## **Learning Outcomes**

After reading this article, you will be able to explain the objectives and structure of the statement of cash flows under IAS 7, distinguish between direct and indirect methods, classify cash flows, and understand key disclosure rules for segment reporting and discontinued operations. You will also apply these principles to exam scenarios, ensuring robust knowledge for ACCA Strategic Business Reporting (SBR).

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand and apply the presentation, classification, and analysis of cash flows and segment information. Focus your revision on the following syllabus areas:

- Explain the objectives and structure of a statement of cash flows (IAS 7)
- Prepare and interpret statements of cash flows using both direct and indirect methods
- Classify cash flows into operating, investing, and financing activities
- Account for the impact of group acquisitions and disposals on consolidated cash flows
- Apply principles of segment reporting under IFRS 8 and discontinued operations under IFRS 5
- Disclose operating segments and analyse continuing/discontinued operations
- Evaluate and explain the usefulness of cash flow, segment, and discontinued operations disclosures to stakeholders

## **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. Which classification in the statement of cash flows would a cash payment for acquisition of a subsidiary generally appear under?
   a) Operating  
   b) Investing  
   c) Financing  
   d) Discontinued Operations

2. True or false? Dividends paid must be classified as a financing activity under IAS 7.

3. Briefly describe the main difference between the direct and indirect methods for reporting operating cash flows.

4. According to IFRS 8, when must a segment be reported separately in the notes to the financial statements?

5. When must the results of a component of an entity be classified as discontinued operations under IFRS 5?

## **Introduction**

A statement of cash flows provides decision-makers with information on an entity’s cash movements over a period. While statements of financial position and profit or loss focus on accruals, the statement of cash flows reconciles opening and closing cash balances, highlighting how cash is generated and applied in operating, investing, and financing activities. Knowledge of how to correctly construct, interpret, and disclose cash flows—including for groups, segments, and discontinued operations—is required for ACCA SBR.

> **Key Term: Statement of cash flows**  
> A primary financial statement summarising cash inflows and outflows over a reporting period, classified into operating, investing, and financing activities under IAS 7.

## METHODS OF PREPARING CASH FLOWS

IAS 7 allows two approaches for arriving at ‘cash generated from operations’: the direct and the indirect method.

### Direct Method

The direct method presents actual cash received from customers and paid to suppliers and employees. Non-cash items and accruals are excluded. Each major class of gross cash receipts and payments is disclosed separately.

### Indirect Method

The indirect method starts with profit before tax, adjusting for non-cash transactions (such as depreciation), accruals, and items related to investing or financing activities to arrive at net cash from operating activities.

> **Key Term: Direct method**  
> A technique for preparing the statement of cash flows in which major classes of gross cash receipts and payments are presented separately.
>
> **Key Term: Indirect method**  
> An approach that adjusts profit before tax for non-cash and non-operating items to derive operating cash flows.

### **Worked Example 1.1**

A company’s profit before tax is \$60,000. Depreciation charged was \$10,000. Receivables increased by \$5,000, payables increased by \$2,000, and there was a \$1,000 gain on sale of equipment. Tax paid during the year was \$8,000.

Prepare the operating cash flows (indirect method).

> **Answer:**  
> Start with profit before tax: **\$60,000**  
> Add depreciation (non-cash): \$10,000  
> Subtract gain on disposal (non-operating): $(1,000)  
> Subtract increase in receivables: $(5,000)  
> Add increase in payables: \$2,000  
> = **\$66,000**  
> Subtract tax paid: $(8,000)  
> Net cash from operating activities: **\$58,000**

### **Exam Warning**

In the SBR exam, you may be provided with figures requiring adjustments for non-cash and non-operating items. Ensure each adjustment either increases or decreases operating cash appropriately. Use workings to avoid missing steps.

## CLASSIFICATION OF CASH FLOWS

Cash flows are categorised as operating, investing or financing to allow users to assess an entity’s cash generation and how resources are managed.

### Operating Activities

Operating activities include principal revenue-producing activities and other activities not classified as investing or financing. Examples: cash receipts from sales, payments to suppliers, employee wages, tax paid, and interest paid (unless classified elsewhere as permitted).

### Investing Activities

Investing activities involve acquisition and disposal of long-term assets and investments not included in cash equivalents. Examples: purchase or sale of property, plant and equipment (PPE), investments in subsidiaries or associates, proceeds from sale of PPE, and receivables from loans made.

### Financing Activities

Financing activities cause changes in the size and composition of equity and borrowings. Examples: proceeds from issue of shares, cash raised from new loans, repayment of borrowings, payment of dividends, and principal lease repayments.

> **Key Term: Operating activities**  
> The main revenue-producing activities of an entity and other activities that are not investing or financing.
>
> **Key Term: Investing activities**  
> Activities regarding the acquisition and disposal of long-term assets and investments.
>
> **Key Term: Financing activities**  
> Activities that alter the equity capital and borrowing structure of an entity.

### Cash and Cash Equivalents

IAS 7 defines cash as both cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts with insignificant risk of value change.

> **Key Term: Cash equivalents**  
> Short-term, highly liquid investments that are easily convertible to cash and subject to insignificant risk of value change.

### **Revision Tip**

Always check the maturity and liquidity of investments when classifying cash equivalents—shares, even if listed, are generally not included due to price risk.

## GROUP CASH FLOWS AND CHANGES IN STRUCTURE

When preparing cash flow statements for groups, further adjustments are needed for acquisitions and disposals of subsidiaries during the period.

Cash paid to acquire a subsidiary is shown under investing activities, net of the cash and cash equivalents acquired. Similarly, on disposal, the cash proceeds are offset by deducting cash and equivalents held by the disposed subsidiary at disposal date.

Dividends paid to non-controlling interests must be disclosed separately, as do transactions with associates (e.g. dividends from associates recorded as investing inflows).

### **Worked Example 1.2**

Peach Group acquires 80% of Apricot Ltd for \$6 million on 1 July. At that date, Apricot’s cash and equivalents were \$500,000. What is the net cash outflow for group investing activities?

> **Answer:**  
> Cash paid: \$6,000,000  
> Less: Cash acquired: $(500,000)  
> Net outflow reported: **\$5,500,000**

## SEGMENT REPORTING (IFRS 8)

Segment reporting increases transparency by providing stakeholders with information on business units contributing to performance.

An operating segment is a component of an entity reviewed regularly by the chief operating decision maker. Segments must be reported if they meet specified size thresholds (10% of revenue, profit/loss, or assets) or collectively account for at least 75% of external revenue.

> **Key Term: Operating segment**  
> A business component engaged in activities yielding revenue and expense, regularly reviewed by management, and with discrete financial information.

### **Worked Example 1.3**

Apple Plc has five business units. Three units each contribute more than 10% of total revenue. Do all five need separate disclosure under IFRS 8?

> **Answer:**  
> No, only segments meeting one of the 10% tests or needed to reach 75% of external revenue require disclosure. In this case, if the three large segments reach 75% of external revenue, only those three are reportable.

### **Exam Warning (Segments)**

When reporting segment information, ensure that applicable thresholds are met, and that segment assets, liabilities, and profit/loss are consistently measured as reported to management.

## DISCONTINUED OPERATIONS (IFRS 5)

A discontinued operation is a component of an entity that has been disposed of or is classified as held for sale and represents a separate major line of business or geographic area.

Results of discontinued operations must be shown as a single amount in the profit or loss and further analysed in the notes. Comparative figures are restated for discontinued operations, even if classification only applied in the current period.

> **Key Term: Discontinued operation**  
> A component classified as held for sale or already disposed of, representing a major business or geographical segment.
>
> **Key Term: Held for sale**  
> A non-current asset or disposal group expected to be recovered principally through sale, not continuing use, available for immediate sale, and highly probable to occur within a year.

### **Worked Example 1.4**

Mango Ltd decides to sell its food division, which comprises 30% of business and all operations in Asia. The division meets IFRS 5 criteria for held for sale. How should this be presented?

> **Answer:**  
> The results of the food division are shown as a single amount as discontinued operations in the profit or loss, with detailed analysis in the notes, and comparative information is restated accordingly.

## **Summary**

IAS 7 requires classification of cash flows into operating, investing, and financing activities, and permits both direct and indirect methods for reporting operating cash. Group statements consolidate cash flows with adjustments for changes in group structure. IFRS 8 mandates disclosure of significant segments to inform user decisions. The results of major business disposals are reported separately as discontinued operations under IFRS 5.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the objectives and layout of the statement of cash flows (IAS 7)
- Distinguish between direct and indirect methods for operating cash flows
- Classify cash flows into operating, investing, and financing activities
- Account for cash flows arising from group acquisitions and disposals
- Define and identify reportable operating segments (IFRS 8)
- Present discontinued operations and held-for-sale assets (IFRS 5)
- Apply proper disclosure and classification of cash flows for ACCA SBR exam

## **Key Terms and Concepts**

- Statement of cash flows
- Direct method
- Indirect method
- Operating activities
- Investing activities
- Financing activities
- Cash equivalents
- Operating segment
- Discontinued operation
- Held for sale

Cash flows, segments, and discontinued operations - Statement of cash flows (ias 7) methods and classifications