BKAF3073 Chapter 8

CONSOLIDATED STATEMENT OF CASH FLOW

LEARNING OBJECTIVES• To explain the rationale of cash flow reporting• To identify the requirements of statutes and

accounting standard on Statement of Cash Flows including related transactions for the group

• To prepare and present the group Statement of Cash Flows- Acquisitions and disposals of subsidiaries and treatment of associates and subsidiaries

INTRODUCTIONWhy preparing STATEMENT OF CASH FLOW?1. Provide information about an entity’s cash receipt

and cash payment during a period.2. Provide information about its operating, investing

and financing activities an entity during a period.

It provides answers for the following questions:1. Where did the cash come from during the period?2. What was the cash used for during the period?3. What was the change in the cash balance during

the period?

INTRODUCTION…

By answering the questions, company will get the some benefit such as;1. Enables users to evaluate the changes in net assets

of company2. Assessing the ability of company to generate cash

and cash equivalent3. Enhances the comparability of the reporting of

operating performance by different company.

INTRODUCTION..• The SCF is usually prepared using cash and

cash equivalents as its basis.

• Cash equivalents are short-term, highly liquid investments that are both:1) readily convertible to known amounts of cash2) so near to their maturity that their market value is

relatively insensitive to changes in interest rates.

CONSOLIDATED STATEMENT OF CASH FLOW (CSCF)

Using the same MFRS 107 Statement of Cash Flow as a guideline

The process to prepare this statement is similar for an individual companies.

CSCF should report cash flows during the period classified by operating, investing, and financing activities (MFRS 107).


i. Operating Activities Include cash effects of transactions that create revenues and expenses. Key indicator- internally generated CF from operations. Include into the determination of net income. Examples; Cash receipts from sale of goods and rendering of

services Cash receipts from royalties, fees, commissions and

other revenues. Cash payments to suppliers for goods and services Cash payments to and on behalf of the employee. Cash receipts and payment of insurance for premiums

and claim and other policy benefits.

* interest element may be classified as an operating activity


2 methods for operating activities:

1. Direct method- major classes of gross receipts and gross payments.- preferred by MFRS 107

2. Indirect method- Profit /loss before tax in income statement is adjusted with

- non-cash nature (depreciation, provisions, deferred taxes , profits retained in associates and NCI)

- changes in stock, debtors and creditors- focuses on the differences between net income and net cash

flow from operating activities.


ii. Investing Activities• Cash flows represent the extent to which expenditures (long

term assets) have been made for resources intended to generate future income and cash flows. Examples: Cash payments to acquire and dispose property, plant and

equipment, intangibles and long-term assets Cash receipts from sales of property, plant and equipment,

intangibles and long-term assets Cash payments to acquire and dispose equity or debt

instruments of other enterprises and interests in joint ventures


iii. Financing Activities• Predicting claims on future cash flows by providers of

capital to the enterprise (changes in the size and composition of the equity capital and borrowings of the enterprise).

• Involves long term liability and equity in balance sheets


Financing activities - Examples:• Cash proceeds from issuing shares of other equity instruments• Cash payments to owners to buyback or redeem the

enterprise’s shares• Cash proceeds from issuing debentures, loans, notes, bonds

and other short/long term borrowing• Cash repayment of amount borrowed


Investing activities and Financing activities• Major classes of gross cash receipts and gross cash payments

arising from investing and financing activities:– Investment in subsidiaries, associates and joint ventures– Acquisitions and disposals of subsidiaries and other business

units– The aggregate cash flows arising from acquisitions and from

disposals of subsidiaries or– Other business units should be presented separately and

classified as investing activities


- In order to prepare the CSCF, the items from consolidated balance sheet (CBS) and consolidated income statement (CIS) need to be used.

- Not to consolidate Statement of Cash flows by individual companies. However, if there is no other way, then the group’s internal cash transactions must be eliminated to avoid double counting of cash.

CONSOLIDATED STATEMENT OF CASH FLOW (CSCF)

CSCF VS SCF• There are few extra items to be included in the

CSCF. 1. Non-controlling Interest2. Investment in Associates3. Acquisition of subsidiaries4. Disposal of subsidiaries


1) Non-controlling Interest - NCI account balance will only change due to:

(a) NCI in the current year’s profit of a subsidiary(b) Dividends paid by a subsidiary to the minority

shareholders.- However, only transaction which effects the Cash flow of

the group will be included in the CSCF.oFor transaction (a), the proportion of current year’s

profit in the subsidiary company will have no effect in CSCF because it has nothing to do with cash or cash equivalent.

oFor transaction (b), it will result in outflow of cash. Then, it will be included in CSCF.

Illustration 1:• A Bhd holds 70% of B Bhd.Below are the PARTIAL CSCI, CSCE

and SCI of B Bhd and SCE of B Bhd for the YE 31 Dec. 2007:

CIS (RM’000) B Bhd (RM’000)Profit before Tax 625 125Tax 187.5 37.5Profit After Tax 437.5 87.5Attributable to:S/holders 411.25NCI 26.25

437.50

Illustration 1…

CIS (RM’000) B Bhd (RM’000)

Beg. Retained Profit 625 375Profit for the year 411.25 87.5Dividend (125) (12.5)Ending Retained Profit 911.25 450

From the above information, it will reflect the CSCF as follows;

Illustration 1…

Indirect Method:A Bhd & GroupCSCF (Partial)

FYE 31 Dec 2007RM’000

Cash flow from operating activities:Profit before tax 625

Cash Flow from financing activities:Dividend paid to NCI (3.75)

*For this kind of transaction, the effect will same for any method, either direct / indirect just same treatment.


2) Investment in Associates The investment in associate account balance will only

change due to:(a) Group’s share of the current year associated profit(b) Dividends received from the associated

However, only transaction which effects the Cash flow of the group will be included in the CSCF.⁻ For transaction (a), the proportion of current year

associate’s profit will have no effect in CSCF because it has nothing to do with cash or cash equivalent.

⁻ For transaction (b), it will result in inflow of cash. Then, it will be included in CSCF.

Illustration 2

• A Bhd holds 70% and of B and 20% of C Bhd. Below are the PARTIAL CIS, CSCE and IS of C Bhd and SCE of C Bhd for the YE 31 Dec. 2007:

CIS (RM’000) C Bhd (RM’000)

Operating profit 625 125Share of assoc. Profit 17.5 - . Profit before Tax 642.5 125Tax (192.5) (37.5)Profit after tax 450.00 87.5Attributable to:S/holders 423.75NCI 26.25

450.00

Illustration 2…

CIS (RM’000) C Bhd (RM’000)Beg. Retained Profit 750 250Profit before the year 423.75 87.5Dividend (125) (12.5)End. Retained Profit 1,048.75 325

From the above information, it will reflect the CSCF as follows;

Illustration 2…Indirect Method:

A Bhd & GroupCSCF (Partial) FYE 31 Dec 2007

RM’000Cash flow from operating activities:

Profit before tax 642.5Less: non cash itemShare of associated profit (17.5)

Cash Flow from financing activities:Dividend received frm associate 2.5

* we need to lessen the amount of profit b4 tax with the appropriation of the associate’s profit amount because the profit was not in the cash or cash equivalent form.

* Dividend receive from associate will increase the group’s cash, thus it will add up in the CSCF.

Illustration 2…

Direct Method:A Bhd & GroupCSCF (Partial)

FYE 31 Dec 2007 RM’000

Cash Flow from investing activities:

Dividend received frm associate 2.5

* By using direct method, you do not have to be bothered by the appropriation of associate profit in the profit before tax amount.

* You can directly add the amount of dividend received from associate under the cash flow from operating/ investing activities.


3) Acquisition of Subsidiary When a company acquires other company, automatically

the group’s total assets and total liabilities will increase. But the group’s cash will decrease

MFRS 107 Para 39 – the aggregate cash flow arising from acquisition of subsidiary companies should be presented separately and classified as cash flow from investing activities.

MFRS 107 Para 42 - aggregate amount of cash paid to acquire the subsidiary company should be reported in the consolidated Statement of Cash Flow as “net of cash and cash equivalent acquired”.

3) Acquisition of Subsidiary

MFRS 107 requires additional relevant information to be presented in detail.a) Total purchase considerationb) The portion of purchase consideration discharged by

means of cash and cash equivalent.c) the amount of cash and cash equivalent in the

subsidiary acquiredd) the amount of other assets and liabilities in the

subsidiary acquired, and summarized by major categories.

* The aim for this presentation is to distinguish the cash flow arising from the acquisition of the subsidiary from the cash flow from other activities. (operating, investing, financing).

Illustration 3A Bhd acquired another subsidiary, D Bhd for about 80% with cash purchased consideration of RM125,000 during year 2007. At the date of acquisition, D Bhd’s balance sheet as shown below:

RM’000 RM’000Share Capital 125 Building 100Retained Profit 25 Equipment 87.5Trade creditors 62.5 Inventory 50Dividend payable 37.5 Cash 12.5

250.0 250.0

Illustration 3…As required by MFRS 107 Para 42, the value to be disclosed would be RM112,500. The amount was derived from the calculation shown;Total Assets RM250,000Less:Total Liabilities Trade creditors RM62,500

Div. payable RM37,500 (RM100,000)Net Assets RM150,000Less:NCI (RM 30,000)

RM120,000Goodwill RM 5,000Thus; Cash purchase RM125,000Less:Cash available in D Bhd RM 12,500Cash flow on acquisition RM112,500

Illustration 3…

This RM112,500 is consider as net of cash acquired under MFRS 107 Para 42 and will be presented in the cash flow as below:

Indirect Method/ Direct Method:

A Bhd & GroupCSCF (Partial)

FYE 31 Dec 2007 RM’000

Cash flow from investing activities:

Acquisition of subsidiary (112.5)


4) Disposal of Subsidiary When a company dispose its subsidiary company,

automatically the group’s total assets and total liabilities will decrease. But the group’s cash will increase.

Para 39 – the aggregate cash flow arising from the disposal of subsidiary companies should be presented separately and classified as cash flow from investing activities.

Para 42 – aggregate amount of cash received as sale consideration should be reported in the consolidated Statement of Cash Flow as “net of cash and cash equivalent disposed of”.

4) Disposal of Subsidiary…

- MFRS 107 requires additional relevant information to be presented in detail.a) Total disposal priceb) The portion of disposal price received in cash and cash

equivalent.c) the amount of cash and cash equivalent in the subsidiary

disposed of; and d) the amount of other assets and liabilities in the subsidiary

disposed of, and summarized by major categories.

* The aim for this presentation is to distinguish the cash flow arising from the disposal of the subsidiary from the cash flow from other activities. (operating, investing, financing).

Illustration 4A Bhd disposed one of its subsidiaries, E Bhd during year 2007. A bhd held 80% of E Bhd. Cash consideration of RM125,000 was agreed for disposal. At the date of acquisition, E Bhd’s balance sheet as shown below:

RM’000 RM’000Share Capital 125.0 Building 100.0Retained Profit 25.0 Equipment 87.5Trade creditors 62.5 Inventory 50.0Dividend payable 37.5 Cash 12.5

250.0 250.0

Illustration 4…

As required by MFRS 107 Para 42, the value to be disclosed would be RM112,500. The amount was derived from the calculation shown:Total Assets RM250,000Less:Total Liabilities Trade creditorsRM62,500 Div. payable RM37,500 (RM100,000)Net Assets RM150,000Less:NCI (RM30,000)

RM120,000Profit from disposal RM 5,000Thus; Disposal price RM125,000Less:Cash available in E Bhd RM 12,500Cash flow on disposal RM112,500

Illustration 4…

This RM112,500 is consider as net of cash disposed of under MFRS 107 Para 42 and will be presented in the cash flow as below:

Indirect Method/ Direct Method:

A Bhd & GroupCSCF (Partial)FYE 31 Dec 2007

RM’000Cash flow from investing activities:Disposal of subsidiary 112.5

End of the Chapter

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BKAF3073 Chapter 8