FRS 102 The Cash Flow

Statement
 FRS 102 THE CASH FLOW STATEMENT

Contents
Introduction ........................................................................................................................................... 2

Presentation of the cash flow statement ................................................................................................ 2

Cash flow statement on transition to FRS 102 ....................................................................................... 3

Example – Balancing the cash flow statement in IRIS Accounts Production........................................... 4

Working capital movements to balance the prior year’s cash flow statement .......................................... 6

Entering the movements via the Interactive Data Screen ....................................................................... 7

........................................................................................................................................................... 10

VAT .................................................................................................................................................... 11

Conclusion .......................................................................................................................................... 11

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 FRS 102 THE CASH FLOW STATEMENT

Introduction

The purpose of the cash flow statement is to show how the reporting entity has generated and spent cash
during the period. Few small companies prepared a cash flow statement under previous UK GAAP, and
this will continue to be the case under FRS 102 The Financial Reporting Standard applicable in the UK
and Republic of Ireland, Section 1A Small Entities as small companies are not required to prepare a cash
flow statement. Paragraph 7.1B of FRS 102 acknowledges that a small entity is not required to comply
with Section 7 Statement of Cash Flows in FRS 102.

However, companies which are not eligible to apply the small companies’ regime in the preparation of
their financial statements must prepare a cash flow statement and there have been some significant
presentational differences in the cash flow statement prepared under FRS 1 Cash flow statements
principles to a cash flow statement prepared under FRS 102.

Presentation of the cash flow statement

Under previous UK GAAP, FRS 1 required an entity’s cash flow statement to be classified under the
following standard headings:

 Operating activities
 Returns on investments and servicing of finance
 Taxation
 Capital expenditure and financial investment
 Acquisitions and disposals
 Equity dividends paid
 Management of liquid resources
 Financing

The cash flow statement under Section 7 is only prepared using three cash flow classifications as follows:

 Operating activities
 Investing activities
 Financing activities

Operating activities

Operating activities are the principle revenue-producing activities of the entity. Paragraph 7.4 of FRS 102
cites examples of cash flows from operating activities as follows:

 cash receipts from the sale of goods and the rendering of services;
 cash receipts from royalties, fees, commissions and other revenue;
 cash payments to suppliers for goods and services;
 cash payments to and on behalf of employees;
 cash payments or refunds of income tax, unless they can be specifically identified with financing and
investing activities;
 cash receipts and payments from investments, loans and other contracts held for dealing or trading
purposes, which are similar to inventory acquired specifically for resale; and
 cash advances and loans made to other parties by financial institutions.

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 FRS 102 THE CASH FLOW STATEMENT

Investing activities

Investing activities involve the acquisition and disposal of long-term assets and other investments not
included in cash equivalents. Paragraph 7.5 of FRS 102 cites examples of cash flows from investing
activities as follows:

 cash payments to acquire property, plant and equipment (including self-constructed property, plant
and equipment), intangible assets and other long-term assets. These payments include those relating
to capitalised development costs and self-constructed property, plant and equipment;
 cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;
 cash payments to acquire equity or debt instruments of other entities and interests in joint ventures
(other than payments for those instruments classified as cash equivalents or held for dealing or
trading);
 cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures
(other than receipts for those instruments classified as cash equivalents or held for dealing or trading);
 cash advances and loans made to other parties (except those made by financial institutions);
 cash receipts from the repayment of advances and loans made to other parties;
 cash payments for futures contracts, forward contracts, option contracts and swap contracts, except
when the contracts are held for dealing or trading, or the payments are classified as financing
activities; and
 cash receipts from futures contracts, forward contracts, option contracts and swap contracts, except
when the contracts are held for dealing or trading, or the receipts are classified as financing activities.

Financing activities

Financing activities are activities which result in changes in the borrowing and equity structure of the
entity. Paragraph 7.6 cites examples of financing activities as follows:

 cash proceeds from issuing shares or other equity instruments;

 cash payments to owners to acquire or redeem the entity’s shares;
 cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-
term borrowings;
 cash repayments of amounts borrowed; and
 cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.

Cash flow statement on transition to FRS 102

Understandably on transition to FRS 102, there will be reclassifications needed to certain cash flows. For
example, interest paid and interest received would have been classified as ‘Returns on investments and
servicing of finance’, but there is no such cash flow classification under FRS 102.

Once a transition is complete in IRIS Accounts Production using the ELTD Chart, it is likely that it will not
balance for the first time. It may be advisable, as part of the transitional exercise, to undertake a separate
reconciliation of what the cash flow statement should look like (for example using an EXCEL spreadsheet)
under FRS 102 in order to assist in the balancing of the cash flow statement in IRIS Accounts Production,
given the significant presentational differences. Alternatively, it may be the case that the preparer
compares the trial balance under previous UK GAAP to that under FRS 102 and deals with any differences
in the cash flow statement that way.

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 FRS 102 THE CASH FLOW STATEMENT

The latest edition of IRIS Accounts Production includes a new ‘Interactive Screen’ feature whereby reports
can be run on screen with ‘drill-down’ functions which take you directly into the relevant Data Screen to
make the adjustments. The reports are still run in the normal way by going into the Reports menu at the
top of the screen and selecting ‘Interactive’ as displayed below:

When it comes to balancing the cash flow statement in IRIS Accounts Production, you can take advantage
of the interactive Data Screens to make the process as efficient as possible.

Example – Balancing the cash flow statement in IRIS Accounts Production

John is preparing the first set of FRS 102 financial statements for his client, FRS 102 Client Limited for
the year-ended 31 December 2015. The date of transition in this example is 1 January 2014, being the
start date of the earliest period reported in the financial statements. He has completed all the work
required and has run the first draft of the financial statements. The cash flow statement has thrown up
the following exception report:

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 FRS 102 THE CASH FLOW STATEMENT

John has noted that last year there is no automatic recognition in the cash flow statement relating to the
opening position which may include stocks, debtors, creditors, directors’ balances and share capital
because there is a further error screen as follows:

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 FRS 102 THE CASH FLOW STATEMENT

The reason these error messages have appeared is because the system is not looking beyond the 2014
duplicate comparative year posting screen when the transition has been done, hence IRIS Accounts
Production will need additional information inputting.

Working capital movements to balance the prior year’s cash flow statement

It is more than likely that when the first draft financial statements are prepared under FRS 102, the cash
flow statement will not balance. Continuing with this example, John needs to enter further information to
clear the errors generated. John extracts a trial balance as at 31 December 2013 (which derives the
opening balance sheet position at the date of transition, being 1 January 2014 in this example). He must
then work out the movement in stock, debtors and creditors. However, care must be taken to calculate
the correct movement – this is because:

 closing balances as at 31 December 2013 are used for account numbers 586 to 590 and 737 to
741 in the ELTD chart; and
 the movement between other debtors and other creditors is used.

John can calculate these as follows to enter into the Interactive Data Screen:

2013 increase in stock for inclusion in the 2014 comparative year:

Account 570 Raw materials 199,158.84) These are ACTUAL end balances per the
Account 574 Finished goods 333,681.92) 2013 closing trial balance
Per Interactive Data Screen 532,840.76

2013 increase in trade and other debtors for inclusion in the 2014 comparative year: Based on
closing
£ balances

Account 586 Trade debtors 1,159,189.00

Account 587 Other debtors 21,351.00
1,180,540.00
 in 594 Other debtors (55,048.00) This is the movement between the 2013
 in 607 Tax recoverable 4,186.00 values and the 2014 values.
 in 614 Prepayments (50,434.00)
Increase per Interactive Data Screen 1,079,244.00

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 FRS 102 THE CASH FLOW STATEMENT

2013 increase in trade and other creditors for inclusion in the 2014 comparative year:

£
Based on
Account 735 VAT 3,172.00 closing
Account 737 Trade creditors 413,726.00 balances
Account 738 Other creditors 153,755.00
Account 755 Social security 29,938.00
600,591.00
 in 767 Other creditors 218,513.00
 in 785 Deferred income 11,803.00
 in 786 Accrued expenses (7,945.00)
 in 788 Wages control (13,142.00)
Decrease per Interactive Data Screen (809,820.00)

Entering the movements via the Interactive Data Screen

John can use the Interactive Data Screen to enter these values by clicking on the red hyperlink
‘Reconciliation of profit’:

This will bring up this Data Screen:

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 FRS 102 THE CASH FLOW STATEMENT

John enters the values in the movements in working capital which will then look like this:

Once John has entered those values, he can then click ‘Refresh’ on the toolbar at the top of the screen:

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 FRS 102 THE CASH FLOW STATEMENT

This will save John time rather than having to leave the Interactive Data Screen and re run the cash flow
statement via Reports | Annual | Standard | CFS.

Once those adjustments are entered, John’s cash flow statement will balance and will look as follows:

These two values both agree to

the closing balance sheet values.

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FRS 102 THE CASH FLOW STATEMENT

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 FRS 102 THE CASH FLOW STATEMENT

VAT

A point worthy of note is that the VAT account in IRIS Accounts Production may fluctuate between debtor
and creditor depending on whether the client is due a refund or due to pay monies at the balance sheet
date. The closing VAT debtor/creditor should be used when entering the working capital movements in
IRIS Accounts Production in increases/decreases in debtors/creditors.

Conclusion

Cash flow statements have always been inherently difficult to balance up first time, and this difficulty is
accentuated within IRIS Accounts Production given that there are certain account balances which are
entered as per the closing balances per the trial balance at the date of transition and those accounts
where only the movement between the date of transition and prior year comparative are entered.
Remember, accounts 586 to 590 in debtors are entered as the end balances on the date of transition trial
balance, as are accounts 737 to 741 for creditors (end balances of VAT debtors and creditors are entered).
Where the client has any other debtors/creditors outside of these nominal code ranges, the movement is
entered.

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