Hook
When companies do not disclose their cash inflows and cash outflows separately, the statement of cash flows can become misleading or confusing. In this article, this net disclosure is referred to as offsetting cash flows.
Fog Zone: a fictional confusing disclosure
This fictional scenario reflects disclosure patterns commonly seen in practice.
Company B discloses a net cash inflow of R1.4 million relating to cash repayments received on loans receivable. However, its note on loans to group companies shows:
- a cash inflow of R3.1 million (loan repayment by Entity 1);and
- a cash outflow of R1.7 million (loan advance to Entity 2).
This net presentation does not comply with IAS 7.21, as the gross movements are material and should be shown separately.
Lookout Observation
IAS 7 – Statement of Cash Flows (IAS 7) generally does not permit offsetting. Specifically, IAS 7.21 states:
‘An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis.’
Offsetting cash flows in either the investing section and the financing section is a common issue I see in financial statement reviews – and one that regulators frequently highlight. For simplicity, the exceptions in IAS 7.22 and IAS 7.24 are not addressed in this article.
BhalaGood North Star Award: Altron Limited
The BhalaGood North Star Award recognises individual disclosures that provide practical examples for other preparers of financial statements.
The disclosure below is from page 46 of Altron Limited’s Consolidated statement of cash flows in its consolidated annual financial statements for the year ended 28 February 2025.
We have recognised this disclosure because it clearly presents cash inflows and cash outflows from other investing activities separately and provides cross-references to the related note disclosures.
This extract from note 38 – Other cash flows (pages 142-144) shows, for example, a cash outflow from a loan advance to TAR presented separately from the cash inflow from the repayment received from TAR.
Although this article highlights loans included in investing activities, the same principle applies to loans included in financing activities. Companies should avoid offsetting cash flows, even when:
- the inflow and outflow relate to the same counterparty, and
- the loan is disclosed as either an asset (investing) or a liability (financing).
Smooth Sailing Tip
Companies should only offset cash flows if permitted to do so under IAS 7.22 or IAS 7.24. In all other cases, gross presentation is required for investing and financing cash flows.
Glynnis Carthy CA(SA)
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The inclusion of a disclosure in this article should not be interpreted as an opinion on its compliance with IFRS Accounting Standards or on the financial statements as a whole.
