History of the statement of cash flows in accounting standards

History of the statement of cash flows in accounting standards


Source: 
2015 
EFRAG Short Discussion Series  
THE STATEMENT OF CASH FLOWS 
ISSUES FOR FINANCIAL INSTITUTIONS
http://old.efrag.org/files/Short%20Discussion%20series%20-%20cashflow%20institutions/EFRAG_SDS_The_Statement_of_Cash_Flows_Issues_for_Financial_Institutions.pdf

 1 - In 1961 the American Institute of Certified Public Accountants (AICPA) recognised the importance of the funds statement by publishing Accounting Research Study No.2 Cash Flow Analysis and the Funds Statement. The FASB’s predecessor, the Accounting Principles Board (APB), responded in 1963 by issuing APB Opinion No.3 The Statement of Source and Application of Funds and later Opinion No.19 Reporting Changes in Financial Position in 1971. Opinion No.19 permitted, but did not require, enterprises to report cash flow information in the statement of changes in financial position.  

2 - Later, the International Accounting Standards Committee, (the ‘IASC’, IASB’s predecessor) published the Exposure Draft E7 Statement of Source and Application of Funds in June 1976. In October 1977, the IASC published the standard Statement of Changes in Financial Position. It was commonly referred to as the ‘Funds Flow Statement’ (FFS), with the term funds referring to ‘cash, to cash and equivalents, or to working capital’. 

3 - In the FFS, funds from operation were normally shown separately and items which did not relate to the ordinary activities of an enterprise were referred to as ‘unusual items’. Entities were not required to classify the changes among operating, investing and financing, but needed to show separately changes other than the funds provided from, or used in, the operations. Examples of transactions that had to be separately presented included issues of shares, proceeds from sale and outlays from the purchase of long-term assets, and issues and repayments of long-term debt. 

4 - In the FFS, two different forms of presentations were allowed. A method commonly used was to show the net income (or loss) and to make adjustments for those revenues or expenses that did not involve a movement of funds in the current period (for example, depreciation). An alternative method was to begin with revenues that provided funds during the period and deduct the costs and expenses that involved a movement of funds. The resulting amount was described as funds from operations. 

5 - In 1986, the FASB issued the Exposure Draft Statement of Cash Flows that led to the publication in 1987 of FAS 95: Statement of Cash Flows that superseded APB Opinion No. 19. It required a statement of cash flows as part of a full set of financial statements for all business enterprises in place of a statement of changes in financial position. It also required classifying cash receipts and payments according to whether they stem from operating, investing, or financing activities. 

6 - The Basis for Conclusions of FAS 95 explains that the FASB observed a trend in practice toward statements of changes in financial position that focused on cash flows. It also states that an overwhelming majority of respondents to the ED and to the Discussion Memorandum agreed with that focus. Many made negative comments on the usefulness of working capital as a concept of funds, generally questioning its relevance since positive working capital does not necessarily indicate liquidity, nor does negative working capital necessarily indicate illiquidity. 

7 - A few years later, in 1991, the IASC published the Exposure Draft E36 Cash Flow Statements which appeared to be based on FAS 95. It proposed to replace the statement of funds with a statement of cash flows. IAS 7 was issued in 199