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Due to continued economic uncertainties, primarily from the impact of coronavirus, investors and regulators are likely to be particularly interested in liquidity disclosures this reporting season. 

The FRC’s latest thematic review on cashflows and liquidity disclosures identifies three areas in which some cashflow statements failed to meet requirements:

• material inconsistencies between items in the cashflow statement and the notes;
• missing or incorrectly classified cashflows; and
• inconsistencies between financing cashflows and the reconciliation of changes in liabilities arising from financing activities in the notes.

The review also highlights several areas of improvement in the disclosure of accounting policies for the treatment of significant and large one-off transactions in the cashflow statement.

Key findings and expectations

Composition of cash and cash equivalents

IAS 7 requires cash equivalents to be held for the purpose of meeting short term cash commitments and be subject to an insignificant risk of changes in value, with a short maturity of three months or less from the date of acquisition. Bank overdrafts which are repayable on demand may be included as a component of cash and cash equivalents, however invoice discounting or factoring arrangements will usually not be for the following reasons.

The FRC has referred to an IFRS Interpretation Committee agenda decision in March 2018 on the types of borrowings which can be included as a component of cash and cash equivalents for the purpose of the cash flow statement.

The Committee concluded that short-term loans and credit facilities (short-term arrangements) that have a short contractual notice period should not be included as components of cash and cash equivalents. This is because these short-term arrangements are not repayable on demand. Additionally, the fact that the balance does not often fluctuate from being negative to positive indicates that the short-term arrangements are a form of financing rather than an integral part of the entity’s cash management. The Committee considered the requirements of paragraphs 7-9 of IAS 7 in reaching its decision.

This has implications for entities that enter into invoice discounting or factoring arrangements. As the related liabilities on these financing arrangements would not fluctuate from being negative to positive and are generally not repayable on demand, they should not be included as a component of cash and cash equivalents. The review identified one company where an invoice discounting facility was treated as part of cash and cash equivalents in the cash flow statement, despite appearing not to fluctuate between an asset and liability position.

The FRC expects companies to provide a sufficiently detailed accounting policy to explain what is included within cash and cash equivalents. In addition, it expects disclosure of the basis for including overdrafts within cash equivalents and a reconciliation between cash and cash equivalents as presented in the cash flow statement and the corresponding items in the statement of financial position. 

The FRC has also highlighted that IAS 7 requires disclosures of any restrictions on the use of cash and cash equivalents by the group.

Going concern, viability and liquidity information – impact on future reviews

The FRC has stated that it will continue to challenge companies during its routine reviews when it does not find clear explanations of going concern, viability and liquidity information, such as availability of cash, undrawn borrowing facilities and compliance with covenants. 

The FRC expects to see evidence of:

• robust pre-issuance reviews to ensure cashflow statements and related notes are compliant with the requirements and free from basic errors;
• consistency between the amounts and descriptions of items in the cashflow statement and other areas of the annual report; and
• disclosure of any judgments relating to the cashflow statement, particularly for large, one-off transactions.

For more information on this, please contact Lee Marshall.