This Standard sets out the principles to be followed by parent entities that are required by section 297(1) of the HGB to prepare cash flow statements as a component of their consolidated financial statements. Entities that are required to supplement their annual financial statements by a cash flow statement or that prepare a cash flow statement voluntarily are encouraged to do so in accordance with this Standard.
Cash flows are classified in the cash flow statement separately by operating, investing and financing activities. Classification is based in each instance on the economic activities of the entity. Cash flows are generally required to be reported gross, except when otherwise permitted or required by this Standard, for example when cash flows from operating activities are reported using the indirect method.
The starting point for the cash flow statement is cash funds at the beginning of the period. These consist solely of cash and cash equivalents. Cash equivalents are short-term, highly liquid investments held as a liquidity reserve that are readily convertible to cash and are subject to an insignificant risk of changes in value.
Cash flows from operating activities may be reported using either the direct or the indirect method. By contrast, cash flows from investing and financing activities are always reported using the direct method.
Cash flows from operating activities are derived from the entity’s revenue-generating activities to the extent that they are not attributable to cash flows from investing or financing activities. In addition, income taxes paid are generally attributed to operating activities and reported separately.
Cash flows from investing activities arise in connection with the use of the entity’s resources to generate long-term income, generally over a period of more than one year. Cash flows relating to the investment of cash funds for short-term cash management are also attributable to cash flows from investing activities, except where these are attributable to cash funds or are held for trading. In addition, cash flows relating to the acquisition and disposal of consolidated entities are classified as investing activities. Moreover, interest and dividends received are attributed to investing activities and reported separately.
Cash flows resulting from transactions with the shareholders of the parent entity and with minority shareholders of consolidated subsidiaries, as well as proceeds from and repayments of borrowings, are generally classified as cash flows from financing activities. In addition, interest and dividends paid are attributed to financing activities and reported separately.
The Standard contains minimum classification formats for reporting cash flows using the direct and indirect methods. These are presented in Appendix 1.
In addition, the Standard contains sector-specific requirements for the cash flow statements of credit institutions and financial services institutions (Appendix 2) and of insurance undertakings (Appendix 3), which reflect the special requirements of those business models as regards cash flows and components of cash funds.