Cash flow statements are consistently identified by the Financial Reporting Council (FRC) as one of the top 10 issues in corporate reports. Based on the FRC’s findings, the Corporate Reporting Faculty has published a new guide on the topic. The guide, suitable for preparers applying either UK GAAP or IFRS Accounting Standards, highlights the common pitfalls to avoid and provides tips on performing robust reviews during the preparation process.

Common cash flow statement errors

The guide, Statement of cash flows: common pitfalls and tips for reviewers, highlights some of the basic and more common errors that can be made when preparing a statement of cash flows, including general pitfalls such as classification errors as well as errors relating to specific transactions.

Through its Corporate Reporting Review work, the FRC has identified errors as fundamental as the inclusion of non-cash transactions (for example, assets acquired under lease agreements being reported as a cash outflow). Also identified are specific transactions that result in an increased risk of error, for example business combinations. Common errors here include the incorrect classification of cash payments for the purchase of a business as an operating activity rather than an investing activity. Another common error is the failure to adjust the cash inflow or outflow on the disposal or purchase of a subsidiary for the subsidiary’s cash and cash equivalents.

Further issues can arise where accounting standards lack clarity on the appropriate treatment of a specific transaction. For example, when entities enter into debt factoring arrangements, complexities arise where the receivables are not derecognised and the entity’s customers pay cash to the factor rather than the entity. Preparers may choose to classify the cash inflow as either operating (reflecting the nature of the original sale to a credit customer) or financing (reflecting the factor offering a form of finance to the entity). Adequate disclosure is necessary to allow users of financial statements to understand the transaction.

Review of cash flow information

To prevent (or detect and correct) errors, the FRC recommends that robust reviews are built into entities’ financial statement preparation processes. Reviewers should ensure consistency between the statement of cash flows and information in the rest of the annual report, including amounts reported elsewhere in the report, disclosure notes and narrative information.

Reviewers might reconcile, for example, cash flows from transactions with shareholders (such as dividend payments and proceeds from share issues) to the corresponding figures in the statement of changes in equity. Reviewers might also consider whether narrative information, such as the strategic report, indicates any transactions which have happened but are not appropriately reflected in the statement of cash flows.

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For further resources on UK GAAP, IFRS Accounting Standards and non-financial reporting including sustainability reporting, visit icaew.com/crresources.

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