Differences between the Polish National Accounting Standard 1 (“NAS 1”) and IAS 7 in the cash flow statement

Julia GŁOWSKA
Senior Audit Assistant at RSM Poland

When looking for information on the condition of the company, users of financial statements very often focus on analysing the balance sheet and the profit and loss account. However, not everyone knows that it is the cash flow statement that contains information about the actual cash position and the direction of cash flows in an organisation.

Nature and purpose of the cash flow statement

The cash flow statement is one of the financial statements of an entity which informs users about the entity's ability to generate cash and use it in its operations. In other words, it shows the inflows and outflows of cash in the operating, investing and financing activities of the company (IAS 7).

In this article, I am going to show the differences in the preparation of the cash flow statement according to the National Accounting Standard (i.e. NAS 1) and International Accounting Standards (i.e. IAS 7), and to discuss the significance of these differences for the interpretation of the entity's final cash position.

Obligation to prepare a cash flow statement

As required by IAS 7, every IFRS adopter, regardless of size, is required to prepare a cash flow statement. The standard recognises a cash-flow statement as an integral part of an entity’s financial statements as a whole (IAS 7 paragraph 1). The NAS, on the other hand, provides that micro and small entities do not have to prepare or present a cash flow statement under the Polish Accounting Act (the “Accounting Act”). However, according to the NAS, if companies choose to prepare a cash flow statement in spite of not being obliged to do so, following NAS 1 (NAS 1 point 2.1.) is recommended.

What to include in the cash flow statement?

The international regulations provide only general guidance on the information that should be included in the cash flow statement. IAS 7 does not impose a uniform format or rules for recognising individual items to be presented in the cash flow statement.

The "Presentation of a cash-flow statement” section in IAS 7 includes a list of the areas that should be presented in a cash flow statement, i.e. operating, investing and financing activities. However, in paragraph 11, IAS 7 emphasises that an entity presents its cash flows in a manner which is most appropriate to its business. Also, it is stated in IAS 7 paragraph 12 that a single transaction may include cash flows that are classified differently (IAS 7 paragraphs 11-12).

The NAS is more rigorous in classifying individual items of the cash flow statement.

Although, similarly to the IAS, the NAS lists the areas that should be included in the cash flow statement, it devotes its chapter 8 to a detailed explanation of the disclosure of individual items and to the method of preparing the cash flow statement. This section of the NAS provides detailed guidance on the items recommended for use in the cash flow statement (NAS 1 Chapter 8). You will not find such an extensive instruction in IAS 7.

Disclosure of cash flows arising from income tax

IAS 7 states that cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities “unless they can be specifically identified with financing and investing activities” (IAS 7 paragraph 35). On the other hand, NAS 1 recommends another solution, i.e. disclosing cash flows arising from income tax in the notes and explanations to the cash flow statement (NAS 1 point 8.11.). 

Indirect method – adjusting the profit or loss

Both national and international standards allow for two methods of cash flow statement presentation – direct and indirect. They differ only in the presentation of operating activities. Under the direct method, the basic groups of cash inflows and outflows are shown (NAS 1 points 4.8-9), while, under the indirect method, profit or loss is adjusted for items that do not have any effect on cash. It will be noted here that, in accordance with Schedule 1 to the Accounting Act, entities that choose to present their cash flow statement using the direct method are required to disclose a reconciliation of cash flows from operating activities using the indirect method in the notes to their financial statements. According to IAS 7, the indirect method requires adjustments to be made to the profit or loss (generally, other than net profit/loss, e.g. pre-tax profit from continuing and discontinued operations separately), while NAS 1 requires that the net profit/loss (“net financial result”) be adjusted. In addition, under IAS 7, entities are encouraged to use the direct method which is stated to have the advantage of providing information which may be useful in estimating future cash flows (IAS 7 paragraph 19).

Reporting overdraft facilities and credit lines

NAS 1 recommends that this item be reported as per account balance (“per saldo”) in the financing activities of the cash flow statement (NAS 1 points 2.2 and 7.2.). Again, IAS 7 gives entities freedom to choose which is characteristic of all International Accounting Standards. According to the international standard, a change in the balance of an overdraft facility may be presented as an item in operating activities and as "a component of cash and cash equivalents" (IAS 7 paragraphs 7-9) as long as these overdrafts form an integral part of an entity's cash management. Such an approach to the presentation of this item may result in negative cash being disclosed in the balance sheet and in the cash flow statement.

Guidelines for interest on deposits and dividends

According to the Polish national guidance, cash flows relating to interest on deposits and dividends should be included in investing activities (NAS 1 point 6.3.). IAS 7 discusses interest and dividends separately (IAS 7 paragraphs 31-34); it provides that cash flows from interest and dividends received and paid shall be classified as either operating, investing or financing activities. It is up to the entity that draws up the cash flow statement to determine in which area it will classify an item. It is worth noting here that, for financial institutions, interest and dividends are generally classified in operating activities.

The consequences of these differences in the preparation of the cash flow statement

Whether an entity takes the IAS or the NAS approach, this will not affect the final result of its cash flow statement, i.e. the entity's cash position (except for the issue of negative cash balance). However, what makes the interpretation difficult is that the information we obtain from particular components of cash flows is distorted by these differences. A company’s situation in terms of its cash flows from investing activities and from financing activities, and, more importantly, whether the company has recorded positive net cash flows (inflows) from operating activities – these can be seen differently under IAS and NAS. This is why it is so important to be familiar with these differences and to look for reliable sources of information on cash flows. Entities obliged to prepare their financial statements in accordance with IAS should first of all search for such information in IAS 7. Those that prepare their financial statements under the Accounting Act should, on the other hand, refer to the National Accounting Standard 1. However, the Accounting Act provides that IAS may be applied to matters not addressed in the National Accounting Standards (Article 10.3 of the Accounting Act).

If you have any questions about a cash-flow statement or need assistance in correctly interpreting the information contained in the financial statements, you are always encouraged to contact us directly at [email protected].