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Frs 1(Cash Flow Statements) & Frs 3 (Reporting Financial Performance)

2098 words - 8 pages

FRS 1: CASH FLOW STATEMENTSAMENDMENT OF FRS 1 CASH FLOW STATEMENTINTRODUCTIONCash flow statements are intended to complement the other primary financial statements. While information about profits and other gains or losses is obviously important in assessing the progress of a company, it is equally important to gain an understanding of how those gains and losses, and other transactions of the company, have been reflected in the cash flows (Chopping & Stephens 2003).FRS 1 (revised) Cash flow statements came out in 1996 as a replacement to FRS 1 Cash flow statement. The release of FRS 1 (revised) lends itself to a potential question - the reasons for the issue of the revised standard.REASONS FOR REVISING FRS 1FRED 10 cash flow statements, the Financial Reporting Exposure Draft that preceded FRS 1 (revised), outlined several criticisms of FRS 1 (Business Source Premier 1996):1. The main criticism was that the definition of 'cash and cash equivalents' was too restrictive. Cash was not a problem, but because treasury management vary among entities, the definition of cash equivalents had presented difficulty.2. The second criticism of FRS 1 was that the final balance on the cash flow statement was of little relevance in assessing the liquidity of the entity. By focusing on the movement in cash and cash equivalents, other balances such as movements on loans and long-term investments were ignored.3. There was also a problem with the heading 'investing activities' on the face of the cash flow statement. 'Investing activities' included the cash effects of the purchase and sale of both long-term investments such as fixed assets, and short-term investments such as short-term deposits.4. Finally, there was a general concern that the cash flow statement was not reflecting the more important or relevant aspects of cash flow to the users of the financial statements, such as not highlighting the dividend paid to the equity shareholders.FRS 1 (revised) has addressed all of the criticisms raised, and in addition has extended the objective of cash flow statements. FRS 1 stated that the objective of cash flow statements was to show the generation and absorption of cash. FRS 1 has added to this objective the need to provide information that assists in the assessment of the company's liquidity, solvency and financial adaptability (Black 2003).THE CHANGES TO FRS 1In order to address criticism 1 and 2 above and to adhere to the original objective of FRS 1, the revised statement has based the cash flow presentation on pure cash rather than 'cash and cash equivalents'. Cash means 'cash in hand and deposits repayable on demand with any qualifying financial institution, less overdrafts from any qualifying financial institution repayable on demand' (Davies et al 1999).In addressing the problem of the all-encompassing 'investing activities' in the FRS 1 cash flow pro-forma, FRS 1 (revised) splits the titles into three new headings. All three were previously disclosed...

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