Larissa Nechaeva
Unlike IAS, Russia recognizes only two statements, i.e. the balance sheet and income statement, as major components of a set of financial statements. The cash flow statement is regarded as merely an attachment to annual financial statements and is not required to be part of interim financial statements.
This cash flow statement has been widely used in international practice. In accordance with IAS, it is treated as a major financial statement and should be presented for each period for which financial statements are presented. In addition to the cash flow statement, a complete set of financial statements includes the balance sheet, income statement, a statement of changes in equity as well as accounting policies and explanatory notes to the financial statements. The component parts of the financial statements interrelate and complement one another because they reflect different aspects of the same transactions and serve a single objective, which is to provide all the information that users may need to make economic decisions.
Each financial statement provides specific information about financial and economic transactions of the enterprise. The cash flow statement reports information about cash flows during the period classified by operating, investing and financing activities. Disclosure requirements concerning changes in cash flows are set out in IAS 7, Cash Flow Statements, that became effective for financial statements covering periods beginning on or after 1 January 1994 and superseded IAS 7, Statement of Changes in Financial Position.
All enterprises need cash regardless of the nature of their principal revenue-producing activities. A cash flow statement is useful in providing both internal and external users (company managers, investors, creditors) with a basis to assess how the enterprise generates and uses cash, whether it is able to generate sufficient cash flows in order to meet short-term cash commitments, pay dividends, and adapt to changing circumstances. It also indicates whether the enterprise needs additional financing or a different dividend policy, what changes have occurred in investing and financing activities during the period, how cash proceeds from issuing ordinary shares, bonds or other borrowings have been utilized.
The cash flow statement has not been widespread in Russia and there is no separate standard on it, while existing disclosure requirements for this statement are significantly different from those of IAS 7. These differences primarily relate to the classification of cash flows by activity and the presentation of the statement. Given below are several examples.
In accordance with IAS 7, an enterprise should present its cash flows during the period classified by operating, investing and financing activities. This classification provides information that allows users to assess the impact of each activity on the financial position of the enterprise and the amount of its cash. This information may also be used to evaluate the relationships among those activities. IAS 7 provides the following definitions of activities:
- Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
- Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
- Financing activities are activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise.
Under Russian regulations, the cash flow statement reports cash flows classified by current, investing and financing activities. The definitions of these activities have the following differences from IAS:
- Operating activities in the Russian cash flow statement are referred to as «current» activities. The definition of current activities does not distinguish them from investing and financing activities the way it is done in IAS.
- The definition of investing activities covers activities arising from the issuance of bonds and other long-term securities. These transactions result in changes in the size and composition of the equity capital and borrowings of the enterprise. Therefore they are included in financing activities under IAS.
- The definition of financing activities covers activities arising from the acquisition and disposal of short-term financial investments. Short-term financial investments are investments other than cash equivalents. Therefore their acquisition and disposal are included in investing activities.
For the purpose of preparing a cash flow statement, cash and cash equivalents are combined under IAS 7, i.e. movements between these items are excluded from cash flows. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Such investments normally have a short maturity (of, say, three months or less). Cash and cash equivalents are not combined when preparing cash flow statements under Russian regulations and methodical guidance.
IAS 7 requires disclosure of all the relevant information about investing and financing transactions that do not have a direct impact on current cash flows (such as the acquisition of an enterprise by means of an equity issue, the conversion of debt to equity, and the acquisition of assets by means of a finance lease). IAS 7 also encourages to disclose additional information that may be relevant to users in understanding the financial position and liquidity of an enterprise. The above disclosures are not required under Russian rules. However, enterprises should disclose other information that is of interest to supervisory and national statistics bodies, including receipts from payments in cash, including those from legal entities, individuals and point-of-sale cash registers, as well as cash flows between cash on hand and bank accounts. Such information cannot be considered useful in understanding the financial position and liquidity of an enterprise.
The adoption of a separate standard on the cash flow statement is not envisaged by the standard implementation plan approved in accordance with the Russian Government Resolution #283, dated 6 March 1998, «On Approval of the Accounting Reform Program towards International Accounting Standards». However, one of the specific features about this statement is the fact that it can be adopted in Russia in full compliance with IAS 7 without any risk of violating some national (primarily, tax) legislation. In spite of differences between Russian and International Accounting Standards, there are no obstacles to complying with uniform international requirements for the cash flow statement (i.e. using a single classification of activities, single format of the statement, etc.).
The cash flow statement will gain well-deserved recognition and application if Russia adopts full IAS 7 or at least allow Russian enterprises preparing IAS-based cash flow statements not to prepare RAS-compliant cash flow statements. Calculations of line items in [IAS-based] cash flow statement can be specified in methodical guidance and training courses. Russian accountants will not have difficulties with these calculations. Moreover, accountants, managers, investors, creditors and other users of Russian financial statements will understand more clearly the objective of the cash flow statement. They will also have a basis to analyze and compare cash flows of different enterprises in order to make efficient economic decisions.
Larissa Nechaeva is a Technical Manager at ICAR. She can be contacted by e-mail larissa@icar.ru.