Regulatory framework in the application of IAS 7
In Bolivia, following the world trend and the global business dynamics, it is in the process of convergence through the adoption of the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board for the preparation of financial information for general purposes.
As a result of the IFRS convergence process, the national technical council of auditing and accounting (CTNAC) established the technical regulatory framework through Resolution No. 01/2012 of November 7, 2012, which maintains the validity of the fourteen (14) Generally Accepted Accounting Standards for Bolivia, issued by the CTNAC of the Association of Public Auditors or Accountants of Bolivia (CAUB). The IFRS are adopted as supplementary or complementary standards, to be applied in the absence of country-specific technical pronouncements or local regulations on specific matters.
In this regard, Accounting Standard No. 11 (AS 11) on Essential Information Required for an Adequate Exposure of Financial Statements, requires companies to present the complete set of financial statements including the cash flow statement, which sets forth the definition of the cash flow statement:
It is a basic, dynamic financial statement that exposes the cash flow (disbursements and payments) of the cash and equivalents, or the changes in the resources of the entity, originated in operation, investment activities.
However, this standard does not establish how to prepare the cash flow statement. Therefore, since the current accounting standards do not contain sufficient technical accounting pronouncements, IFRS are substantially adopted, and IAS 7 is the standard to be applied for the preparation and presentation of the cash flow statement.
The objective of International Accounting Standard No. 7 (IAS 7) is to require the provision of information on historical changes in an entity’s cash and cash equivalents through a cash flow statement in which the cash flows for the period are classified as coming from operating, investing and financing activities.
What are cash flows?
Cash flows are the inflows and outflows of cash, which occur in an entity primarily from the production and sale of goods and/or services with the intention of generating a profit.
IAS 7 establishes the following definitions:
- Cash flows are the inflows and outflows of cash and cash equivalents.
- Cash comprises both cash and bank deposits on demand.
- Cash equivalents are short-term, highly liquid investments that are readily convertible to specified amounts of cash and are subject to an insignificant risk of changes in value.
Classification of cash flows in accordance with IAS 7
The cash flow statement will report cash flows during the period, classifying them by activity:
- Operating activities are those activities that constitute the principal source of income of the entity, as well as other activities that cannot be classified as investing or financing activities.
- Investing activities are those of acquisition and disposal of long-term assets, as well as other investments not included in cash equivalents.
- Financing activities are those activities that produce changes in the size and composition of the equity and loans taken by the entity.
What are operating activities?
- Collections of sales of goods and provision of services.
- Payments from suppliers.
- Payments from employees.
- Collection of royalties, commissions.
- Payments or refunds of income taxes.
- Collections and payments from insurance companies for premiums.
What are the investment activities?
- Purchases of fixed assets, intangible assets and other long-term assets, represented by cash payments.
- Collections for sales of fixed, intangible and other long-term assets.
- Payments and collections for advances and loans to third parties (Not financial institutions).
- Payments and collections for the acquisition and sale of investments.
What are the financing activities?
- Increase or decrease of capital.
- Collection of the issue of shares or other financial instruments.
- Payments for acquiring or redeeming shares.
- Collections for the issuance of financial obligations, loans, promissory notes, bonds, mortgages and other short and long term loans.
- Payment of loans.
- Reimbursements of financial leasing.
Types of cash flow
- Direct method
- Greater detail of income, collections and operational payments.
- The information IS OBTAINED from the accounting reports.
- Adjusting sales or cost of sales to:
- Changes during the period in inventories and operating accounts receivable and payable.
- Other non-cash items.
- Indirect method
- Adjusts the net gain or loss for the purposes of:
- Cashless transactions (e.g., depreciation).
- Income or expense items with investment or financing cash flow.
- Adjusts the net gain or loss for the purposes of:
Which cash flow method to use?
In accordance with tax regulations, the cash flow statement must be prepared using the indirect method, specifically because the latest updated digital form 605, corresponding to the SIAT APPLICATION – EEFF MODULE and ANNUAL REPORT, includes the cash flow format in the indirect method.
Therefore, the choice of method to be used will depend on the aims and objectives that the entity.