Standard No. 24 CASH FLOW STATEMENTS

Article ID: 621
Last updated: 03 Oct, 2012

Standard No. 24

CASH FLOW STATEMENTS

GENERAL PROVISIONS

01. This standard aims to prescribe and guide the principles and methods for compiling and presenting cash flow statements.

02. This standard applies to the compilation and presentation of cash flow statements.

03. The cash flow statement is a constituent of a financial statement, it provides information to help users assess changes in net assets, financial structure, cash liquidity of assets, solvency and capability of enterprises for creating cash flows in their operations. Cash flow statements enhance the ability to objectively assess the business operation situation of enterprises and the comparability among enterprises because it can eliminate effects of the use of different accounting methods for the same transactions and events

The cash flow statement is used in assessing and forecasting the possibilities in terms of amount, timing and certainty of future cash flows; it is also used in re-checking the previous assessments and forecasts of cash flows, and examining the relationship between profitability and net cash flow as well as impacts of price fluctuation.

04. The terms in this standard are construed as follows:

Cash comprises cash in funds, cash on transfer and demand deposits.

Cash equivalents are short-term (not exceeding 3 months) investments, which can be easily converted into known amounts of cash and are subject to an insignificant risk of conversion into cash.

Cash flows are inflows and outflows of cash and cash equivalents, excluding internal transfers between cash and cash equivalent amounts within enterprises.

Business activities are principal revenue-earning activities of enterprises and activities other than investment or financial ones.

Investment activities are activities of procuring, constructing, liquidating, assigning or selling long-term assets and other investments other than cash equivalents.

Financial activities are activities that result in changes in size and structure of the owners’ equity and borrowed capital of enterprises.

CONTENTS OF THE STANDARD

Presentation of cash flow statements

05. Enterprises shall have to present in-period cash flows in their cash flow statements upon three types of activities: business, investment and financial activities.

06. Enterprises may present their cash flows from business, investment and financial activities in a manner which is most appropriate to their business characteristics. The classification of and reporting on cash flows by activities shall provide information which help users assess impacts of those activities on the enterprises’ financial positions and on cash and cash equivalent amounts generated by the enterprises in the period. This information may also be used to evaluate the relationships among the above-said activities.

07. A single transaction may involve cash flows in different types of activities. For example, the repayment of a borrowing including both the principal and interest, in which the interest belongs to business activities and the principal belongs to financial activities.

Cash flows from business activities

08. Cash flows arising from business activities are those relating to principal revenue-earning activities of an enterprise, and providing basic information to evaluate the enterprise’s capability to generate cash from their business activities to repay debts, maintain operation, pay dividends and make new investments without external financing sources. Information on cash flows from business activities, when being used in conjunction with other information, shall help users forecast cash flows from future business activities. Principal cash flows from business activities include:

(a) Cash receipts from the sale of goods and the provision of services;

(b) Cash receipts from other revenue-earning activities (royalties, fees, commissions and other revenues other than received cash amounts determined being cash flows from investment and financial activities);

(c) Cash payments to goods suppliers and service providers;

(d) Cash payments to employees as wages and bonuses, and those on behalf of employees such as insurance premiums, allowances, etc.;

(e) Cash payments of loan interests;

(f) Cash payment of enterprise income tax;

(g) Cash receipts from tax reimbursements;

(h) Cash receipts from compensations or fines paid by customers violating economic contracts;

(i) Cash payments to insurance companies as insurance premiums, indemnities and other cash amounts under insurance policies;

(j) Cash payments of fines or compensations imposed on enterprises for their breaches of economic contracts.

09. Cash flows relating to the purchase and sale of securities for commercial purposes shall be classified as cash flows from business activities.

Cash flows from investment activities

10. Cash flows arising from investment activities are those relating to the procurement, construction, assignment, sale or liquidation of long-term assets and investments other than cash equivalents. The principal cash flows from investment activities include:

(a) Cash payments to procure and/or construct fixed assets and other long-term assets, including those relating to development costs already capitalized as intangible fixed assets;

(b) Cash receipts from the liquidation, assignment or sale of fixed assets and other long-term assets;

(c) Cash payments to provide loans to third parties, other than loans of banks, credit institutions and financial institutions; cash paid to acquire debt instruments of other units, other than payments for those debt instruments considered to be cash equivalents and those for commercial purposes;

(d) Cash receipts from the recovery of loans provided to third parties, other than recovered loans of banks, credit institutions and financial institutions; cash receipts from the re-sale of debt instruments of other units, other than receipts from the sale of those instruments considered to be cash equivalents and those for commercial purposes;

(e) Cash payments of investments in capital contributions to other units, other than payments for the purchase of shares for commercial purposes;

(f) Cash recovered from investments in capital contributions to other units, other than cash receipts from the re-sale of already purchased shares for commercial purposes;

(g) Cash receipts from loan interests, dividends and earned profits.

Cash flows from financial activities

11. Cash flows arising from financial activities are those relating to the change in size and structure of owners’ equity and borrowed capital of enterprises. The principal cash flows from financial activities include:

(a) Cash proceeds from the issuance of shares or reception of capital contributed by owners;

(b) Cash repayments of contributed capital to owners or for redemption of shares by the issuing enterprises;

(c) Cash receipts from short- or long-term borrowings;

(d) Cash repayments of principals of borrowings;

(e) Cash repayments of financial leasing debts;

(f) Cash payments of dividends or profits to owners or shareholders.

Cash flows from business activities of banks, credit institutions, financial institutions and insurance enterprises

12. For banks, credit institutions, financial institutions and insurance enterprises, their arising cash flows bear distinct characteristics. When making their cash flow statements, these organizations shall have to base themselves on their operation natures and characteristics to classify cash flows in an appropriate manner.

13. For banks, credit institutions and financial institutions, the following cash flows shall be classified as cash flows from business activities:

(a) Provided loan cash;

(b) Received loan cash;

(c) Cash receipts from capital mobilization (including deposits or savings received from other organizations and/or individuals);

(d) Cash refunds of mobilized capital (including repayments of deposits or savings of other organizations and/or individuals);

(e) Receipt of deposits from and repayment of deposits to other financial and credit institutions;

(f) Deposits and receipt of deposits at other financial and credit institutions;

(g) Receipts and payments of assorted service charges and commissions;

(h) Receipts from interests on loans and/or interests on deposits;

(i) Payment of interests on borrowings and/or deposits;

(j) Profits or losses from the purchase and sale of foreign currencies;

(k) Receipts or payments in the purchase and sale of securities at securities-trading enterprises;

(l) Payments for the purchase of securities for commercial purposes;

(m) Proceeds from the sale of securities for commercial purposes;

(n) Recovery of bad debts already written off;

(o) Other receipts from business activities;

(p) Other payments for business activities.

14. For insurance enterprises, received insurance premiums and paid insurance indemnities as well as receipts and payments related to clauses of insurance policies shall all be classified as cash flows from business activities.

15. For banks, credit institutions, financial institutions and insurance enterprises, cash flows from investment activities and financial activities shall be similar to those of other enterprises, except for loans provided by banks, credit institutions and financial institutions, which are already classified as cash flows from business activities for the reason that they relate to principal revenue-generating activities of enterprises.

METHODS OF MAKING CASH FLOW STATEMENTS

Cash flows from business activities

16. Enterprises shall have to report their cash flows from business activities by one of the following two methods:

(a) The direct method: Under this method, the norms indicating cash inflows and cash outflows are presented on statements and determined by one of the following two ways:

- Direct analysis and synthesis of cash receipts and payments upon each receipt or payment item according to the accounting records of enterprises.

- Readjustment of revenues, cost of goods sold and other items in the business result report, for:

+ Changes in the period in inventories, and receivables and payables from business activities;

+ Other non-cash items;

+ Cash flows relating to investment and financial activities.

(b) The indirect method: Norms indicating cash flows are determined on the basis of total before-tax profit and readjusted from the following:

- Non-cash revenues and costs, such as depreciation of fixed assets, reserves, etc.;

- Gains and losses of unrealized exchange rate difference;

- Paid enterprise income tax amounts;

- Changes in the period in inventories, and receivables and payables from business activities (other than income tax and other payables after enterprise income tax);

- Profits or losses from investment activities.

Cash flows from investment and financial activities

17. Enterprises shall have to report separately cash inflows and cash outflows from investment and financial activities, except for those cash flows which are reported on a net basis and mentioned in paragraphs 18 and 19 of this standard.

Reporting on cash flows on a net basis

18. Cash flows arising from the following business, investment or financial activities shall be reported on a net basis:

(a) Cash receipts and payments on behalf of customers:

- Rentals received or paid on behalf of asset owners and those returned to them;

- Investment funds held for customers;

- Acceptance and repayment of demand deposits by banks, amounts transferred or paid via banks.

(b) Cash receipts and payments for items of which the turnover is quick and the maturities are short:

- Purchase and sale of foreign currencies;

- Purchase and sale of investments;

- Other borrowings and loans of a short-term of 3 months or less.

19. Cash flows arising from the following activities of banks, credit institutions and financial institutions shall be reported on a net basis:

(a) Acceptance and repayment of time deposits with fixed maturity dates;

(b) Placement of deposits at and withdrawal of deposits from other financial institutions;

(c) Provision of loans to customers and repayment of those loans by customers.

Foreign currency-related cash flows

20. Cash flows arising from foreign-currency transactions must be converted into the accounting currency at the foreign exchange rates at the time such transactions arise. Currencies in cash flow statements of institutions operating overseas must be converted into the accounting currency of the parent companies at the actual exchange rate of the cash flow statement date.

21. Unrealized exchange rate difference arising from the changes in exchange rates for converting foreign currencies into the accounting currency are not cash flows. However, the exchange rate difference due to the conversion of cash and cash equivalents currently deposited in foreign currencies must be separately presented on cash flow statements in order to compare cash and cash equivalents at the beginning and the end of the reporting period.

Cash flows relating to received interests, dividends and profits

22. For enterprises (other than banks, credit institutions and financial institutions), cash flows relating to already paid loan interests shall be classified as cash flows from business activities. Cash flows relating to received loan interests, dividends and profits shall be classified as cash flows from investment activities. Cash flows relating to already paid dividends and profits shall be classified as cash flows from financial activities. These cash flows must be presented as separate norms suitable to each type of activities on cash flow statements.

23. For banks, credit institutions and financial institutions, the already paid or received interests shall be classified as cash flows from business activities, other than received interests definitely identified to be cash flows from investment activities. The received dividends and profits shall be classified as cash flows from investment activities. The paid dividends and profits shall be classified as cash flows from financial activities.

24. The total amount of loan interest paid in the period must be presented in the cash flow statement whether it has been recognized as a cost in the period or capitalized in accordance with accounting standard No. 16 "Borrowing costs."

Cash flows relating to enterprise income tax

25. Cash flows relating to enterprise income tax shall be classified as cash flows from business activities (except for cases where they are determined as cash flows from investment activities) and presented as separate norms on cash flow statements.

Cash flows relating to the acquisition and liquidation of subsidiary companies or other business units

26. Cash flows arising from the acquisition and liquidation of subsidiary companies or other business units shall be classified as cash flows from investment activities and presented as separate norms on cash flow statements.

27. The total amount of payments for and/or receipts from the acquisition and liquidation of subsidiary companies or other business units shall be presented in cash flow statements in net cash and cash equivalents paid for or received from the acquisition and liquidation.

28. Enterprises shall have to synthetically present in their financial statement explanations the following information on both the acquisition and liquidation of subsidiary companies or other business units in the period:

(a) Total purchase or liquidation value;

(b) Value portion of the purchase or liquidation paid in cash and cash equivalents;

(c) Cash and cash equivalent amounts actually available at subsidiary companies or other business units acquitisioned or liquidated;

(d) Value portion of assets and liabilities other than cash and cash equivalents at subsidiary companies or other business units acquitisioned or liquidated in the period. Value of such assets must be synthesized upon each type of asset.

Non-cash transactions

29. Investment and financial transactions that do not require the direct use of cash or cash equivalents shall not be presented in cash flow statements.

30. Many investment and financial activities do not have a direct impact on current cash flows although they do affect the asset and capital source structure of enterprises. Therefore, they shall not be presented in cash flow statements but in financial statement explanations. For example:

(a) The purchase of assets by accepting related liabilities directly or through financial leasing operation;

(b) The acquisition of an enterprise by means of share issuance;

(c) The conversion of debts into owners’ equity.

Components of cash and cash equivalents

31. Enterprises shall have to present in their cash flow statements the norms of cash and cash equivalents at the beginning and the end of the period, effects of changes in foreign exchange rates for converting the currently held cash and cash equivalents in foreign currencies for comparison of the data in cash flow statements with the corresponding items on the balance sheets.

Other explanations

32. Enterprises shall have to present the value of and reasons for large cash and cash equivalent amounts that they have held and not been used due to limitations prescribed by law or other commitments which must be fulfilled by enterprises.

33. There are many circumstances in which cash and cash equivalent balances held by enterprises are not available for use for business activities. For example: Cash amounts accepted as deposits or into escrow accounts; special-use funds; project funding, etc.-

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Article ID: 621
Last updated: 03 Oct, 2012
Revision: 1
Views: 4672
Comments: 0
Posted: 03 Oct, 2012 by Thanh Nam - Webketoan
Updated: 03 Oct, 2012 by Thanh Nam - Webketoan
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