 2.9]. Bank overdrafts which are repayable on demand and form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IPSAS 2.10]


Presentation of the Statement of Cash Flows

In the cash flow statement cash flows are classified according to one of the following activities [IPSAS 2.18]:

• Operating activities

• Investing activities

• Financing activities

Key definitions from cash flows as defined by IPSAS 2 are:


Operating activities: Are the main cash-generating activities that are not investing or financing activities [IPSAS 2.8] and is a key indicator to which extent the operations are funded by way of [IPSAS 2.21]:


a) Direct or indirect taxes

b) From the recipients of goods and services provided by the entity

If an entity is unable to separately identify the funds that are appropriated or authorized by the government or other public entity into operational, financing or investing cash flows, these should be reported as an operational cash flow with disclosure in the notes [IPSAS 2.24].


Investing activities: Are the acquisition and disposal of long-term assets and other investment not included in cash and cash flow equivalents [IPSAS 2.8].

Information about cash flows arising from investing activities give a view on the extent to which outflows have been made for resources that are intended to contribute to the entity’s future service delivery.

Financing activities: are activities that changes the contributed capital and the entity’s borrowings [IPSAS 2.8].

The cash flows from financing activities are an indicator of claims on future cash flows by providers of capital to the entity [IPSAS 2.26]


Cash Flows from Operating Activities

An entity has the choice between (i) the direct method and (ii) the indirect method for reporting cash flows from operating activites [IPSAS 2.27]. The direct method of presentation is encouraged for reporting operating cash flows. [IPSAS 2.28].


(i) The direct method shows each major class of gross cash receipts and gross cash payments and could be presented, for example, as follows:



 


















(ii) The indirect method adjusts the accrual based net surplus or deficit for the effects of non-cash transactions and could be presented, for example, as following:














Cash Flows from Investing and Financing Activities


Cash flows from investing and financing activities should be reported on a gross basis by major class of cash receipts and major class of cash payments, except for the following items, which can be reported on a net basis [IPSAS 2.31-35]:

• cash receipts and payments on behalf of customers, taxpayers, or beneficiaries (e.g. taxes received by one level of government for another level of government)

• cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short

• cash receipts and payments relating to deposits with financial institutions

• cash advances and loans made to customers and repayments of these loans


An example of the presentation of investing and financing cash flows is a follows:













 








 




Foreign Currency Cash flows


The exchange rate at the date of the cash flow in a foreign currency will be used to record that cash flow in the functional currency of the entity [IPSAS 2.36].


Cash flows of foreign controlled entity should be translated at the exchange rate prevailing when the cash flows occurred [IPSAS 2.37].


Interest, Dividends or Similar Distributions


Interest and dividends (or similar distributions) received and paid have to be disclosed separately. They may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IPSAS 2.40].


Taxes on net surplus

Taxes on net surplus shall be disclosed separately and are normally classified as a cash flow from operating activities, unless they can be specifically identified with financing or investing activities [IPSAS 2.44].


Investments in Controlled Entities, Associates and Joint-Ventures


When the equity method is used, the statement of cash flows should report only cash flows between the investor and the investee [IPSAS 2.47].

When proportionate consolidation is used for a jointly controlled entity, the cash flow statement should include the entity's share of the cash flows of the investee [IPSAS 2.48].


Acquisitions and Disposals

Aggregate cash flows related to acquisitions and disposals of controlled entities and other operating units should be presented separately and classified as investing activities [IPSAS 2.47].

Following specific disclosures are required [IPSAS 2.48]:

• Aggregate amount of the consideration

• Total amount of the consideration discharged by cash

• Amount of cash and cash equivalents acquired or disposed of

• Amount of assets and liabilities other than cash and cash equivalents, per major category recognized in the entity acquired disposed of

An example of such a disclosure could be:


 












































Noncash Transactions

Investing and financing transactions which do not require the use of cash (e.g. conversion of debt into contributed capital or equity) should be excluded from the cash flow statement, but a separate disclosure is required elsewhere in the financial statements [IPSAS 2.54].


Disclosures

An entity is required to present the components of cash and cash equivalents and the reconciliation to the amounts included in the statement of financial position [IPSAS 2.56].












Other Disclosures


The amount of cash and cash equivalents held by the entity that is not available for use by the economic entity should be disclosed, together with a commentary by management [IPSAS 2.59]


May 2000

Issuance of IPSAS 2: Cash flow statements

1 July 2001

Effective date of IPSAS 2

1 January 2011

Effective date of improvements to IPSASs (issued January 2010)

1 January 2012

Effective date of improvements to IPSASs (issued November 2010)


Year X + 1


Year X


€ (000)


€ (000)

Receipts




Cash receipts from taxation

x


x

Interest received

x


x

Other receipts

x


x

Payments




Cash payments to employees

(x)


(x)

Cash payments to suppliers

(x)


(x)

Interest paid

(x)


(x)

Other payments

(x)


(x)

Net cash flows from operating activities

x


x


Year X + 1


Year X


€ (000)


€ (000)

Surplus/(deficit)

x


x

Adjustments for non-cash items:




Add back depreciation

x


x

Add back amortization




Increase in provision for doubtful debts

x


x

Increase/(decrease) in payables

(x)


x

Increase/(decrease) in borrowings

x


x

(Gain)/loss on sale of PPE

x


(x)

(Gain)/loss on sale of investments

(x)


x

(Increase)/decrease in other current assets

x


(x)

(Increase)/decrease in receivables

(x)


(x)

Net cash flows from operating activities

x


x


Year X + 1


Year X


€ (000)


€ (000)

CASH FLOWS FROM INVESTING ACTIVITIES




Purchase of PPE

(x)


(x)

Proceeds from sale of PPE

x


x

Proceeds from sale of investments

x


x

Purchase of securities

(x)


(x)

Net cash flows from investing activities

(x)


(x)





CASH FLOWS FROM FINANCING ACTIVITIES




Proceeds from borrowings

x


x

Repayment of borrowings

(x)


(x)

Distribution of dividend to government

(x)


(x)

Net cash flows from financing activities

x


x


Year X+1


Year X


€ (000)


€ (000)

ASSETS




Non-current assets




Property, plant and equipment (net)

x


x

Goodwill and Intangible assets (net)

x


x

Deferred tax assets

x


x


x


x

Current assets




Inventories (net)

x


x

Trade receivables and other receivables

x


x

Cash and cash equivalents

x


x


x


x

TOTAL ASSETS

x


x





Non-current liabilities




Provisions for other liabilities and charges

x


x

Retirement benefit obligations

x


x

Deferred tax liability

x


x


x


x

Current liabilities




Trade and other payables

x


x

Provisions

x


x


x


x

TOTAL LIABILITIES

x


x





NET ASSETS

x


x





Total consideration

x



Adjustments

(x)



Net proceeds received

x







Net consideration

x



Satisfied in cash

x




Year X+1


Year X


€ (000)


€ (000)

Cash at bank and in hand

x


x

Short term deposits

x


x

Short term investments

x


x

Total cash and cash equivalents

x


x

IPSAS 2: Cash Flow Statements