Amendment to IAS 7 ‘net debt’: how to implement the new guidance?

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John Chan of Accounting Consulting Services gives us an update on the narrow scope amendment to IAS 7 Statement of Cash Flows and shows how entities could meet the new disclosure requirement.

Borrowing is an important part of almost every business and operation. Information about changes in borrowings helps users of financial statements assess the financial health of an entity.

Although IAS 7 and IFRS 7 require certain disclosures, users have still noted that they have difficulty understanding changes in borrowings over time. The IASB therefore amended IAS 7 as part of its disclosure initiative to address these concerns.

What additional disclosure is required?

Purpose and scope

The purpose of the revised information is to help users assess changes in borrowings.

As neither borrowings nor “net debt” are defined in IFRS, the IASB requires disclosures to apply to liabilities arising from financing activities.

Disclosure requirements also apply:

  • Financial assets arising from financing activities (eg derivative assets that hedge long-term borrowings).
  • Other assets and liabilities. Entities should also include other assets and liabilities that could be included in other categories of the statement of cash flows if doing so would meet the disclosure objective (for example, cash and cash equivalents and interests that are classified as operating activities).

Required disclosures

Entities should disclose changes in the above items resulting from cash flows and non-cash changes (eg acquisitions, disposals and exchange differences).

Disclosure format

The amendment does not mandate any specific format and management should consider which disclosure best meets the purpose based on their circumstances. Different ways to achieve the disclosure objective are described below.

Disclosure Examples

Reconciliation table

The amendment suggests that a reconciliation between the opening and closing balances of the above items would satisfy the disclosure requirement. This may be the best way to achieve the disclosure objective when entities have several different items to disclose or when non-cash changes result from different transactions or events. A tabular reconciliation might look like this:

Click here to see the picture.

  1. The amendment requires that the link between the reconciliation and the balances and amounts presented in the balance sheet and the statement of cash flows be explained. Management should consider the balance sheet and the disclosure objective when deciding the level of detail to disclose.
  2. The amendment requires a separate presentation of changes in assets and liabilities classified as financing activities from changes in other assets and liabilities included in other categories.
  3. The example assumes that the bank overdraft is repayable on demand and is an integral part of the entity’s cash management.

Narrative descriptions

Narrative disclosures may be appropriate when there is little to disclose or when non-cash changes are limited, for example:

During the year ended December 31, 20×7, non-cash changes on long-term bank borrowings amounted to US$3 million resulting from unrealized exchange differences.

Other information

Some preparers may already provide similar information in accordance with local guidelines or on a voluntary basis. Such existing disclosures may not fully comply with the revised requirements, so management should review the items included in the disclosures to verify their completeness, appropriate separation from other assets and liabilities, and link to the balance sheet and cash flow statement.

Effective date and transition

The amendment applies to annual periods beginning on or after January 1, 2017. Early application is permitted. When an entity applies the amendment for the first time, it is not required to provide comparative information for previous periods.

Who is affected?

The amendment will affect every entity preparing IFRS financial statements. However, the required information must be readily available. Preparers should consider how best to present additional information explaining changes in liabilities resulting from financing activities.

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