## **Learning Outcomes**

After studying this article, you will be able to define and distinguish between cash and cash equivalents, accurately identify and present non-cash transactions in accordance with IAS 7, and explain why such transactions are excluded from the main sections of the statement of cash flows. You will also be able to apply requirements for the correct reporting and disclosure of these elements in exam-standard scenarios.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the treatment and disclosure requirements for cash flows and related items. In particular, you need to be confident in:

- Explaining the distinction between cash, cash equivalents, and other financial assets
- Identifying transactions that do not involve actual cash movements ("non-cash transactions") and understanding their impact on the statement of cash flows
- Applying IAS 7 guidance on disclosures for non-cash transactions in published accounts
- Correctly including or excluding items in cash and cash equivalents for cash flow reporting

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. According to IAS 7, which of the following transactions is _not_ included in the statement of cash flows, but must be disclosed separately?
   a) Purchase of inventory paid by bank transfer  
   b) Acquisition of machinery by issuing shares  
   c) Cash dividends paid  
   d) Payment of interest on a bank loan

2. Which of these correctly meets the IAS 7 definition of a cash equivalent?
   a) A 6-month treasury bill maturing in 2 months  
   b) A 5-year corporate bond  
   c) A 3-month deposit with an option for early withdrawal but with penalties  
   d) Ordinary trade receivable

3. True or false? Payments made by offsetting a liability directly with an asset, without cash movement, are included within the main cash flow statement.

4. Briefly explain how a significant non-cash transaction should be reported according to IAS 7.

## **Introduction**

Cash flow information gives users of financial statements key information about an entity’s liquidity, solvency, and overall cash management. The statement of cash flows, required by IAS 7, classifies inflows and outflows into operating, investing, and financing activities. However, some significant transactions do not result in actual movements of cash or cash equivalents—these are _non-cash transactions_. It is important to distinguish such transactions and ensure they are disclosed in accordance with IAS 7, while not being included within the main cash flow statement. Additionally, IAS 7 requires careful definition and consistent classification of _cash equivalents_, to avoid misstatement and ensure comparability.

> **Key Term: cash**
> Cash comprises cash on hand and demand deposits (such as readily available bank account balances).
>
> **Key Term: cash equivalents**
> Short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Typically, only investments with maturities of three months or less from acquisition date qualify.
>
> **Key Term: non-cash transaction**
> An investing or financing transaction that does not require the use of cash or cash equivalents (e.g., buying an asset by issuing shares). Such transactions are excluded from the main statement of cash flows but must be disclosed elsewhere in the financial statements.

## **Cash and Cash Equivalents: Definitions and Classification**

The "cash and cash equivalents" line is a core component of the cash flow statement. Only items that satisfy the definitions above should be included. Typical components are:

- Petty cash and till floats
- Bank current accounts (including eligible overdrafts repayable on demand)
- Short-term deposits (up to 3 months original maturity)

Items not considered cash equivalents:

- Equity investments, except in rare cases (e.g., certain money market funds)
- Term deposits longer than three months from acquisition
- Restricted cash balances (e.g., amounts pledged as security or not available for use)
- Short-term borrowings, unless part of an integrated cash management facility

> **Exam Warning**
> Investments held for investment purposes or with significant risk of changes in value (e.g., shares, long-term bonds) must not be included as cash equivalents, no matter how easily they can be sold.

## **Non-Cash Transactions: Identification and Disclosure**

Under IAS 7, cash flow statements must only report actual cash and cash equivalent movements. Nevertheless, many major transactions in a company’s activities may happen without immediate cash implications. These are classed as non-cash transactions.

Common examples include:

- Acquisition of assets by means other than cash (e.g., by incurring a direct finance lease liability, or by issuing shares)
- Conversion of debt to equity
- Asset swaps (exchanging one piece of property for another)
- Settlement of debt by transferring non-cash assets (e.g., goods provided to extinguish a payable)

> **Revision Tip**
> Always read exam scenarios carefully. If an asset is “acquired by finance lease” or “shares issued to purchase equipment,” this is a non-cash transaction. It should _not_ change the cash flow for investing or financing sections but _must_ be clearly disclosed in the notes.

### **Worked Example 1.1**

Alton Ltd purchases a delivery truck valued at \$40,000. Instead of paying cash, Alton Ltd enters a finance lease, recognising a lease liability and a right-of-use asset. No cash changes hands at commencement.

**How should this transaction be reported in the cash flow statement for the year?**

> **Answer:**
>
> - The acquisition is not included in cash flows from investing or financing activities (no cash movement).
> - In the notes to the financial statements, Alton Ltd must disclose that a truck valued at \$40,000 was acquired through a finance lease, not by cash payment.

### **Worked Example 1.2**

Bexley Ltd acquires plant worth \$100,000 by issuing shares to the seller. The entire transaction is completed with no money paid or received at any stage.

**How is this reported under IAS 7?**

> **Answer:**
>
> - There are no cash flows from investing or financing activities for this transaction.
> - The issue of shares and the acquisition of the plant should be disclosed in the notes as a significant non-cash transaction, including a description and the value.

## **Treatment and Disclosure under IAS 7**

IAS 7 requires the statement of cash flows to be a summary of cash transactions only. Non-cash items:

- Must _not_ be included in the main body of the cash flow statement.
- Should be _clearly disclosed_ in the notes or an adjoining schedule, enabling users to understand material investing or financing activities that affect the entity’s structure but do not impact cash or cash equivalents in the period.

Disclosure should be clear, for example:

> "The entity acquired property, plant and equipment of \$X during the year, of which \$Y was acquired by means of finance leases and \$Z by issue of equity shares."

## **Classifying Cash Equivalents: Common Errors**

When deciding whether an investment qualifies as a cash equivalent, consider both _original maturity_ (not current remaining term), and _risk profile_.

### **Worked Example 1.3**

On 1 October, Delta plc places \$1,000,000 in a 4-month time deposit maturing 31 January. Its year-end is 31 December.

**Can this deposit be included as a cash equivalent at year-end?**

> **Answer:**
>
> - No. Although at year-end only 1 month remains, at acquisition the term was 4 months. Cash equivalents require an original maturity of _three months or less_, so this deposit is shown separately.

## **Summary**

Only movements in cash and cash equivalents are reported in the main statement of cash flows. Significant non-cash investing or financing transactions—such as acquisition of assets by finance lease, or purchase of assets through share issues—are excluded from cash flows and require separate note disclosure. Cash equivalents must be short-term, highly liquid, and acquired with a maturity of three months or less. Items that do not meet both time and risk criteria must not be classified as cash equivalents.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define cash, cash equivalents, and non-cash transactions as per IAS 7 requirements
- Identify examples of non-cash investing and financing transactions
- Demonstrate the correct exclusion of non-cash transactions from the main cash flow statement
- Specify IAS 7’s disclosure requirements for significant non-cash transactions
- Determine if an item qualifies as a cash equivalent for reporting purposes

## **Key Terms and Concepts**

- cash
- cash equivalents
- non-cash transaction


Statement of cash flows (IAS 7) - Non-cash transactions and cash equivalents