Group statement of cash flows

A consolidated statement of cash flows reports the cash that moved between the group and the outside world. That single sentence settles most of what is different about it. Cash paid by a parent to its own subsidiary has not left the group and does not appear; a dividend paid by a partly owned subsidiary to its outside shareholders has left the group and does.

Everything else you already know about a single company's statement of cash flows carries straight across. What this chapter adds is a short list of group-specific items, one structural change that arrived with IFRS 18, and the workings that produce each figure.

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1 What is different about a group

Four things, and only four.

1. A dividend paid to the non-controlling interests. The subsidiary's dividend is split: the parent's share stays inside the group and is eliminated; the outside shareholders' share is a real cash outflow, in financing activities.

2. A dividend received from an associate. The associate is outside the group, so cash it pays over is a real inflow, in investing activities. It is not "revenue" of any kind — under the equity method it reduces the carrying amount of the investment.

3. The acquisition or disposal of a subsidiary. Two separate effects: a single net cash figure in investing activities, and an indirect adjustment to every other balance the subsidiary brought in or took away.

4. Extra non-cash items in the reconciliation — an impairment of goodwill, and any gain or loss on disposing of a subsidiary.

Sections 5 and 6 take each of them in turn. Section 2 deals with the change that affects the top of the statement.

2 IFRS 18 and this chapter

2.1 What that does to the group reconciliation

It makes it shorter, which is not what students expect from a change. Three lines leave the top of the statement and one line moves down it:

Two of the three classic add-backs have disappeared, because the subtotal you now start from already excludes them. The arithmetic is worth doing once to convince yourself: on the old basis you took profit before tax, added back the finance cost and deducted the associate's profit — and profit before tax plus the finance cost less the associate's profit is operating profit. Starting from operating profit does the same work in one step.

Nothing else about a group statement of cash flows changed. The non-controlling interest working, the treatment of the cash acquired with a subsidiary, the elimination of intra-group cash flows and the working capital adjustment are all exactly as they were. IFRS 18 changed where a result is presented, not what it is.

3 The pro-forma

Consolidated statement of cash flows for the year ended [date]. Items marked * arise only in a group.

4 Two sets of three, and they are not the same classification

IFRS 18 sorts income and expenses into an operating, an investing and a financing category. IAS 7 sorts cash flows under the headings operating activities, investing activities and financing activities. The two sets of three are deliberately parallel and they are not the same classification. An item can sit differently in each.

The row that catches people is income tax: it is its own category in the statement of profit or loss — one of the five IFRS 18 defines, the other four being operating, investing, financing and discontinued operations — and it is an operating cash flow in the statement of cash flows.

5 The group-specific items

5.1 Dividend paid to the non-controlling interests

This is almost never given to you; it is derived. Reconcile the opening and closing non-controlling interests from the consolidated statement of financial position, through everything else that moved them, and the dividend is what is left. A T-account is the quickest way, and the non-controlling interests are part of equity, so the balance is a credit.

The two group-structure lines appear only when there has been an acquisition or a disposal in the year. Acquiring a subsidiary that is not wholly owned creates a non-controlling interest, so it is a credit; disposing of one removes it, so it is a debit.

Where a question happens to give you the subsidiary's own dividend instead, the figure is simply NCI% × that dividend, and no T-account is needed. That is rare.

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5.2 Dividend received from an associate

Same idea, from the other side of the statement of financial position. The investment in associate is an asset, so the balance is a debit, and the movement on it is the share of profit added and the dividend taken out:

Or, without a T-account: opening balance, plus the share of profit, less the closing balance. And where the question gives you the associate's own dividend and the group's holding, the answer is simply group % × that dividend.

The inflow goes in investing activities.

5.3 Acquisition or disposal of a subsidiary

There are two entirely separate effects, and a question can ask for either.

Effect 1 — the net cash figure, in investing activities. Buying a subsidiary is a large cash outflow, but the subsidiary arrives with a bank balance of its own which is consolidated from that day. What is reported is the net figure:

Cash flow on acquisition = cash consideration paid − cash and cash equivalents acquired

and on a disposal, the mirror image: the proceeds received, less the cash and cash equivalents that left with the subsidiary. IAS 7 requires the net figure, and a question that gives you both numbers is asking for it.

Effect 2 — the indirect adjustment to every other balance. A statement of cash flows works from the movement in each balance. Where a subsidiary joined the group during the year, the closing balance includes it and the opening balance does not, so the movement is not a cash movement at all — part of it is simply the arrival of the subsidiary's assets and liabilities, whose cash effect has already been dealt with in the net figure above.

The fix is to compare like with like. Take the opening balance, add what was acquired with the subsidiary (or deduct what left with a disposal), and compare that expected figure with the actual closing balance. The difference is the real cash movement. For working capital there is a standard working:

Then decide the direction of each. A decrease in inventories or receivables is an inflow — you have turned an asset into cash. An increase in payables is an inflow — you have kept the cash and not yet paid the supplier. The opposite movements are outflows. Decide this at the end, once, rather than while you are building the working.

The same "expected against actual" logic applies to every other balance a question gives you, most often property, plant and equipment — where the amount acquired with the subsidiary is one more debit in the T-account.

5.4 Non-cash items in the reconciliation

Impairment of goodwill. An expense that reduces operating profit and moves no cash, so it is added back. In a group question it usually has to be derived: opening goodwill, plus the goodwill arising on any acquisition in the year, less closing goodwill.

Gain or loss on the disposal of a subsidiary. A gain or loss on losing control of a subsidiary is a non-cash item, so it has to come out of the reconciliation — but only if it is inside the figure the reconciliation starts from. That is the test to apply, and it is a question of where the disposal has been presented:

• Where the disposal qualifies as a discontinued operation under IFRS 5, the whole post-tax result of that operation is presented as a single line at the foot of the statement of profit or loss, below the income tax expense. It is not inside operating profit, so there is nothing to strip out of the starting figure.

• Where it does not, the gain or loss forms part of the group's continuing result. Apply the same test: it comes out of the starting figure if it is in the starting figure. A question will tell you where the gain has been presented, and the adjustment follows from that.

The cash effect is the same either way, and it is not in this reconciliation at all: the proceeds received, less the cash and cash equivalents that left with the subsidiary, is a single net figure in investing activities.

6 Worked examples

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7 Exam technique

Objective test questions ask for one figure out of a very large amount of information, and almost always one of five: the dividend paid to the non-controlling interests, the dividend received from an associate, the net cash on an acquisition or disposal, a working capital movement adjusted for an acquisition, or tax paid. Each of them is a two- or three-line working, and each of them is reachable without preparing anything else.

A reliable order for a longer question:

1. Write down the opening and closing cash and cash equivalents and the movement between them. That is the figure everything else has to reconcile to.

2. Start the reconciliation at operating profit and take the non-cash items from the statement of profit or loss and the notes: depreciation, goodwill impairment, gains and losses on disposal.

3. Do the working capital working, adjusting the opening balances for anything acquired or disposed of with a subsidiary.

4. Tax paid, from a T-account that includes both current and deferred tax.

5. Investing activities: property, plant and equipment from a T-account; the associate's dividend; the net cash on any acquisition or disposal.

6. Financing activities: share issues, borrowings, interest paid, and both dividends. The statement of changes in equity usually gives you three of these.

7. Cast, and check against step 1.

One last thing worth internalising, because it is the reason the whole statement hangs together: reclassifying a cash flow cannot change how much cash there is. IFRS 18 moved interest paid from one heading to another and every subtotal in between changed — and the movement in cash and cash equivalents did not move at all. If a change you have made alters the bottom line, it is not a reclassification and you have made an error.

8 Test your knowledge