Appendix E — Differences Between U.S. GAAP and IFRS Accounting Standards

Scope

Although all entities are required to present a statement of cash flows, there are certain exceptions. Entities that are not required to present a statement of cash flows include defined benefit pension plans that prepare financial information in accordance with ASC 960, certain investment companies within the scope of ASC 946 that meet all of the conditions in ASC 230-10-15-4(c), and certain funds described in ASC 230-10-15-4(b)(3).

Under paragraph 7 of IAS 7, all entities are required to present a statement of cash flows (i.e., there are no scope exceptions).

Method of reporting cash flows from operating activities

Under ASC 230-10-45-25, an entity is allowed to use the direct or indirect method. Under both methods, net income must be reconciled to net cash flows from operating activities.

Under paragraph 18 of IAS 7, an entity is allowed to use the direct or indirect method. Net income must be reconciled to net cash flows from operating activities only under the indirect method.

Presentation of bank overdrafts

Bank overdrafts cannot be presented in cash and cash equivalents.

Bank overdrafts may be included as components of cash and cash equivalents in certain situations if they are an “integral part of an entity’s cash management,” even though such overdrafts are not presented in cash and cash equivalents on the balance sheet unless the offsetting criteria in IAS 32 are met. An entity that classifies bank overdrafts as cash and cash equivalents in the statement of cash flows will need to disclose this policy.

Presentation of restricted cash

There is no specific guidance on whether amounts generally described as restricted cash or restricted cash equivalents should be included in an entity’s beginning and ending balances of cash and cash equivalents as presented in the statement of cash flows. However, amounts generally described as restricted cash or restricted cash equivalents are not included in these balances in the statement of cash flows unless an entity classifies these amounts as cash and cash equivalents on its balance sheet.

Classification in the statement of cash flows

ASC 230-10-45-10 requires that cash flows be classified and presented in one of three categories: operating, investing, or financing. ASC 230 provides more specific guidance than IFRS Accounting Standards on items to be included in each category.

Paragraph 10 of IAS 7 requires that cash flows be classified and presented in one of three categories: operating, investing, or financing. IAS 7 is more flexible than U.S. GAAP regarding which items are to be included in each category.

Presentation of components of transactions with characteristics of more than one category of cash flows

Under ASC 230-10-45-22, ASC 230-10-45-22A, and ASC 230-10-45-23, an entity first needs to determine whether there are separately identifiable cash flows within a specific transaction. If so, the entity presents such cash flows on the basis of their nature in operating, investing, and financing . In the absence of separately identifiable cash flows, the entity would present such cash flows collectively on the basis of the predominant source or use of the cash flows.

Paragraph 12 of IAS 7 requires that an entity classify individual components of a single transaction separately as operating, investing, or financing depending on the nature of the transaction. IFRS Accounting Standards do not provide guidance on situations in which individual components of a single transaction cannot be separately identified.

Disclosure of cash flows pertaining to discontinued operations

An entity must disclose either of the following if it is not already presented on the face of the cash flows statement:

• The total operating and investing cash flows of the discontinued operation.
• The depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation.

In accordance with paragraph 33(c) of IFRS 5, an entity must disclose cash flows from discontinued operations under each category either on the face of the cash flow statement or in the notes.

Presentation of cash flow per share on the face of the financial statements

Under IFRS Accounting Standards (including IAS 7, which does not mention this metric), an entity is not explicitly prohibited from disclosing cash flow per share.

Taxes paid

Under ASC 230-10-45-25, taxes paid are classified as operating activities.

Under paragraph 14(f) of IAS 7, taxes paid are classified as operating activities unless they can be specifically identified within financing and investing activities.

Interest and dividends paid and received

Under ASC 230, interest paid and received should be classified as operating activities.

Cash flows from interest paid must be disclosed separately if the indirect method is used.

Dividends received are classified as operating activities because these are generally considered to be returns on an entity’s investment. However, a dividend from an equity method investment may be investing if the distribution is a return of investment. That is, for distributions from equity method investments, an entity is required to determine whether the distribution is a return on or a return of the entity’s investment. See Section 6.1.2 for specific guidance on distributions from equity method investments.

Dividends paid are classified as financing activities.

In addition, entities should elect accounting policies for presenting interest and dividends received as either operating or investing activities.2

Cash flows from interest and dividends received and paid must be disclosed separately.

Note that IAS 7 does not include a requirement to determine whether a distribution from an equity method investment is a return on, or a return of, the entity’s investment.

Remittances of statutory withholdings on share-based payment awards

For U.S. GAAP guidance, see Section 7.3.5.

Under IAS 7, an entity should assess the nature of the transaction on the basis of the general principles of classification of the cash flows as operating or financing, as well as the applicable noncash activity disclosures.

Leases

After the adoption of ASC 842, a lessee should present payments associated with its leases in the statement of cash flows as follows:

• Finance leases:
  • Present the principal portion of the payment as a financing activity.
  • Present the interest portion of the payment as an operating activity.
• Operating leases:
  • Present payments as an operating activity.

See Section 7.6 for more information.

The lessee should present payments associated with its leases in the statement of cash flows as follows:

• Present the principal portion of the payment as a financing activity.
• Present the interest portion of the payment as either a financing or an operating activity, depending on the lessee’s accounting policy election under IAS 7.

Settlement of zero-coupon debt instruments or other debt instruments that are insignificant in relation to the effective interest rate of the borrowing

As bonds are accreted from issuance to maturity, the interest expense is presented as a reconciling item between net income and cash flows from operating activities. At redemption, the cash paid to settle the interest component is classified as an operating activity and the cash paid to settle the principal is classified as a financing activity. See Sections 6.4.2 and 6.4.3.

Rather than including specific guidance similar to that in U.S. GAAP, IFRS Accounting Standards include principles related to assessing the classification of the cash flows as operating, investing, or financing activities.

Contingent consideration payments made after the date of a business combination

Contingent consideration payments that are not made soon after the acquisition date must be classified as financing activities; any excess cash payments (that are in excess of the fair value of the consideration recorded after the business combination) will be classified as operating activities. Cash payments made soon after the acquisition date in a business combination transaction must be classified as investing activities (see Section 7.5.4.1).

IFRS Accounting Standards do not provide guidance similar to that in U.S. GAAP (under U.S. GAAP, such guidance is based on when contingent consideration payments are made in relation to the date of a business combination). Instead, an entity should assess the nature of the transaction on the basis of the general principle of classification of the cash flows as operating or financing activities.

Proceeds from the settlement of insurance claims

Proceeds from the settlement of insurance claims should generally be classified on the basis of the nature of the loss (see Section 6.3.2).

Rather than including specific guidance similar to that in U.S. GAAP, IFRS Accounting Standards include principles related to assessing the classification of the cash flows as operating, investing, or financing activities.

Proceeds from the settlement of company-owned or BOLI policies

ASC 230-10-45-21C indicates that proceeds from the settlement of company-owned or BOLI policies should be classified as investing activities (see Section 6.1.5).

Rather than including specific guidance similar to that in U.S. GAAP, IFRS Accounting Standards include principles related to assessing the classification of the cash flows as operating, investing, or financing activities.

Beneficial interests in a securitization transaction

For U.S. GAAP guidance, see Sections 7.9 and 7.9.1.

Rather than including specific guidance similar to that in U.S. GAAP, IFRS Accounting Standards include principles related to assessing the classification of the cash flows as operating, investing, or financing activities.

Income tax effects of share-based payment awards

Excess tax benefits or tax deficiencies represent operating activities (see Section 7.3.2).

IFRS Accounting Standards do not include explicit guidance on classifying excess tax benefits related to share-based payment awards.

Comparative periods

Under ASC 230, presentation of comparative periods is not required.

Under paragraph 36 of IAS 7, the most recent two years must be presented.

Cash flows from hedging instruments

A company may classify cash flows from hedging activities in the same category as the cash flows from the hedged item provided that the requirements in ASC 230-10-45-27 are met (i.e., regarding the financing element at inception and disclosure of the accounting policy).