Top 10 differences between a cash flow statement under IAS 7 and ASC 230.
A company is required to present a statement of cash flows that shows how its cash and cash equivalents have changed during the period. Cash flows are classified as either operating, investing or financing activities, depending on their nature.
| Classification | Description |
|---|---|
| Operating activities | The company’s principal revenue-producing activities, and other activities that are not investing or financing activities. |
| Investing activities | Relate to the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Only expenditures that result in a recognized asset on the balance sheet are eligible for classification as investing activities. |
| Financing activities | Result in changes in the size and composition of the company’s contributed equity and borrowings. |
IFRS Accounting Standards and US GAAP contain similar overarching principles in preparing the statement of cash flows, including:
Under IFRS Accounting Standards, the primary principle is that cash flows are classified based on the nature of the activity to which they relate. Under US GAAP, the classification of an item on the balance sheet, and its related accounting, often informs the appropriate classification in the statement of cash flows. As such, different classification and accounting for an underlying item on the balance sheet under US GAAP may result in differences in the statement of cash flows. In addition, certain differences exist between the detailed requirements of IAS 7 and ASC 230, which could affect dual preparers. See KPMG Handbook, Statement of cash flows, to learn more about the US GAAP requirements.
Here we summarize our selection of Top 10 differences.
1. Statement of cash flows always required under IFRS Accounting Standards; exceptions exist under US GAAP
Under IFRS Accounting Standards, there are no scope exceptions and all companies must present a statement of cash flows in a complete set of financial statements.
Under US GAAP, defined benefit pension plans that present financial information under ASC 960 3 and certain investments companies in the scope of ASC 946 4 may be exempt from presenting a statement of cash flows.
2. The starting point of the statement of cash flows varies under IFRS Accounting Standards; net income is the starting point under US GAAP
Under IFRS Accounting Standards, companies may use different starting points for reporting operating cash flows under the indirect method – e.g. profit or loss, profit or loss from continuing operations, profit or loss before tax or operating profit or loss.
Diversity in practice may have developed because IAS 7 refers to ‘profit or loss’, but an example to the standard starts with a different figure (profit before taxation). We believe it is more appropriate to follow the standard (i.e. start with profit or loss), because the example is illustrative only and does not have the same status as the standard.
See the proposed amendments that would require the operating profit or loss subtotal as the starting point.
3. IFRS Accounting Standards provide options for classifying cash flows related to interest, dividends and income taxes; US GAAP does not
The table summarizes the classification differences.
IFRS Accounting Standards
Operating or financing
(generally operating for financial institutions)
Operating or investing
(generally operating for financial institutions)
See the proposed amendments that would affect these classifications under IFRS Accounting Standards.
4. Cash may be net of bank overdrafts under IFRS Accounting Standards; not under US GAAP
Under IFRS Accounting Standards, bank overdrafts are generally 6 presented as liabilities on the balance sheet. However, in the statement of cash flows, bank overdrafts reduce the cash and cash equivalents balance if they are repayable on demand and form an integral part of the company’s cash management. Assessing whether a banking arrangement is an integral part of the entity’s cash management depends on the specific facts and circumstances and may require judgment. Components making up the total cash and cash equivalents opening and closing balances in the statement of cash flows are disclosed and reconciled to the appropriate balance sheet line items.
Under US GAAP, bank overdrafts are considered a form of short-term financing and are generally 6 presented as liabilities, with changes therein classified as financing activities (draws separate from repayments) in the statement of cash flows.
5. Restricted amounts may be excluded from total cash and cash equivalents under IFRS Accounting Standards; included under US GAAP
IFRS Accounting Standards do not define ‘restricted’ amounts and do not address whether restricted amounts should be included in a company’s beginning or ending cash and cash equivalent balances in the statement of cash flows. This depends on whether these amounts, while restricted, still meet either the definition of cash or the definition of cash equivalents. This usually requires judgment as further explained below.
IAS 7 definition and related guidance
Defined as comprising cash on hand and demand deposits.
Demand deposits are not defined in IFRS Accounting Standards, but we believe they should have the same level of liquidity as cash and therefore should be able to be withdrawn at any time without penalty.
Demand deposits with restrictions on use arising from a contract with a third party are still considered cash, unless those restrictions change the nature of the deposit in a way that it would no longer meet the definition of cash in IAS 7 7 .
A deposit that fails to be classified as cash may still meet the definition of cash equivalents if specific criteria are met.
Defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
An overriding test for cash equivalents is that they are held for the purpose of meeting short-term cash commitments rather than for investing or other purposes – i.e. the ‘purpose test’.
Under US GAAP, while restricted amounts of cash and cash equivalents are presented separately from unrestricted amounts on the balance sheet, restricted amounts are included in the total cash and cash equivalents in the statement of cash flows. The company then discloses a reconciliation between the two cash and cash equivalents totals.
Although neither GAAP provides a specific definition of restricted cash, under US GAAP it is commonly understood to include cash and cash equivalents whose withdrawal or usage is restricted for certain purposes – e.g. legally restricted deposits held as compensating balances on short-term borrowing arrangements, contracts entered into with others, statements of intention regarding particular deposits. This absence of definitions may lead to differences in practice between amounts reported as restricted cash under IFRS Accounting Standards and US GAAP.
6. IFRS Accounting Standards do not distinguish between operating and finance leases; Classification of lease payments for lessees depends on lease classification under US GAAP
Under IFRS 16 8 , a lessee classifies cash payments for the principal portion of a lease liability as financing activities in the statement of cash flows. Payments for the interest portion are classified as operating or financing activities, in line with a company’s policy election for interest paid (see Difference #3). (For lessees, IFRS 16 does not distinguish between operating and finance leases, unlike US GAAP.)
Under US GAAP, a lessee classifies operating lease payments as operating activities. Finance lease payments are classified in the same way as all lease payments under IFRS Accounting Standards.
Both GAAPs classify the following as operating cash flows: payments for short-term leases , and variable lease payments not included in the lease liability (as measured under the applicable GAAP).
7. Classification of deferred or contingent consideration payments in a business combination may differ under IFRS Accounting Standards and US GAAP
Under IFRS Accounting Standards, cash payments for deferred and contingent consideration in a business combination require judgment to determine the appropriate classification based on the nature of the activity to which the cash flows relate. We believe it is generally appropriate to classify payments as shown in the following table.
Payment reflecting a finance expense
Consistent with the policy election for interest paid (see Difference #3).
Financing or investing activities.
Judgment needs to be applied when determining whether the payment arises from obtaining control (an investing activity) or whether it is a settlement of financing provided by the seller.
Factors that may be relevant include: (1) the time between initial recognition of the liability and settlement; (2) whether the settlement period reflects a normal credit period; and (3) whether the liability is discounted to reflect its deferred settlement (which would suggest a financing element to the arrangement).
US GAAP includes prescriptive guidance on how to classify payments for contingent consideration, which we believe applies equally to deferred fixed consideration payments as follows:
We believe that three months or less is an appropriate interpretation of ‘soon after’.
Payments up to the fair value of consideration recognized at acquisition are classified as financing activities
Any excess is classified as operating activities.
8. IFRS Accounting Standards do not prescribe classification of certain cash flows; US GAAP does
Unlike IAS 7, US GAAP explicitly specifies the classification of the following cash flows:
Absent specific guidance in IAS 7, we believe that judgment is required in determining the classification of these items. Such judgment should primarily consider the nature of the activity (rather than the classification of the related items on the balance sheet), as mentioned above. Unlike US GAAP, this principles-based approach may lead to more diverse classification outcomes.
9. No predominance principle in IFRS Accounting Standards; exists in US GAAP
Under IFRS Accounting Standards, a company classifies each of the separate components of a single transaction as operating, investing or financing because IAS 7 does not allow a transaction to be classified based on its predominant characteristic. IAS 7 includes specific guidance related to purchases and sales of equipment held for rental to others.
US GAAP includes similar principles, but when a transaction has characteristics of more than one class of cash flows – and each separately identifiable source or use of cash cannot reasonably be separated – then a company applies the predominance principle to determine the appropriate classification for the related cash flows.
Example: Company A routinely purchases equipment to be rented to others and then sold.
Under IFRS Accounting Standards, payments to purchase the equipment, as well as the proceeds from rentals and ultimate sale, are classified as operating activities. This classification is prescribed by the specific guidance in IAS 7 related to the purchase and sale of equipment held for rental to others.
Under US GAAP, the rental proceeds are also classified as operating activities. However, the classification of the cash flows from the purchase and sale of equipment depends on which activity is predominant – rental or sale.
10. IFRS Accounting Standards and US GAAP have different disclosure requirements
The following are key disclosure differences between IFRS Accounting Standards and US GAAP.
In December 2019, the International Accounting Standards Board (IASB®) issued its exposure draft, General Presentation and Disclosures – Primary Financial Statements, which proposed a new standard for the presentation of financial statements that aims to improve their usefulness and relevance. While the proposals mostly focused on the income statement, some aim to reduce diversity in the classification and presentation of cash flows and improve comparability between companies.
The following proposals have tentatively been confirmed through subsequent IASB meetings:
Our article, IFRS Perspectives: Proposed changes to IFRS Standards financial statements, provides an overview of the key proposals.
In April 2022, the IASB added a research pipeline project on the statement of cash flows and related matters, which could address discrete classification and presentation issues or result in a comprehensive review of IAS 7.
The statement of cash flows is a central component of a company’s financial statements and provides users with key information to evaluate a company’s financial performance for investing or other decisions. However, cash flows can be classified differently under IFRS Accounting Standards and US GAAP – due to differences in accounting for the underlying item to which a cash flow relates, as well as differing requirements in IAS 7 and ASC 230. Financial statement preparers and users should develop a clear understanding of these classification differences when analyzing and using statements of cash flows prepared under IFRS Accounting Standards or US GAAP.
For further discussion on the differences between IFRS Accounting Standards and US GAAP, see our publication IFRS Compared to US GAAP.
