BCS cash flows

[Former Member]

What is the difference between direct and indirect method of cash flow in BCS..

How it is handled and best addressed in BCS.

[Former Member · Accepted solution]

I feel that also need to say something with more details.

All cash reports have 3 sections: cash flow from operational, investment and financing activities.

In case of indirect method, the calculation starts from the net income before or after taxes. Then difference in balances of some B/S accounts are used in order to account for not-monetary changes. And no movement types are needed here.

However, investment and financing activities, REGARDLESS of the method, direct or indirect, are ALWAYS presented in gross turnovers (receipts, payments etc.), not in netted format. In general, you cannot easily get this information from the accounting books. And certainly, it cannot be gotten just as a difference in balances.

In order to get these activities, on the CASH and CASH equivalent accounts MUST BE some analytics. It might be a MoveType. But I usually name it as an 'item of Cash Flow'.

All this together will help you to construct a cash flow, direct or indirect.

[Former Member · Accepted solution]

Thanks for details.

1. Is the Intercompany cash transfer of fund or IC dividend or loan needs eliminated for cash flow purposes?

2. Which type of accounts listed in the ' notes to financial statements' along with cash flow statement..

3. Seperate cash flow hierarchy is created in BCS or BW for cash flow purposes.

Edited by: Gokul on Sep 11, 2008 6:48 AM

[Former Member · Accepted solution]

1. Yes, and I wrote about it recently:

They are to be eliminated in both methods.

2. Didn't really get the question. Do you mean some disclosures? Depends on the standards you use.

3. To have the cash flow hierarchy in the BCS is a must if you want to calculate (have) it in BCS (as opposed to creating the report on the fly, in the BEx report only). Saving the hierarchy in BCS should automatically replicate it in BW.

[Former Member · Accepted solution]

Hello Gokul & Eugene,

By very nature & purpose cash flow statements (whether direct or indirect method) are different from Balance Sheet and Income Statements. As such so called elimination (usually used for IC Revenue/CoGS, Income / Exp and AR/AP) does NOT apply to cash flow statements.

Rather both receipt of cash & its utilization need to be shown in the cash flow statements.

In short eliminations are not applicable for cash flow statement.

Ambadas

[dan_sullivan · Accepted solution]

I respectfully disagree that eliminations are not applicable.

For a cons group cash flow using indirect method, eliminations must be factored into the calculation for propoer accounting.

[Former Member · Accepted solution]

Hello Dan,

Interesting climax!

Can you please support your comments with a simple but real business scenario?

Cheers!

Ambadas

[dan_sullivan · Accepted solution]

If a cons group has inter-unit revenues and expenses, as well as inter-unit working capital items, that are eliminated for Income Statement and Balance Sheet reporting, the cons group indirect cash flow report, which starts with Net Income, must include these eliminations to be correct and reconcile with the cons group Income Statement and Balance Sheet reports.

[Former Member · Accepted solution]

My friend Dan,

Unfortunately you lost the context in which discussion was going on.

The context was with specific reference to following question from Gokul.

Hence can you please answer to 3 parts which I divided into three parts as A, B & C ?

1. Is the A) Intercompany cash transfer of fund or B) IC dividend or C) loan needs eliminated for cash flow purposes?

May I add here that when we speak cash flow statement, it mean post consolidation values.

I hope this brings clarity.

Ambadas

Edited by: Kodam AV on Sep 11, 2008 2:31 PM

[Former Member · Accepted solution]

Hi Ambadas,

Yes, to all your three parts.

In my case I almost always have to make eliminations in the CF.

Because I calculate the Cash Flow of the particular companies in the LOCAL currency. If I do it in the GC after the C/T, in case of the same item balance (during the calculation of CF from operational activity) but changed rate I'll have the FICTITIOUS CASH MOVEMENTS.

Maybe in your particular case you luckily have no C/T.

So, when I talk CF I always mean PREconsolidated values.

Edited by: Eugene Khusainov on Sep 11, 2008 8:24 PM

[Former Member · Accepted solution]

Hello Eugene, Dan & Gokul,

It has been interesting debate based on various aspects such as currency, eliminations etc, so let me summarize in a simple words. (As far as possible I try to avoid difficult accounting terminology)

1) Currency of individual financial statements-RFD (BS, PL etc): These are analysed mostly in local currency (LC) as it makes sense and hardly in group currency.

2) Consolidated financial statements(BS, PL etc including Cash Flow Statements):

a. Currency: Almost always in GC but very rarely in LC

b. Sequence of preparation: 1st u2013 Balance Sheet, 2nd Income Statement and finally Cash Flow Statements or even Funds Flow Statements (if required)

c. Basis: Consolidated BS & PL is prepared based on individual financial statements (RFD) with all usual tasks including eliminations. Whereas Consolidated Cash Flow Statement shall be based on Consolidated Financial Data (CFD) in GC rather than RFD in LC, as such no eliminations are warranted including the point C (part 3) of Gokulu2019s question. In other words inter-company LOANS need not be eliminated for cash flow purposes.

I hope this settles down the dust and brings clarity as well as consensus.

Cheers,

Ambadads

[Former Member · Accepted solution]

Hi Ambadads,

Cannot agree with all your statements, but will support it with more details later.

Now, do you agree that in case of ##1 & 2 of the Gokul's question (I/C cash transfer and dividends) eliminations are needed?

[Former Member · Accepted solution]

2) Consolidated financial statements(BS, PL etc including Cash Flow Statements):

a. Currency: Almost always in GC but very rarely in LC

Actually, consolidated statement are always given in the GC, even if the GC = LC.

c. Basis: Consolidated BS & PL is prepared based on individual financial statements (RFD) with all usual tasks including eliminations. Whereas Consolidated Cash Flow Statement shall be based on Consolidated Financial Data (CFD) in GC rather than RFD in LC...

Do not agree.

There is no legally required sequence, currency or steps in calculation the CF.

Illustration to my point said in previous posts.

I need to calculate changes in working capital.

For example, for two reported dates I have Inventory in amount 1000 LC. At the year end the rate from LC to GC was 2. At the reporting date it's 3.

Calculating the change in inventory, I'll get difference of:

- 1000 - 1000 = 0 in LC

and

- 1000 * 3 - 1000 * 2 = 500 GC. This 500 units will go to cash outcomes from operational activities. That's what I named as fictitious cash movement.

Is it the right approach?

Certainly, if it's OK to you and your company, you may calculate the CF statement in the GC. With the consequencies I just shown.

"...as such no eliminations are warranted including the point C (part 3) of Gokulu2019s question. In other words inter-company LOANS need not be eliminated for cash flow purposes."

Why???

[Former Member · Accepted solution]

Hello Eugene,

Please refer to point 2 b) of my above answer. (This is way I wrote with detailed sequence as well as some of the principles which are not followed during the discussion)

Let me re-iterate to do the consolidation in BCS or ECCS, one should have strong foundation of concept of consolidation through professional qualifications. One can not do consolidation just by practise or on the job experience.

I hope you appreciate this.

Ambadas

[Former Member · Accepted solution]

Hello Eugene

Q: There is no legally required sequence, currency or steps in calculation the CF.

A: Rather than legal, but the basics of consolidation as well as accounting warrants this.

Q: "...as such no eliminations are warranted including the point C (part 3) of Gokulu2019s question. In other words inter-company LOANS need not be eliminated for cash flow purposes."

Why???

A: It is one of the fundamental principles of consolidation.

Ambadas

[Former Member · Accepted solution]

Ok, Ambadads, your 2b point:

2) Consolidated financial statements(BS, PL etc including Cash Flow Statements):

b. Sequence of preparation: 1st u2013 Balance Sheet, 2nd Income Statement and finally Cash Flow Statements or even Funds Flow Statements (if required)

And what's so convincing in it that answers my arguments and illustration?

Yes, the CF statement is prepared after the B/S & P&L and what?

You didn't answer one of my previous posts where I asked you about # 1 & 2, since it was my impression that you agreed with my/(also Dan?) point of view.

Are you able to argument professionally?

Or

"Let me re-iterate to do the consolidation in BCS or ECCS, one should have strong foundation of concept of consolidation through professional qualifications. One can not do consolidation just by practise or on the job experience."

with a, I would say an arrogant cue, is your best talky answer?

A: Rather than legal, but the basics of consolidation as well as accounting warrants this.

Facts, arguments, links, do you have them?

Q: "...as such no eliminations are warranted including the point C (part 3) of Gokulu2019s question. In other words inter-company LOANS need not be eliminated for cash flow purposes."

Why???

A: It is one of the fundamental principles of consolidation.

Where are the links?

Can you support your opinion?

[Former Member · Accepted solution]

OK, Ambadas, I see that there are no arguments.

I could talk about someone's

strong foundation of concept of consolidation

or

professional qualifications

or

practise

or

job experience

or

another blah-blah-blah

But I prefer the facts.

How about the IAS 27?

Intragroup balances, transactions, income, and expenses should be eliminated in full. Intragroup losses may indicate that an impairment loss on the related asset should be recognised. [IAS 27.24-25]

Isn't it a fundamental principle of consolidation ???

Edited by: Eugene Khusainov on Sep 16, 2008 11:10 AM

[Former Member · Accepted solution]

Instead of objective way the discussion has resulted into subjective path, which I regret.

I therefore prefer to stop the discussion, although there is still a room for improvement.

Ambadas

[Former Member · Accepted solution]

I regret it too, Ambadas.

But we really have the room for improvement. We may professionally argue our point of views.

I'd add the following. Actually two points were discussed: 1) in which currency the CF is to be calcualted and 2). If the I/C eliminations are attributable to CF.

So.

1). Regardless of some statements in the standards about calculation of CF in GC, I prefer to do it in LC because of more accuracy (see above in our discussion).

2). Along with IAS 27, with its rather vague statement, I found a very clear procedure of elimination in GAAP, Statement of Cash Flows for Consolidated Entites.

Certainly, the procedures of elimination are different for case of LC and GC. But eliminations in CF is a must for consolidated statements.

You may protect your point of view with your arguments.

[Former Member · Accepted solution]

Hey, Ambadas,

If you have no arguments, I'm going to close this thread in a few days.

[Former Member · Accepted solution]

No arguments, no professional discussion... Closing the thread.

[Former Member]

Hello Gokul

The difference between the two (irrespective of any tool u2013 BCS or ECCS or FI/GL) is as under:

Direct Method: Where cash flow statement is prepared based on receipts & payment of each & every items of the components such as operations, investment etc. This is more complex.

Handling: though use of sub-items / sub assignment .

Indirect Method: is based on the two ending balance sheets. This is lot easier to achieve.

Handling through a simple report

Either way results will be the same.

Ambadas

[Former Member]

Does all ECC GL accounts need to be having the movement type to help indirect method of cash flow reporting?

Which are the accounts need to have movement types as must in ECC for Cash flow... how does it help...

[Former Member]

These are only CASH accounts: bank, petty cash, accounts that are treated as cash equivalents (like treasury bills etc.).

[dan_sullivan]

The account where movement type (transaction type) is necessary or helpful in ECC depends on the level of detail for the indirect cash flow report definition.

In many cases having movement type for fixed assets, accumulated depreciation, bad debt reserves and similar reserves, and equity are the minimum requirements.

It is recommended that the requirements for the cash flow report are very clear as to what level of detail is needed for reporting and analysis.

[Former Member]

Hello Gokul,

No movement types are needed for Indirect Method. The Indirect method does not deal with movements of cash DURING the period, rather it is based on the ending balances of two periods. I mean to prepare a cash flow statement of the period ending 31-Aug-2008, you need two balance sheets u2013 1st one u2013 as of 31-Jul-2008 and 2nd one u2013 31-Aug-2008.

One need to compare these two balance sheets values so as to get cash flow statement. Now question comes how to compare . Such comparison is purely an accounting subject.

Get the indirect method of cash flow statement from the business people in the project, which you just need to realise in the system via a report.

Hope this helps!

Ambadas

[Former Member]

Hello Dan

I regret to write, there is no question of level of details, rather it is the fixed format based on the items appearing in the balance sheet.

What we (consolidation project team) need to do is: to get a indirect cash flow statement from the business process owner, which need to be realised in the system through a report.

Hope this helps.

Ambadas

Edited by: Kodam AV on Sep 10, 2008 5:52 AM

[Former Member]

Difference (not only in BCS):

http://en.wikipedia.org/wiki/Cash_flow_statement

http://www.nysscpa.org/cpajournal/2004/1004/essentials/p58.htm

Handling:

- use the standard CF report provided with add-ons for your country (if exists)

- calculate in BEx on the fly (with very limited usage)

- create you own reclasses. Calculate the CF and make needed eliminations.