Recent Financial Reporting Council (FRC) Annual Reviews of Corporate Reporting identify cash flow statements as an area of reporting that requires improvement, consistently featuring in the top 10 list of topics that result in substantive queries being raised with companies. To help avoid common errors, the regulator recommends that companies include robust review measures in the financial statement preparation process.
This guide is for preparers of the statement of cash flows (other than financial institutions) and those conducting reviews and highlights common errors and how to avoid them, as well as providing tips for conducting reviews. The guide is suitable for use by entities applying either IFRS Accounting Standards or UK GAAP. While there are differences between IAS 7 Statement of Cash Flows and Section 7 Statement of Cash Flows of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, the same underlying principles apply in both cases. Where relevant, differences between IFRS Accounting Standards and UK GAAP are highlighted.
This guide does not cover the scope of IAS 7 or FRS 102 with respect to preparing a statement of cash flows. For information on the exemptions available to certain preparers, refer to the Corporate Reporting Faculty’s factsheets on:
Definitions, principles and application considerations
The statement of cash flows reconciles cash and cash equivalents at the start of the reporting period to cash and cash equivalents at the end of the reporting period, with the movements in the period analysed as either operating, investing or financing activities.
Common cash flow statement errors
Basic errors in cash flow statements are not unusual. This section highlights some of the basic and more common errors that are made when preparing a statement of cash flows, along with more complex areas which are frequently dealt with incorrectly. This is not an exhaustive list.
Common pitfalls: specific transactions
The FRC’s reporting has addressed errors in the statement of cash flows relating to specific balances and transactions, including:
- overdrafts;
- disposals of property, plant and equipment;
- business combinations;
- cash and cash equivalents held in a foreign currency; and
- debt factoring and reverse factoring arrangements.
Preparation process checks
In its November 2020 thematic review of cash flow statements and liquidity disclosures, the FRC notes that most of the errors it finds in statements of cash flows could be avoided if an entity has robust reviews built into the preparation process. Such processes might include a review by a person with knowledge of the underlying detail plus a second review by somebody more removed from the detail who is able to take a “bigger picture” view of the statement within the context of the overall financial statements. Classification errors in particular may be identified by these reviews.
Performing sense-checks could also help identify several of the more basic errors seen in the statement of cash flows. For example, when the statement of cash flows has been prepared using the indirect method, a review of the reconciliation from profit to cash generated from operations may highlight items that are illogical or simply incorrect, such as movements in working capital being added when they should be subtracted or vice versa.
Further resources
This guide has been written with reference to the following reports published by the FRC, which readers may find helpful.
- FRC Annual Activity Reports
- FRC Lab report on Disclosures on the sources and uses of cash (published September 2019)
- Thematic review: Cash flow and liquidity disclosures (published November 2020)
- Thematic review: Reporting by the UK’s largest private companies (published January 2024)
- Thematic review: Reporting by smaller listed and aim quoted companies (published November 2018)
Statement of cash flows: common pitfalls and tips
Read the full guidance on how to avoid common errors when preparing statements of cash flow.
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