Consolidated statement of cash flows
- Authors
- Name
- Rephop
- @RephopHQ
Table of Contents
No distinction is made between single entities and groups for the purpose of preparing cash flows and there are no specific requirements to follow in order to prepare the consolidated statement of cash flows. Cash inflows and outflows would consequently be treated similarly to income and expenses. This means that, consolidated statement of cash flows should reflect only the movements of cash into and out of the group – i.e. presented as those of a single economic entity. Cash flows which have occurred between group entities should be eliminated (e.g. intragroup purchases and sales, dividends paid/received, interest and financing arrangements, etc). On the contrary, transactions with unconsolidated subsidiaries, non-controlling interest, associates and joint ventures are not eliminated.
For the classification of individual items of cash inflows and outflows, rules of IAS 7 Statement of Cash Flows (IFRS) or ASC 230 Statement of Cash Flows (US GAAP) shall be followed.
Preparing consolidated statement of cash flows
Similarly to preparing consolidated statements of financial position and comprehensive income, consolidated statement of cash flows should be composed by aggregating the cash flows of each individual subsidiary and eliminating any intra-group cash movements.
It is also possible to prepare cash flows at a more consolidated level. For example, by starting with the disclosures in the consolidated statement of financial position and comprehensive income and taking into account any necessary eliminations and additional information related to external cash flows of each subsidiary. An entity having chosen to report its cash flows under the direct method would use such information for the purpose of deriving the value of its major classes of gross cash receipts and payments. Whereas an entity adopting indirect method for presenting its operating cash flows would use such information for calculating the movements of operating receivables and payables, inventories and other non-cash adjustments reported within operating activities.
Reconciling relevant headings in the consolidated statement of comprehensive income to the movements in the consolidated financial position can also be used for determining the cash flows from investing and financing activities. Although, subsidiaries would need to provide detailed information in order to ensure correct classification of specific cash movements and to avoid gross cash flows from being netted off. For example, additional information regarding receivables and payables would be needed to identify movements that have occurred in operating, investing and financing receivables and payables.
Preparing consolidated statement of cash flows with foreign subsidiaries
Using the consolidated statement of financial position movements and consolidated statement of comprehensive income together with additional information from subsidiaries as the basis for preparing consolidated statement of cash flows can be applied in the groups where the parent and all subsidiaries have the same functional currency.
For groups with foreign subsidiaries, that method would need to be used taking extra care in order to ensure appropriate treatment of exchange differences. It would be more reasonable to take the below steps when preparing consolidated cash flow statement where foreign subsidiaries are involved:
- Prepare separate statements of cash flows for each entity in the group to be consolidated (i.e. parent and all the subsidiaries).
- Translate the statement of cash flows of a foreign subsidiary into the presentation currency of the consolidated financial statements using the same exchange rate as was used in the preparation of comprehensive income (either transaction date or average).
- Due to using different exchange rates in the translation of cash movements and SOFP (Statement of Financial Position), difference arises between the sum of opening cash balance of cash and net cash movement per year and the closing balance of cash. This difference shall be added to a separate line “effect of exchange rate changes on cash” in the SOCF (Statement of Cash Flow) of that individual foreign subsidiary.
- Combine individual statements of cash flows.
- Make eliminations for intragroup transactions.
- Add together the combined SOCF and eliminations.
Using consolidated statement of financial position would not give a correct result of cash flows, as the financial position is translated to the presentation currency using the closing rate and thus incorrect translation rates would be used in the preparation of consolidated statement of cash flows. Line items in the consolidated statement of cash flows would then include also effects of changes in foreign exchange rates, which need to be reported separately (see point 3 above).
Illustrative example – Consolidated statement of cash flows with foreign subsidiary (under IFRS)
A German parent has a 100% US subsidiary. German Parent prepares the consolidated financial statements under IFRS in EUR. Functional currency of the US Subsidiary is USD.
On 15th December the US subsidiary paid dividends of 2000 USD to the Parent.
On the same day a German Parent purchased goods amounting to 3000 USD from the US subsidiary. The cost of theses goods for the subsidiary amounted to 2400 USD. These goods were still in the inventories of the parent at the year end and they were unpaid.
Relevant conversion rates (USD to EUR):
| 31 December 2021 | 0,8829 |
| 31 December 2022 | 0,9327 |
| 15 December 2022 | 0,9367 |
| Average 2022 | 0,9515 |
SOFP and SOCI of the German Parent:
| SOFP (EUR) | 31 December 2021 | 31 December 2022 |
|---|---|---|
| Cash | 10 000 | 20 500 |
| Trade receivables | 13 000 | 18 000 |
| Inventory | 12 000 | 17 000 |
| Property, plant and equipment | 18 000 | 30 000 |
| Total Assets | 53 000 | 85 500 |
| Trade payables | 8 000 | 7 000 |
| Non-current liabilities | 14 000 | 20 000 |
| Total Liabilities | 22 000 | 27 000 |
| Share capital | 10 000 | 10 000 |
| Reserves | 1 000 | 1 000 |
| Retained earnings | 20 000 | 47 500 |
| Total Equity | 31 000 | 58 500 |
| Total Liabilities and Equity | 53 000 | 85 500 |
| SOCI for the year ended 31 December 2022 | |
|---|---|
| USD | |
| Revenue | 300 000 |
| Cost of goods sold | -200 000 |
| Depreciation expense | -10 000 |
| Administrative expenses | -48 000 |
| Other operating expenses | -12 000 |
| Operating profit / -loss | 30 000 |
| Dividends received | 1 873 |
| Interest expense | -2 873 |
| Profit before tax | 29 000 |
| Income tax expense | -1 500 |
| Profit for the year | 27 500 |
SOFP and SOCI of the US Subsidiary:
| SOFP (USD) | 31 December 2021 | 31 December 2022 |
|---|---|---|
| Cash | 8 000 | 7 000 |
| Trade receivables | 3 000 | 7 500 |
| Inventory | 10 000 | 8 000 |
| Property, plant and equipment | 19 000 | 25 000 |
| Total Assets | 40 000 | 47 500 |
| Trade payables | 6 000 | 5 000 |
| Non-current liabilities | 13 000 | 15 000 |
| Total Liabilities | 19 000 | 20 000 |
| Share capital | 6 000 | 6 000 |
| Reserves | 600 | 600 |
| Retained earnings | 14 400 | 20 900 |
| Total Equity | 21 000 | 27 500 |
| Total Liabilities and Equity | 40 000 | 47 500 |
| SOCI for the year ended 31 December 2022 | |
|---|---|
| EUR | |
| Revenue | 200 000 |
| Cost of goods sold | -135 000 |
| Depreciation expense | -5 000 |
| Administrative expenses | -43 000 |
| Other operating expenses | -6 000 |
| Operating profit / -loss | 11 000 |
| Interest expense | -1 500 |
| Profit before tax | 9 500 |
| Income tax expense | -1 000 |
| Profit for the year | 8 500 |
Preparation of consolidated SOCF
Steps to be taken as indicated in the table below:
- Prepare individual SOCF of parent
- Prepare individual SOCF of subsidiary in functional currency
- Translate the subsidiary’s SOCF to the presentation currency of the consolidated financial statements
- Combine the two SOCFs
| SOCF for the year ended 31 December 2022 | |||||
|---|---|---|---|---|---|
| Step | 1 | 2 | 3 | 4 | |
| German Parent (EUR) | US Subsidiary (USD) | Rate | US Subsidiary (EUR) | Combined | |
| Profit before tax | 29 000 | 9 500 | n/a | 9 030 | 38 031 |
| Adjustments: | |||||
| Depreciation | 10 000 | 5 000 | 0,9515 | 4 758 | 14 758 |
| Finance income | -1 873 | 0 | 0 | -1873,4 | |
| Finance expenses | 2 873 | 1 500 | 0,9515 | 1 427 | 4 300 |
| Working capital changes: | |||||
| Decrease/(increase) in trade receivables | -5 000 | -4 500 | 0,9515 | -4 282 | -9 282 |
| Decrease in inventories | -5 000 | 2 000 | 0,9515 | 1 903 | -3 097 |
| Increase/(decrease) in trade and payables | -1 000 | -1 000 | 0,9515 | -952 | -1 952 |
| Interest paid | -2 873 | -1 500 | 0,9515 | -1 427 | -4 300 |
| Dividends received | 1 873 | 0 | 0 | 1 873 | |
| Dividends paid | 0 | -2 000 | 0,9367 | -1 873 | -1 873 |
| Income tax paid | -1 500 | -1 000 | 0,9515 | -952 | -2 452 |
| Net cash flows from operating activities | 26 500 | 8 000 | 7 633 | 34 133 | |
| Purchase of PPE | -22 000 | -11 000 | 0,9515 | -10 467 | -32 467 |
| Net cash used in investing activities | -22 000 | -11 000 | -10 467 | -32 467 | |
| Proceeds from non-current liabilites | 6 000 | 2 000 | 0,9515 | 1 903 | 7 903 |
| Net cash from financing activities | 6 000 | 2 000 | 1 903 | 7 903 | |
| Net increase/(decrease) of cash | 10 500 | -1 000 | -931 | 9 570 | |
| Net foreign exchange difference | 396 | 396 | |||
| Cash at 1 January | 10 000 | 8 000 | 0,8829 | 7 063 | 17 063 |
| Cash 31 December | 20 500 | 7 000 | 0,9327 | 6 528 | 27 029 |
Once combined SOCF has been prepared, incorporate elimination adjustments:
- Eliminate dividends paid by the US subsidiary to the German Parent. Dividends received impact the finance income of the German Parent and consequently the profit before tax – both overstated. Therefore elimination shall be booked to these line items in the SOCF. Furthermore actual dividends paid and received must be eliminated.
- Eliminate intragroup balances arising from the purchases made by the German Parent. In the US Subsidiary’s SOCF the balance of 3000 USD has been translated into EUR using the 2022 average rate, thus the elimination entry against receivables movements is booked in the amount of 3000 USD * 0,9515 = 2855 EUR. In the German Parent SOFP this balance is translated into EUR using the closing rate, thus elimination entry against payables movement is booked in the amount of 3000 USD * 0,9327 = 2798 EUR. The difference of 56 EUR between these entries arises due to different exchange rates used and thus adjustment to line “Net foreign exchange difference” must be made.
- In relation to the previous point, unrealised gain from the transaction is included within the group’s results as the inventories have not been sold by the German Parent. I.e. profit before tax of the US Subsidiary and inventories of the German Parent are overstated. Therefore elimination should be booked to these lines. Unrealised profit amounts to 3000 USD – 2400 USD = 600 USD. This is translated using the actual transaction date rate (i.e. the rate used by the German Parent in its SOFP to convert the inventories and US Subsidiary in SOCI (Statement of Comprehensive Income) to convert the intragroup sale and cost of sale results into EUR) 600 USD * 0,9367 = 562 EUR.
| Consolidated SOCF for the year ended 31 December 2022 | |||||
|---|---|---|---|---|---|
| Eliminations | |||||
| EUR | Combined | 1. Dividends | 2. Intragroup balances | 3. Unrealised profit | Consolidated SOCF |
| Profit before tax | 38 031 | -1 873 | -562 | 35 595 | |
| Adjustments: | 0 | ||||
| Depreciation | 14 758 | 14 758 | |||
| Finance income | -1 873 | 1 873 | 0 | ||
| Finance expenses | 4 300 | 4 300 | |||
| Working capital changes: | 0 | ||||
| Decrease/(increase) in trade receivables | -9 282 | 2 855 | -6 427 | ||
| Decrease in inventories | -3 097 | 562 | -2 535 | ||
| Increase/(decrease) in trade and payables | -1 952 | -2 798 | -4 750 | ||
| Interest paid | -4 300 | -4 300 | |||
| Dividends paid | -1 873 | 1 873 | 0 | ||
| Income tax paid | -2 452 | -2 452 | |||
| Net cash flows from operating activities | 34 133 | 0 | 56 | 0 | 34 190 |
| Purchase of PPE | -32 467 | -32 467 | |||
| Net cash used in investing activities | -32 467 | 0 | 0 | 0 | -32 467 |
| Proceeds from non-current liabilites | 7 903 | 7 903 | |||
| Net cash from financing activities | 7 903 | 0 | 0 | 0 | 7 903 |
| Net increase/(decrease) of cash | 9 570 | 0 | 56 | 0 | 9 626 |
| Net foreign exchange difference | 396 | -56 | 340 | ||
| Cash at 1 January | 17 063 | 17 063 | |||
| Cash 31 December | 27 029 | 0 | 0 | 0 | 27 029 |
Note that under the US GAAP dividends paid would need to be classified under the financing activities (no classification choice). Furthermore, dividends received, and interest paid and received are only allowed to be reported under the operating activities. IFRS gives a choice between operating and financing activities for the classification of dividends paid/received and interest paid/received.
Rephop helps with preparing consolidated statements of cash flows by providing a step-by-step process to consolidate the cash flows of each subsidiary, eliminating any intra-group cash movements, and classifying individual items of cash inflows and outflows according to IAS 7 (IFRS) or ASC 230 (US GAAP). For groups with foreign subsidiaries, Rephop guides the user through preparing separate statements of cash flows, translating them into the presentation currency, and making necessary eliminations to ensure an accurate reflection of cash flows as a single economic entity. Rephop also takes into account the effects of exchange rate changes on cash flows and ensures that they are reported separately.