Is a statement of cash flows required for special purpose financial statements?

IAS 7 prescribes how to present information in a statement of cash flows about how an entity’s cash and cash equivalents changed during the period. Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. 

The statement classifies cash flows during a period into cash flows from operating, investing and financing activities:

• operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. An entity reports cash flows from operating activities using either:
  • the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or
  • the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments and items of income or expense associated with investing or financing cash flows.
• investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The aggregate cash flows arising from obtaining and losing control of subsidiaries or other businesses are presented as investing activities.
• financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.

Investing and financing transactions that do not require the use of cash or cash equivalents are excluded from a statement of cash flows but separately disclosed. IAS 7 requires an entity to disclose the components of cash and cash equivalents and to present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.

In April 2001 the International Accounting Standards Board adopted IAS 7 Cash Flow Statements, which had originally been issued by the International Accounting Standards Committee in December 1992. IAS 7 Cash Flow Statements replaced IAS 7 Statement of Changes in Financial Position (issued in October 1977).

As a result of the changes in terminology used throughout the IFRS Standards arising from requirements in IAS 1 Presentation of Financial Statements (issued in 2007), the title of IAS 7 was changed to Statement of Cash Flows.

In January 2016 IAS 7 was amended by Disclosure Initiative (Amendments to IAS 7). These amendments require entities to provide disclosures about changes in liabilities arising from financing activities.

Other Standards have made minor consequential amendments to IAS 7. They include IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 16 Leases (issued January 2016) and IFRS 17 Insurance Contracts (issued May 2017).

The accounting world is full of jargon and concepts which aren’t very clear. Special purpose financial statements (SPFS) might also be considered part of this category as a niche form of financial statement. So what exactly are special purpose financial statements? Find out everything you need to know, starting with our special purpose financial reports definition.

Special purpose financial statements definition

Special purpose financial statements are financial reports that are intended for presentation to a limited group of users. Generally, these types of statements are required by a government entity when they wish to present specific information laid out in a reporting framework. Special purpose financial statements are generally used for tax reporting, bank reporting, and industry-specific reporting.

Special purpose vs. general purpose financial statements

It is important for businesses to meet reporting requirements to not fall foul of the rules in their home country. Businesses should look to the International Financial Reporting Standard (IFRS) for the common standards applicable to all financial reports. Generally, there are two types of financial reports. Let’s take a closer look at special purpose vs. general purpose financial statements and how they are reported.

Special purpose financial reporting

Earlier we spoke about what exactly special purpose financial statements are. Essentially these types of reports offer a greater degree of flexibility to most SMEs as they can be in any format that the business requires. This is usually a simple profit and loss sheet that follows the reporting requirements established by the directors, owners or members of a business.

General purpose financial reporting

General purpose financial reporting provides financial information that is useful to existing and potential investors, lenders and other creditors in making decisions on providing resources to a particular business. For this reason, it’s important that the reports are standardised and follow the accounting standards of the company’s domicile.

General purpose financial reporting is done throughout the year and includes a balance sheet, income statement, statement of owner’s equity/retained earnings and statement of cash flows. As a general rule, these statements are reserved for companies with a large number of employees. However, in Australia, this landscape is changing.

Rule changes in Australia from 1 July 2021

In March the Australian Accounting Standards Board (AASB) issued amendments that apply to all annual reporting periods commencing from 1 July 2021. The amendments state that all for-profit entities that are required by law to prepare financial statements must prepare general purpose financial statements (GPFS). This does away with the previously mentioned rule that general purpose financial statements are reserved for large companies, so it is important for SMEs to not get caught out by the new rule change.

What about NFPs?

The AASB has acknowledged that this process will not be as smooth for NFPs. A huge challenge faced by this sector is that statutory requirements start at much lower thresholds than their for-profit counterparts. Removing the option of preparing special purpose financial statements will create unnecessary red tape for many small NFPs.

To combat this the AASB have revised its NFP definition to widen the gap between the for profit and not for profit sectors. The new definition of an NFP is as follows:

“An entity whose primary objective is to provide goods or services for community or social benefit and where any equity has been provided with a view to supporting that primary objective rather than for a financial return to equity holders.”

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