Statements Cash Flow - National Treasury
ACCOUNTING GUIDELINEGRAP 2Cash FlowStatements
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GRAP 2 on Cash Flow StatementsContents1.Introduction . 42.Scope . 53.Presentation of a Cash Flow Statement . 53.1Operating activities . 53.2Investing activities . 73.3Financing activities. 83.4Classifying cash flows . 94.Cash and Cash Equivalents . 105.Notes to the Cash Flow Statement . 116.5.1Cash and cash equivalents . 115.2Other Supplementary Disclosures. 12Guidance on other cash flows . 146.1Interest and dividends or similar distributions . 146.2Non cash transactions . 156.3Discounts and premiums . 156.4Refinancing of borrowings. 176.5Sale and leaseback transactions. 176.6Treatment of cash in the statement of financial position . 176.7Investments in controlled entities, associates and joint ventures . 186.8Acquisitions and disposals of controlled entities and other operating units . 196.9Foreign currency cash flows . 216.10 Factoring of trade receivables . 216.11 Renegotiating terms - trade payables . 216.12 Reporting cash flows on a gross vs net basis. 227.Illustrative Example . 238.Entity Specific Guidance . 309.8.1Municipalities . 308.2Public entities and constitutional institutions . 31Useful links and references . 32Issued February 2020Page 3 of 32
GRAP 2 on Cash Flow Statements1.IntroductionThis document provides guidance on the identification and disclosure of information about thehistorical changes in cash and cash equivalents of an entity by means of a cash flowstatement, which classifies cash flows during the period from operating, investing andfinancing activities. The contents should be read in conjunction with GRAP 2. For purposesof this guide, “entities” refer to the following bodies to which the standard of GRAP relate to,unless specifically stated otherwise: Public entities Constitutional institutions Municipalities and all other entities under their control Trading entities and government components applying the standards of GRAP Parliament and the provincial legislatures TVET and CET collegesExplanation of images used in manual:DefinitionTake noteManagement process and decision makingExampleIssued February 2020Page 4 of 32
GRAP 2 on Cash Flow Statements2.ScopeGRAP 2 is applicable to all entities preparing their financial statements on the accrual basis ofaccounting. Entities will comply with GRAP 2 for the preparation of a cash flow statementwhich should be presented as an integral part of the financial statements for each period forwhich financial statements are prepared.3.Presentation of a Cash Flow StatementThe primary purpose of a cash flow statement is to provide information about cash receipts,cash payments, and the net change in cash resulting from the operating, investing, andfinancing activities of an entity during the period.Net cash flows for the period(important for example in analyzing the liquidity and long term solvency of an entity)3.1Cash flows fromoperatingactivitiesCash flows fromfinancingactivitiesCash flows frominvestingactivitiesActivities of the entity thatare not investing orfinancing activitiesActivities that are theacquisition and disposal oflong-term assets and otherinvestments not included incash and cash equivalentsActivities that result inchanges in the size andcomposition of thecontributed capital andborrowings of the entityOperating activitiesThe amount of net cash flows arising from operating activities is a key indicator of the extentto which the operations of the entity are funded from internal sources (such as the sale ofgoods and services provided by the entity) or external sources (such as allocations from thegovernment fiscus). It also provides an indication of the entity’s ability to maintain its operatingcapability, repay obligations and make new investments without recourse to external sourcesof financing (such as the issuance of bonds).Cash flows from operating activities include: Cash receipts from charges for goods and services; Cash receipts from transfers and subsidies (current or capital); Cash receipts from taxes, levies and fines; Cash payments to suppliers for goods and services;Issued February 2020Page 5 of 32
GRAP 2 on Cash Flow Statements Cash payments to and on behalf of employees; and Cash receipts or payments in relation to litigation settlements.Cash flows from operating activities should be reported by using only the direct method,whereby the entity’s significant classes of cash receipts and cash payments are disclosed.Example: Direct MethodExtract from Cash Flow e of goods and servicesXXXXTransfers and subsidies receivedXXXXInterest receivedXXXXLeviesXXXXCompensation of employees(XX)(XX)Goods and services(XX)(XX)Interest paid(XX)(XX)Transfers and subsidies paid(XX)(XX)XXXXXXCASH FLOWS FROM OPERATING ACTIVITIESPaymentsNet cash flows from operating activitiesxAn entity should disclose a reconciliation between the surplus/deficit and the cash flows fromoperating activities.This reconciliation may form part of the cash flow statement or be included in the notes to thefinancial statements.Issued February 2020Page 6 of 32
GRAP 2 on Cash Flow StatementsExample: Reconciliation of net cash flows from operating activities to surplus/(deficit)Extract from Notes to the Cash Flow ionXXXXIncrease in impairment of receivablesXXXX(XX)XXXXXX(XX)(XX)Decrease in receivablesXXXXIncrease in unspent transfers and subsidiesXXXXIncrease in consumer h movements(Gain)/loss on sale of propertyIncrease in provisions relating to employee costMovement in working capitalIncrease in inventoryDecrease in VAT payableNet cash flow from operating activities3.2Investing activitiesCash flows arising from investing activities represent the extent to which cash outflows havebeen made for resources that are intended to contribute to the entity’s future service delivery.Cash flows from investing activities include: Cash payments to acquire and cash receipts from the sale of property, plant andequipment, intangibles and other long-term assets. These payments include those relatingto capitalised development costs and self-constructed property, plant and equipment;Remember that:oProceeds from the sale of property, plant and equipment or similar assets, as disclosedin the cash flow statement, represents only the cash flow in the transaction. If an assetis sold for R100 and the carrying value is R65 then the gain will be R35 but theproceeds to be disclosed in the cash flow statement are R100. The gain of R35 willbe a non-cash item to be included as part of the reconciliation of net cash flows fromoperating activities and the surplus/deficit for the period in the notes.Issued February 2020Page 7 of 32
GRAP 2 on Cash Flow StatementsoWhen an asset is exchanged for another asset and there is no cash flow, even if again or loss is made, then no proceeds on the sale will be disclosed in the cash flowstatement. If an asset with a carrying value of R70 is exchanged for an asset with amarket value of R60 then the effective gain on the exchange is R10. No cash hasflowed in this transaction and thus no proceeds on sale of assets should be disclosedin the cash flow statement. Cash payments to acquire and cash receipts from sale of equity or debt instruments ofother entities and interest in joint ventures (other than those instruments considered to becash equivalents or those held for trading or dealing);oThe most commonly known equity instrument is shares in an entity.oAn RSA Government Bond is an example of a debt instrument, where an entity investswith the government of South Africa. These bonds can be traded, in the market,similarly to equity instruments. Cash advances and loans made to other parties, or cash receipts from the repayment ofadvances and loans made to other parties (other than advances and loans of a publicfinancial institution).As indicated in the example above, cash payments to acquire property, plant andequipment are classified as investing activities. There is, however, an exception tothis rule. When an entity, in the course of its ordinary activities, acquires an asset forrental to others which is subsequently held for sale, then the initial cash payments,as well as all rental income and the proceeds from the sale of these assets shouldbe classified as operating activities and not investing activities.3.3Financing activitiesCash flows from financing activities is useful in predicting claims on future cash flows byproviders of capital to the entity.Cash flows from financing activities include: Cash repayments of amounts borrowed; Cash repayments of finance leases; and Cash proceeds from short- or long-term borrowings.Issued February 2020Page 8 of 32
GRAP 2 on Cash Flow Statements3.4Classifying cash flowsCash flows should be classified in accordance with the nature of the activity to which theyrelate (operating, investing or financing).ExampleNature of TransactionClassification inCash FlowStatementCash contributions to a longterm employee benefit fundCash outflows are part of the compensation foremployment services and would be classified like anyother cash payment on behalf of the employeesOperating activitiesCash received ascompensation for an insuredloss for damaged property,plant & equipmentCash inflows are received to cover for losses anddamages of property, plant & equipment. Thistransaction represents ‘in substance’ a disposal ofproperty, plant & equipment and would be classified asan investing activity. Insurance proceeds are notderived from the principal cash-generating (or revenuegenerating) activities of the entity.Investing activitiesCash payment to purchaseof property, plant andequipment on deferredpayment termsCash outflows are to acquire property, plant &equipment and made to a supplier. Consequently theywould be classified as an investing activity regardlessof when cash flows will be paid.Investing activitiesCash payment to meet arehabilitation obligationCash outflows are for costs of rehabilitation, which arederived from the mine’s normal operation activities.These activities are for the decommissioning ordismantlement of an asset. They therefore do not meetthe definition of an investing and/or financing activity.Operating activitiesCash received from atransfer or subsidy (alsoreferred to as a governmentgrant)These cash inflows provide the entity with revenue tofinance its current activities. Although an entity mayuse the funds to acquire/construct an asset, the initialreceipt of the cash is in substance operating cashinflows.Operating activitiesCash payments in a reversefactoring agreementThe bank has provided credit to the entity to enable theentity’s liabilities to be settled on the due date. Therepayment of that amount to the bank is a financingcash outflow.Financing activitiesIssued February 2020Page 9 of 32
GRAP 2 on Cash Flow Statements4.Cash and Cash EquivalentsCash and cash equivalents are short-term, highly liquid investments that are readilyconvertible to known amounts of cash and which are subject to an insignificant riskof changes in value.Cash equivalents are cash held for the purpose of meeting the entity’s short-term cashcommitments rather than for investment purposes, thus the intention of management shouldbe considered when determining what qualifies as cash equivalents.Bank overdrafts that are repayable on demand usually form part of an entity’s cashmanagement activities and are part of cash and cash equivalents.Generally excluded from cash and cash equivalents are equity investments, unlessthey are cash equivalents in substance and bank borrowings (excluding bankoverdrafts)For an investment to qualify as a cash equivalent it must be readily convertible into cash, itmust have a short maturity date, and be subject to an insignificant risk of changes in value.Each element of the definition should be considered as follows:An investment requires a short maturity to meet the definitionof cash equivalent. GRAP 2 is not definitive, but it makesShort term, highly liquidreference to an investment with a maturity date of three monthsor less from the date of acquisition, as an example of this. Thisdoes not automatically mean an investment with a maturitydate of more than three months cannot be classified as a cashequivalent. Note that the maturity period is measured from thedate of acquisition and not the reporting date.This implies that an investment must be convertible into cashwithout an undue period of notice and without incurring aReadily convertible toknown amounts of cashsignificant penalty on withdrawal. Known amounts of cashmeans that the amount of cash that will be received must beknown at the time of the initial investment. Investments inshares or units of money market funds that are redeemable atIssued February 2020Page 10 of 32
GRAP 2 on Cash Flow Statementsany time are not considered cash equivalents, even thoughthey can be converted to cash at any time at the then marketprice in an active market. This is because the share price orunit price fluctuates and the amount of cash for which theshares or units of money market funds can be exchanged arenot known at initial investment.This implies that an investment must be so similar to cash thatany changes in value are insignificant. For this reason, a shortmaturity period is necessary because a longer maturity periodInsignificant risk ofchange in valueexposes an investment to fluctuations in value. Entities shouldconsider the effect on the redemption amount of e.g.cancellation clauses, termination fees or usage restrictions andwhether they create a more than insignificant risk of change invalue.GRAP 2 recognises that entities may have a variety of cash management practices andbanking arrangements that will influence which items are classified as cash and cashequivalents. For this reason, GRAP 2 requires that, in order to comply with GRAP 1 onPresentation of Financial Statements, an entity should disclose the policy which it adopts indetermining the composition of cash and cash equivalents.5.Notes to the Cash Flow Statement5.1Cash and cash equivalentsEntities should disclose the components of cash and cash equivalents and should present areconciliation of the amounts in its cash flow statement with the cash and cash equivalents inthe statement of financial position. An entity should also disclose the amount of significantcash and cash equivalent balances that are not available for use by the entity along withcommentary on the restrictions.Issued February 2020Page 11 of 32
GRAP 2 on Cash Flow StatementsExample: Cash and cash equivalent noteExtract from Note to the Cash Flow Statement20x120x0RRCash and cash equivalentsCash and cash equivalents consist of cash on hand, balances with banks and investments in money marketinstruments. Cash and cash equivalents included in the cash flow statement comprise of the followingamounts indicated in the statement of financial position:Cash on handXXXXBank balanceXXXXShort-term investmentXXXX(XX)(XX)XXXXXXOverdraftThe entity has undrawn borrowing facilities of Rx, of which Rx must be used on infrastructure projects.5.2Other Supplementary DisclosuresNet cash flows attributable to activities of discontinued operationsEntities are, in terms of GRAP 100 on Discontinued Operations, required to disclose the netcash flows attributable to the operating, investing and financing activities of discontinuedoperations. These disclosures are included in either the notes or on the face of the cash flowstatement.Undrawn facilitiesEntities are encouraged to disclose the amount of any undrawn borrowing facilities, forexample, undrawn loan facility agreed with the bank or the National Treasury. Disclosure ofany restrictions on the use of these facilities by the entity is also encouraged. This may alsobe included as part of an entity’s liquidity risk disclosures.Cash flows from entities accounted for using proportional consolidationDisclosure of cash flows arising from those investments accounted for as join ventures usingproportionate consolidation is encouraged. The aggregate cash flows for each of the threemain classifications of operating, investing and financing activities would provide usefulinformation to the users of the financial statements.Issued February 2020Page 12 of 32
GRAP 2 on Cash Flow StatementsSegmental cash flowsGRAP 2 encourages that cash flows arising from operating, financing and investing activitiesbe disclosed for each reportable segment. This enables users to understand the relationshipbetween the cash flows of the entity as a whole and those of its components. The Standarddoes not specifically identify the type of segmental cash flow information to be reported, butas a minimum an entity should consider giving an analysis of the most important elements ofoperating cash flows between major reportable segments.In presenting information on a segment basis it is suggested that a full cash flow statement,in compliance with GRAP 2, is separately prepared for each reportable segment. It may alsobe necessary to present a column/row for inter-entity eliminations and other adjustments inorder to reconcile to the primary statements.Example: Segmental cash flowsNet cash flowsfrom operatingactivitiesNet cash flowfrom investingactivitiesNet cash flowfrom financingactivitiesPublic ordinary schooleducation20x120x0XXXXXXXX(XX)XXXIndependent schoolssubsidies20x120x0XXXXXXXXXXXXX(X)Public special schooleducation20x120x0XXXXXXXX(X)XX(XX)Early childhood al for entity (oreconomic entity)20x120x0XXXXXXXXXXXXXIssued February 2020Page 13 of 32
GRAP 2 on Cash Flow Statements6.Guidance on other cash flows6.1Interest and dividends or similar distributionsThe cash flows arising from interests and dividends or similar distributions should be classifiedin the cash flow statement under the activity appropriate to their nature. Classification shouldbe on a consistent basis from one period to the next. Additionally, these items are required tobe disclosed separately on the face of the cash flow statement.For total interest paid, GRAP 2 requires disclosure on the face of the cash flow,regardless of whether the interest has been expensed or capitalised in terms ofGRAP 5 on Borrowing costs.Guidance on classification: Interest and dividends or similar distributions paid or received from working capital (e.g.bank, receivables, payables) should be classified as operating cash flows; Interest and dividends or similar distributions paid or received may be classified asinvesting cash flows if they are returns on investments; Interest and dividends or similar distributions paid or received from borrowings may beclassified as financing cash flows as they are a cost of obtaining or issuing finance; Interest paid (or received) on finance leases should be classified as financing cash flowstogether with the movement in the liability (or receivable).The table below summarises in which category interest and dividends or similar distributionsare allowed to be included:OperatingactivitiesInterest paid Interest received dividends or similar distributions paid dividends or similar distributions received Issued February 2020InvestingactivitiesFinancingactivities Page 14 of 32
GRAP 2 on Cash Flow Statements6.2Non cash transactionsAny operating, investing and financing activities that not require the use of cash and must beexcluded from the cash flow statement.Examples of non-cash transactions are: Depreciation and amortisation; Increase or decrease in impairment provisions; Year-end adjustment to the bonus and leave provision; Purchases of an asset by exchanging another asset; and Acquiring an asset by means of a finance lease.Surplus/deficit from sale, disposal, write-offs, revaluations etc.It is consistent with the objective of cash flow reporting that such surpluses/deficits from suchtransactions should be excluded from the cash flow statement. These surpluses/deficits areusually reported in the statement of financial performance and to the extent that they areincluded in arriving at the total surplus/deficit for the period, they should be adjusted in thereconciliation to arrive at the net cash flow from operating activities.A surplus from the sale of machinery should be excluded from cash flow fromoperating activities. The surplus is not a cash flow as such, but the proceeds fromthe sale forms part of the cash flows from investing activities.Similar treatment is required for movement in inventory and/or investments;6.3Discounts and premiumsGRAP 2 does not specifically address how the redemption of a deep discount bond or apremium payable on the redemption of a debt security should be treated in the cash flowstatement. When applying GRAP 104 on Financial Instruments, any difference between theinitial measurement at cost (being the fair value of the consideration received less transactioncosts) and the maturity value of the liability, such as a discount or redemption premium, willbe amortised to the statement of financial performance as a finance cost. Such finance costsare similar to interest costs for the liability and, therefore, the cash flow effects of these itemsshould be reported in the cash flow statement when the instruments are redeemed in a mannerconsistent with interest costs.Issued February 2020Page 15 of 32
GRAP 2 on Cash Flow StatementsExample: Discounted bondAn entity issues a 10 year zero coupon bond with a face value of R120,000 at a discount ofR65,000. Its issue price is therefore, R55,000 and the effective yield is 8,11%.At the issue date, the proceeds of R55,000 would be shown as a cash inflow from financingactivities.The discount of R65,000 represents a rolled-up interest charge which would be amortised tothe statement of financial performance as finance cost over the life of the bond while the bondremains outstanding. However, there would be no cash flow in these periods, because nocash (i.e. interest) has been paid.On maturity the repayment of R120,000 should be split between the R65,000 premium paidand the repayment of long-term borrowings of R55,000. The premium paid is similar in natureto interest and should accordingly be classified as such in the cash flow statement. Thebalance should be classified as a cash flow from financing activities.Similarly, the investor should record the payment for the bond as part of cash flows frominvesting activities. On maturity, the receipt should be split classifying the R65,000 in thesame manner as interest received and the R55,000 as cash flows from investing activities.If the entity decides to redeem the bond early, at the beginning of year 4 for R75,000.The carrying value of the bond in the statement of financial position at the end of year 3 iscalculated as follows:Proceeds at the beginning of year 155,000Interest accrued in year 18.11 % on 55,0004,463Interest accrued in year 28.11 % on 59,4634,825Interest accrued in year 38.11 % on 64,2875,216Total interest14,504Carrying value69,504Loss on redemption:Redemption proceeds75,000Less: carrying value(69,504)Loss(5,496)The loss should be allocated to finance costs, being R20,000 (14,504 5,496) and should beclassified in the same manner as interest paid in the cash flow statement.Issued February 2020Page 16 of 32
GRAP 2 on Cash Flow Statements6.4Refinancing of borrowingsEntities may renegotiate their existing borrowings on terms that are different from those thatwere in place prior to the renegotiation. The classification of such renegotiation in the cashflow statement will depend on whether the renegotiation gives rise to any cash flows.Example: Refinancing of bank loanAn entity renegotiates a refinancing arrangement whereby an old loan is repaid witha new loan facility. The refinancing is accounted for as a modification of the existingdebt.From a cash flow statement perspective the entity the new facility will be shown as afinancing activity cash inflow and the settlement of the old loan as a finance activitycash outflow.Further disclosure should be provided to explain this arrangement to the users of thefinancial statements.6.5Sale and leaseback transactionsIf the sale and leaseback results in an operating leaseback, any cash flows should be treatedas proceeds from the sale of assets and recorded in the cash flow statement as investingactivities. The lease payments made in the future are shown as operating cash flows.If the leaseback is a finance lease, any cash flows should be classified as financing activitiesin the cash flow statement.6.6Treatment of cash in the statement of financial positionAccording to GRAP 1, cash and cash equivalents should be disclosed as a line item on theface of the statement of financial position.As mentioned previously, a bank overdraft repayable on demand and which is used in theentity’s cash management should be included as a component of cash and cash equivalentsfor the purpose of the cash flow statement. However, this does not mean that the bankoverdraft should be included in the line item “cash and cash equivalents” in the statement offinancial position (unless the conditions for offsetting in GRAP 104 on Financial Instruments(2018) are met). Instead the bank overdraft will be included with financial liabilities in thestatement of financial position (or separately on the face if material).Issued February 2020Page 17 of 32
GRAP 2 on Cash Flow StatementsThe reconciliation of cash and cash equivalents in the notes to the financialstatements should reconcile the closing cash and cash equivalents to the appropriateline items in the statement of financial position, being the “cash and cash equivalents”under current assets and the bank overdraft under current liabilities.Cash should be recognised initially at the amount received by the entity or the amount receivedinto the entity’s bank account. Cash equivalents should initially be recognised at cost, whichis the fair value of the consideration given to acquire the cash equivalent. Normally noadjustment should be required to cash and cash equivalents balances except to update theexchange rate applied to balances dominated in foreign currencies and to reflect the effect ofsubsequent cash transactions. This is because they are only subject to insignificant risk ofchanges in value.6.7Investments in controlled entities, associates and joint venturesWhen an entity has an investment in an associate or a controlled entity accounted for by useof the equity or cost method, on consolidation, only the cash flows between the entity and theinvestee will be reported in the cash flow statement. These cash flow transactions include, forexample, dividends or interest paid or received.When an entity has an investment in a joint venture and it accounts f
Cash flows from operating activities should be reported by using only the direct method, whereby the entity’s significant classes of cash receipts and cash payments are disclosed. Example: Direct Method Extract from Cash Flow Statement Note 20x1 20x0 R R CASH FLOWS FROM OPERATING ACTIVITIES Receipts XX XX
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Cash flow statements AS 3 cash flow statements IAS 7 statement of cash flows Ind AS 7 statement of cash flows Bank overdraft Financing activities Cash &cash equivalents Same as IFRS Cash flows from extra ordinary items to be classified as operating, financing and investing activities. Cash flow statements do not reflect any
TREASURY & CASH MANAGEMENT ESSENTIALS What Is Treasury and Cash Management? PIAL RPR APRIL 2017 48 POSITIONING TREASURY AND CASH MANAGEMENT Every organisation deals with treasury issues, but many organisations do not have a distinct
Cash flow from Operations Cash flow from Investing Cash flow from Financing ÎWe will need to place each cash transaction and put it in one of the above sections. Remember, the total of the cash inflows less the outflows balance to the net change in the cash account from one year to the next. ÎThis is always the total of the cash account and the
Meaning : It is a statement that shows flow (Inflow or outflow) of cash and cash equivalents during a given period of time. As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash & cash equivalent arises on account of three types of activities i.e., Cash flow from Operating Activities. Cash flow from Investing Activities.
To search the Cash Flow Process , follow these steps: 1. Navigate to the Cash Flow Process Summary page. 2. Enter the Name, Description, or Folder in Search Criteria. 3. Click the Search. Only Cash Flow Process that match the search criteria are displayed. 2.3 Create Cash Flow Process To create a new Cash Flow process, perform the following .
changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating , investing and financing activities. Scope 1. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. 2.
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