IPSAS 2

Cash Flow Statements

Acknowledgment
This International Public Sector Accounting Standard is drawn primarily from
International Accounting Standard IAS 7, Cash Flow Statements published by the
International Accounting Standards Committee (IASC). The International
Accounting Standards Board (IASB) and the International Accounting Standards
Committee Foundation (IASCF) were established in 2001 to replace the IASC.
The International Accounting Standards (IASs) issued by the IASC remain in
force until they are amended or withdrawn by the IASB. Extracts from IAS 7 are
reproduced in this publication of the Public Sector Committee of the
International Federation of Accountants with the permission of IASB.
The approved text of the International Accounting Standards (IASs) is that
published by IASB in the English language, and copies may be obtained directly
from IASB Publications Department, 7th floor, 166 Fleet Street, London EC4A
2DY, United Kingdom.
E-mail: publications@[Link]
Internet: [Link]
IASs, Exposure Drafts and other publications of the IASC and IASB are
copyright of the IASCF.
“IAS,” “IASB,” “IASC,” “IASCF” and “International Accounting Standards” are
Trade Marks of the IASCF and should not be used without the approval of the
IASCF.

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 IPSAS 2
May 2000

Cash Flow Statements

CONTENTS

Paragraphs
OBJECTIVE
SCOPE ............................................................................................. 1-4
BENEFITS OF CASH FLOW INFORMATION ........................... 5-7
DEFINITIONS................................................................................. 8-17
Cash and Cash Equivalents......................................................... 9-11
Economic Entity ......................................................................... 12-14
Future Economic Benefits or Service Potential ............................ 15
Government Business Enterprises ............................................... 16
Net Assets/Equity........................................................................ 17
PRESENTATION OF A CASH FLOW STATEMENT................. 18-26
Operating Activities......................................................................... 21-24
Investing Activities........................................................................... 25
Financing Activities ......................................................................... 26
REPORTING CASH FLOWS FROM OPERATING
ACTIVITIES.................................................................................... 27-30
REPORTING CASH FLOWS FROM INVESTING AND
FINANCING ACTIVITIES............................................................. 31
REPORTING CASH FLOWS ON A NET BASIS ......................... 32-35
FOREIGN CURRENCY CASH FLOWS ....................................... 36-39
EXTRAORDINARY ITEMS .......................................................... 40-41
INTEREST AND DIVIDENDS ....................................................... 42-45

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TAXES ON NET SURPLUS............................................................ 46-48
INVESTMENTS IN CONTROLLED ENTITIES,
ASSOCIATES AND JOINT VENTURES....................................... 49-50
ACQUISITIONS AND DISPOSALS OF CONTROLLED
ENTITIES AND OTHER OPERATING UNITS............................ 51-55
NON-CASH TRANSACTIONS....................................................... 56-57
COMPONENTS OF CASH AND CASH EQUIVALENTS............ 58-60
OTHER DISCLOSURES................................................................. 61-64
EFFECTIVE DATE ......................................................................... 65-66
APPENDIX — CASH FLOW STATEMENT (FOR AN
ENTITY OTHER THAN A FINANCIAL INSTITUTION)
COMPARISON WITH IAS 7

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 IPSAS 2 — CASH FLOW STATEMENTS

INTERNATIONAL PUBLIC SECTOR ACCOUNTING STANDARD IPSAS 2

CASH FLOW STATEMENTS

The standards, which have been set in bold italic type, should be read in the
context of the commentary paragraphs in this Standard, which are in plain type,
and in the context of the “Preface to International Public Sector Accounting
Standards.” International Public Sector Accounting Standards are not intended to
apply to immaterial items.

OBJECTIVE
The cash flow statement identifies the sources of cash inflows, the items on which
cash was expended during the reporting period, and the cash balance as at the
reporting date. Information about the cash flows of an entity is useful in providing
users of financial statements with information for both accountability and decision
making purposes. Cash flow information allows users to ascertain how a public
sector entity raised the cash it required to fund its activities and the manner in
which that cash was used. In making and evaluating decisions about the allocation
of resources, such as the sustainability of the entity’s activities, users require an
understanding of the timing and certainty of cash flows. The objective of this
Standard is to require the provision of information about the historical changes in
cash and cash equivalents of an entity by means of a cash flow statement which
classifies cash flows during the period from operating, investing and financing
activities.

SCOPE
1. An entity which prepares and presents financial statements under the
accrual basis of accounting should prepare a cash flow statement in
accordance with the requirements of this Standard and should present it as
an integral part of its financial statements for each period for which
financial statements are presented.
2. Information about cash flows may be useful to users of an entity’s financial
statements in assessing the entity’s cash flows, assessing the entity’s
compliance with legislation and regulations (including authorized budgets
where appropriate) and for making decisions about whether to provide
resources to, or enter into transactions with an entity. They are generally
interested in how the entity generates and uses cash and cash equivalents.
This is the case regardless of the nature of the entity’s activities and
irrespective of whether cash can be viewed as the product of the entity, as
may be the case with a public financial institution. Entities need cash for
essentially the same reasons, however different their principal revenue
producing activities might be. They need cash to pay for the goods and
services they consume, to meet ongoing debt servicing costs, and, in some

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cases, to reduce levels of debt. Accordingly, this Standard requires all

entities to present a cash flow statement.
3. This Standard applies to all public sector entities other than Government
Business Enterprises.
4. Government Business Enterprises (GBEs) are required to comply with
International Accounting Standards (IASs) issued by the International
Accounting Standards Committee. The Public Sector Committee’s
Guideline No. 1 Financial Reporting by Government Business Enterprises
notes that IASs are relevant to all business enterprises, regardless of whether
they are in the private or public sector. Accordingly, Guideline No. 1
recommends that GBEs should present financial statements that conform, in
all material respects, to IASs.

BENEFITS OF CASH FLOW INFORMATION

5. Information about the cash flows of an entity is useful in assisting users to
predict the future cash requirements of the entity, its ability to generate cash
flows in the future and to fund changes in the scope and nature of its
activities. A cash flow statement also provides a means by which an entity
can discharge its accountability for cash inflows and cash outflows during
the reporting period.
6. A cash flow statement, when used in conjunction with other financial
statements, provides information that enables users to evaluate the changes
in net assets/equity of an entity, its financial structure (including its liquidity
and solvency) and its ability to affect the amounts and timing of cash flows
in order to adapt to changing circumstances and opportunities. It also
enhances the comparability of the reporting of operating performance by
different entities because it eliminates the effects of using different
accounting treatments for the same transactions and other events.
7. Historical cash flow information is often used as an indicator of the amount,
timing and certainty of future cash flows. It is also useful in checking the
accuracy of past assessments of future cash flows.

DEFINITIONS
8. The following terms are used in this Standard with the meanings
specified:
Accrual basis means a basis of accounting under which transactions and
other events are recognized when they occur (and not only when cash or
its equivalent is received or paid). Therefore, the transactions and events
are recorded in the accounting records and recognized in the financial
statements of the periods to which they relate. The elements recognized
under the accrual basis are assets, liabilities, net assets/equity, revenue
and expenses.

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Assets are resources controlled by an entity as a result of past events and

from which future economic benefits or service potential are expected to
flow to the entity.
Associate is an entity in which the investor has significant influence and
which is neither a controlled entity nor a joint venture of the investor.
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents.
Contributions from owners means future economic benefits or service
potential that has been contributed to the entity by parties external to the
entity, other than those that result in liabilities of the entity, that establish
a financial interest in the net assets/equity of the entity, which:
(a) conveys entitlement both to distributions of future economic benefits
or service potential by the entity during its life, such distributions
being at the discretion of the owners or their representatives, and to
distributions of any excess of assets over liabilities in the event of the
entity being wound up; and/or
(b) can be sold, exchanged, transferred or redeemed.
Control is the power to govern the financial and operating policies of
another entity so as to benefit from its activities.
Controlled entity is an entity that is under the control of another entity
(known as the controlling entity).
Controlling entity is an entity that has one or more controlled entities.
Cost method is a method of accounting whereby the investment is recorded
at cost. The statement of financial performance reflects revenue from the
investment only to the extent that the investor receives distributions from
accumulated net surpluses of the investee arising subsequent to the date of
acquisition.
Distributions to owners means future economic benefits or service
potential distributed by the entity to all or some of its owners, either as a
return on investment or as a return of investment.
Economic entity means a group of entities comprising a controlling entity
and one or more controlled entities.
Equity method is a method of accounting whereby the investment is
initially recorded at cost and adjusted thereafter for the post-acquisition
change in the investor’s share of net assets/equity of the investee. The
statement of financial performance reflects the investor’s share of the
results of operations of the investee.
Exchange rate is the ratio for exchange of two currencies.

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Expenses are decreases in economic benefits or service potential during

the reporting period in the form of outflows or consumption of assets or
incurrences of liabilities that result in decreases in net assets/equity, other
than those relating to distributions to owners.
Extraordinary items are revenue or expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the
entity, are not expected to recur frequently or regularly and are outside the
control or influence of the entity.
Financing activities are activities that result in changes in the size and
composition of the contributed capital and borrowings of the entity.
Foreign currency is a currency other than the reporting currency of an
entity.
Government Business Enterprise means an entity that has all the
following characteristics:
(a) is an entity with the power to contract in its own name;
(b) has been assigned the financial and operational authority to carry on
a business;
(c) sells goods and services, in the normal course of its business, to other
entities at a profit or full cost recovery;
(d) is not reliant on continuing government funding to be a going
concern (other than purchases of outputs at arm’s length); and
(e) is controlled by a public sector entity.
Investing activities are the acquisition and disposal of long-term assets
and other investments not included in cash equivalents.
Investor in a joint venture is a party to a joint venture and does not have
joint control over that joint venture.
Joint venture is a binding arrangement whereby two or more parties are
committed to undertake an activity which is subject to joint control.
Liabilities are present obligations of the entity arising from past events,
the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits or service potential.
Minority interest is that part of the net surplus (deficit) and of net
assets/equity of a controlled entity attributable to interests which are not
owned, directly or indirectly through controlled entities, by the controlling
entity.
Net assets/equity is the residual interest in the assets of the entity after
deducting all its liabilities.
Net surplus/deficit comprises the following components:
(a) surplus or deficit from ordinary activities; and
(b) extraordinary items.

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Operating activities are the activities of the entity that are not investing or
financing activities.
Proportionate consolidation is a method of accounting and reporting
whereby a venturer’s share of each of the assets, liabilities, revenue and
expenses of a jointly controlled entity is combined on a line-by-line basis
with similar items in the venturer’s financial statements or reported as
separate line items in the venturer’s financial statements.
Reporting currency is the currency used in presenting the financial
statements.
Reporting date means the date of the last day of the reporting period to
which the financial statements relate.
Revenue is the gross inflow of economic benefits or service potential
during the reporting period when those inflows result in an increase in net
assets/equity, other than increases relating to contributions from owners.
Surplus/deficit from ordinary activities is the residual amount that
remains after expenses arising from ordinary activities have been deducted
from revenue arising from ordinary activities.

Cash and Cash Equivalents

9. Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes. For an
investment to qualify as a cash equivalent it must be readily convertible to a
known amount of cash and be subject to an insignificant risk of changes in
value. Therefore, an investment normally qualifies as a cash equivalent only
when it has a short maturity of, say, three months or less from the date of
acquisition. Equity investments are excluded from cash equivalents unless
they are, in substance, cash equivalents.
10. Bank borrowings are generally considered to be financing activities.
However, in some countries, bank overdrafts which are repayable on demand
form an integral part of an entity’s cash management. In these
circumstances, bank overdrafts are included as a component of cash and
cash equivalents. A characteristic of such banking arrangements is that the
bank balance often fluctuates from being positive to overdrawn.
11. Cash flows exclude movements between items that constitute cash or cash
equivalents because these components are part of the cash management of an
entity rather than part of its operating, investing and financing activities.
Cash management includes the investment of excess cash in cash
equivalents.

Economic Entity
12. The term “economic entity” is used in this Standard to define, for financial
reporting purposes, a group of entities comprising the controlling entity and
any controlled entities.

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13. Other terms sometimes used to refer to an economic entity include

“administrative entity, “financial entity,” “consolidated entity” and “group.”
14. An economic entity may include entities with both social policy and
commercial objectives. For example, a government housing department may
be an economic entity which includes entities that provide housing for a
nominal charge, as well as entities that provide accommodation on a
commercial basis.

Future Economic Benefits or Service Potential

15. Assets provide a means for entities to achieve their objectives. Assets that
are used to deliver goods and services in accordance with an entity’s
objectives but which do not directly generate net cash inflows are often
described as embodying “service potential.” Assets that are used to generate
net cash inflows are often described as embodying “future economic
benefits.” To encompass all the purposes to which assets may be put, this
Standard uses the term “future economic benefits or service potential” to
describe the essential characteristic of assets.

Government Business Enterprises

16. Government Business Enterprises (GBEs) include both trading enterprises,
such as utilities, and financial enterprises, such as financial institutions.
GBEs are, in substance, no different from entities conducting similar
activities in the private sector. GBEs generally operate to make a profit,
although some may have limited community service obligations under which
they are required to provide some individuals and organizations in the
community with goods and services at either no charge or a significantly
reduced charge. International Public Sector Accounting Standard IPSAS 6
Consolidated Financial Statements and Accounting for Controlled Entities
provides guidance on determining whether control exists for financial
reporting purposes, and should be referred to in determining whether a GBE
is controlled by another public sector entity.

Net Assets/Equity
17. “Net assets/equity” is the term used in this Standard to refer to the residual
measure in the statement of financial position (assets less liabilities). Net
assets/equity may be positive or negative. Other terms may be used in place
of net assets/equity, provided that their meaning is clear.

PRESENTATION OF A CASH FLOW STATEMENT

18. The cash flow statement should report cash flows during the period
classified by operating, investing and financing activities.
19. An entity presents its cash flows from operating, investing and financing
activities in a manner which is most appropriate to its activities.
Classification by activity provides information that allows users to assess the

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impact of those activities on the financial position of the entity and the
amount of its cash and cash equivalents. This information may also be used
to evaluate the relationships among those activities.
20. A single transaction may include cash flows that are classified differently.
For example, when the cash repayment of a loan includes both interest and
capital, the interest element may be classified as an operating activity and
the capital element is classified as a financing activity.

Operating Activities
21. The amount of net cash flows arising from operating activities is a key
indicator of the extent to which the operations of the entity are funded:
(a) by way of taxes (directly and indirectly); or
(b) from the recipients of goods and services provided by the entity.
The amount of the net cash flows also assists in showing the ability of the
entity to maintain its operating capability, repay obligations, pay a dividend
to its owner and make new investments without recourse to external sources
of financing. The consolidated whole-of-government operating cash flows
provide an indication of the extent to which a government has financed its
current activities through taxation and charges. Information about the
specific components of historical operating cash flows is useful, in
conjunction with other information, in forecasting future operating cash
flows.
22. Cash flows from operating activities are primarily derived from the principal
cash-generating activities of the entity. Examples of cash flows from
operating activities are:
(a) cash receipts from taxes, levies and fines;
(b) cash receipts from charges for goods and services provided by the
entity;
(c) cash receipts from grants or transfers and other appropriations or other
budget authority made by central government or other public sector
entities;
(d) cash receipts from royalties, fees, commissions and other revenue;
(e) cash payments to other public sector entities to finance their operations
(not including loans);
(f) cash payments to suppliers for goods and services;
(g) cash payments to and on behalf of employees;
(h) cash receipts and cash payments of an insurance entity for premiums
and claims, annuities and other policy benefits;
(i) cash payments of local property taxes or income taxes (where
appropriate) in relation to operating activities;

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(j) cash receipts and payments from contracts held for dealing or trading
purposes;
(k) cash receipts or payments from discontinuing operations; and
(l) cash receipts or payments in relation to litigation settlements.
Some transactions, such as the sale of an item of plant, may give rise to a
gain or loss which is included in the determination of net surplus or deficit.
However, the cash flows relating to such transactions are cash flows from
investing activities.
23. An entity may hold securities and loans for dealing or trading purposes, in
which case they are similar to inventory acquired specifically for resale.
Therefore, cash flows arising from the purchase and sale of dealing or
trading securities are classified as operating activities. Similarly, cash
advances and loans made by public financial institutions are usually
classified as operating activities since they relate to the main cash-
generating activity of that entity.
24. In some jurisdictions, governments or other public sector entities will
appropriate or authorize funds to entities to finance the operations of an
entity and no clear distinction is made for the disposition of those funds
between current activities, capital works and contributed capital. Where an
entity is unable to separately identify appropriations or budgetary
authorizations into current activities, capital works and contributed capital,
the appropriation or budget authorization should be classified as cash flows
from operations and this fact should be disclosed in the notes to the financial
statements.

Investing Activities
25. The separate disclosure of cash flows arising from investing activities is
important because the cash flows represent the extent to which cash outflows
have been made for resources which are intended to contribute to the entity’s
future service delivery. Examples of cash flows arising from investing
activities are:
(a) cash payments to acquire property, plant and equipment, intangibles
and other long-term assets. These payments include those relating to
capitalized development costs and self-constructed property, plant and
equipment;
(b) cash receipts from sales of property, plant and equipment, intangibles
and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other entities
and interests in joint ventures (other than payments for those
instruments considered to be cash equivalents or those held for dealing
or trading purposes);
(d) cash receipts from sales of equity or debt instruments of other entities
and interests in joint ventures (other than receipts for those instruments

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considered to be cash equivalents and those held for dealing or trading

purposes);
(e) cash advances and loans made to other parties (other than advances
and loans made by a public financial institution);
(f) cash receipts from the repayment of advances and loans made to other
parties (other than advances and loans of a public financial institution);
(g) cash payments for futures contracts, forward contracts, option contracts
and swap contracts except when the contracts are held for dealing or
trading purposes, or the payments are classified as financing activities;
and
(h) cash receipts from futures contracts, forward contracts, option contracts
and swap contracts except when the contracts are held for dealing or
trading purposes, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable position, the
cash flows of the contract are classified in the same manner as the cash flows
of the position being hedged.

Financing Activities
26. The separate disclosure of cash flows arising from financing activities is
important because it is useful in predicting claims on future cash flows by
providers of capital to the entity. Examples of cash flows arising from
financing activities are:
(a) cash proceeds from issuing debentures, loans, notes, bonds, mortgages
and other short or long-term borrowings;
(b) cash repayments of amounts borrowed; and
(c) cash payments by a lessee for the reduction of the outstanding liability
relating to a finance lease.

REPORTING CASH FLOWS FROM OPERATING ACTIVITIES

27. An entity should report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and
gross cash payments are disclosed; or
(b) the indirect method, whereby net surplus or deficit is adjusted for the
effects of transactions of a non-cash nature, any deferrals or accruals
of past or future operating cash receipts or payments, and items of
revenue or expense associated with investing or financing cash flows.
28. Entities are encouraged to report cash flows from operating activities using
the direct method. The direct method provides information which may be
useful in estimating future cash flows and which is not available under the
indirect method. Under the direct method, information about major classes
of gross cash receipts and gross cash payments may be obtained either:

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(a) from the accounting records of the entity; or

(b) by adjusting operating revenues, operating expenses (interest and
similar revenue, and interest expense and similar charges for a public
financial institution) and other items in the statement of financial
performance for:
(i) changes during the period in inventories and operating
receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing
cash flows.
29. Entities reporting cash flows from operating activities using the direct
method are also encouraged to provide a reconciliation of the surplus/deficit
from ordinary activities with the net cash flow from operating activities.
This reconciliation may be provided as part of the cash flow statement or in
the notes to the financial statements.
30. Under the indirect method, the net cash flow from operating activities is
determined by adjusting net surplus or deficit from ordinary activities for the
effects of:
(a) changes during the period in inventories and operating receivables and
payables;
(b) non-cash items such as depreciation, provisions, deferred taxes,
unrealized foreign currency gains and losses, undistributed surpluses of
associates, and minority interests;
(c) all other items for which the cash effects are investing or financing
cash flows; and
(d) the impact of any extraordinary items which are classified as operating
cash flows.

REPORTING CASH FLOWS FROM INVESTING

AND FINANCING ACTIVITIES
31. An entity should report separately major classes of gross cash receipts and
gross cash payments arising from investing and financing activities,
except to the extent that cash flows described in paragraphs 32 and 35 are
reported on a net basis.

REPORTING CASH FLOWS ON A NET BASIS

32. Cash flows arising from the following operating, investing or financing
activities may be reported on a net basis:

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(a) cash receipts collected and payments made on behalf of customers,

taxpayers or beneficiaries when the cash flows reflect the activities of
the other party rather than those of the entity; and
(b) cash receipts and payments for items in which the turnover is quick,
the amounts are large, and the maturities are short.
33. Paragraph 32(a) refers only to transactions where the resulting cash balances
are controlled by the reporting entity. Examples of such cash receipts and
payments include:
(a) the collection of taxes by one level of government for another level of
government, not including taxes collected by a government for its own
use as part of a tax sharing arrangement;
(b) the acceptance and repayment of demand deposits of a public financial
institution;
(c) funds held for customers by an investment or trust entity; and
(d) rents collected on behalf of, and paid over to, the owners of properties.
34. Examples of cash receipts and payments referred to in paragraph 32(b) are
advances made for, and the repayment of:
(a) the purchase and sale of investments; and
(b) other short-term borrowings, for example, those which have a maturity
period of three months or less.
35. Cash flows arising from each of the following activities of a public
financial institution may be reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of
deposits with a fixed maturity date;
(b) the placement of deposits with and withdrawal of deposits from other
financial institutions; and
(c) cash advances and loans made to customers and the repayment of
those advances and loans.

FOREIGN CURRENCY CASH FLOWS

36. Cash flows arising from transactions in a foreign currency should be
recorded in an entity’s reporting currency by applying to the foreign
currency amount the exchange rate between the reporting currency and
the foreign currency at the date of the cash flow.
37. The cash flows of a foreign controlled entity should be translated at the
exchange rates between the reporting currency and the foreign currency at
the dates of the cash flows.
38. Cash flows denominated in a foreign currency are reported in a manner
consistent with International Public Sector Accounting Standard IPSAS 4
The Effects of Changes in Foreign Exchange Rates. This permits the use of

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an exchange rate that approximates the actual rate. For example, a weighted
average exchange rate for a period may be used for recording foreign
currency transactions or the translation of the cash flows of a foreign
controlled entity. IPSAS 4 does not permit the use of the exchange rate at
reporting date when translating the cash flows of a foreign controlled entity.
39. Unrealized gains and losses arising from changes in foreign currency
exchange rates are not cash flows. However, the effect of exchange rate
changes on cash and cash equivalents held or due in a foreign currency is
reported in the cash flow statement in order to reconcile cash and cash
equivalents at the beginning and the end of the period. This amount is
presented separately from cash flows from operating, investing and
financing activities and includes the differences, if any, had those cash flows
been reported at end of period exchange rates.

EXTRAORDINARY ITEMS
40. The cash flows associated with extraordinary items should be classified as
arising from operating, investing or financing activities as appropriate,
and separately disclosed.
41. The cash flows associated with extraordinary items are disclosed separately
as arising from operating, investing or financing activities in the cash flow
statement, to enable users to understand their nature and effect on the
present and future cash flows of the entity. These disclosures are in addition
to the separate disclosures of the nature and amount of extraordinary items
in the statement of financial performance required by International Public
Sector Accounting Standard IPSAS 3 Net Surplus or Deficit for the Period,
Fundamental Errors and Changes in Accounting Policies.

INTEREST AND DIVIDENDS

42. Cash flows from interest and dividends received and paid should each be
disclosed separately. Each should be classified in a consistent manner
from period to period as either operating, investing or financing activities.
43. The total amount of interest paid during a period is disclosed in the cash
flow statement whether it has been recognized as an expense in the
statement of financial performance or capitalized in accordance with the
allowed alternative treatment in International Public Sector Accounting
Standard IPSAS 5 Borrowing Costs.
44. Interest paid and interest and dividends received are usually classified as
operating cash flows for a public financial institution. However, there is no
consensus on the classification of these cash flows for other entities. Interest
paid and interest and dividends received may be classified as operating cash
flows because they enter into the determination of net surplus or deficit.
Alternatively, interest paid and interest and dividends received may be
classified as financing cash flows and investing cash flows respectively,

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because they are costs of obtaining financial resources or returns on

investments.
45. Dividends paid may be classified as a financing cash flow because they are a
cost of obtaining financial resources. Alternatively, dividends paid may be
classified as a component of cash flows from operating activities in order to
assist users to determine the ability of an entity to make these payments out
of operating cash flows.

TAXES ON NET SURPLUS

46. Cash flows arising from taxes on net surplus should be separately
disclosed and should be classified as cash flows from operating activities
unless they can be specifically identified with financing and investing
activities.
47. Public sector entities are generally exempt from taxes on net surpluses.
However, some public sector entities may operate under tax equivalent
regimes where taxes are levied in the same way as they are on private sector
entities.
48. Taxes on net surplus arise from transactions that give rise to cash flows that
are classified as operating, investing or financing activities in a cash flow
statement. While tax expense may be readily identifiable with investing or
financing activities, the related tax cash flows are often impracticable to
identify and may arise in a different period from the cash flows of the
underlying transaction. Therefore, taxes paid are usually classified as cash
flows from operating activities. However, when it is practicable to identify
the tax cash flow with an individual transaction that gives rise to cash flows
that are classified as investing or financing activities the tax cash flow is
classified as an investing or financing activity as appropriate. When tax
cash flows are allocated over more than one class of activity, the total
amount of taxes paid is disclosed.

INVESTMENTS IN CONTROLLED ENTITIES,

ASSOCIATES AND JOINT VENTURES
49. When accounting for an investment in an associate or a controlled entity
accounted for by use of the equity or cost method, an investor restricts its
reporting in the cash flow statement to the cash flows between itself and the
investee, for example, to dividends and advances.
50. An entity which reports its interest in a jointly controlled entity using
proportionate consolidation, includes in its consolidated cash flow statement
its proportionate share of the jointly controlled entity’s cash flows. An entity
which reports such an interest using the equity method includes in its cash
flow statement the cash flows in respect of its investments in the jointly
controlled entity, and distributions and other payments or receipts between it
and the jointly controlled entity.

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ACQUISITIONS AND DISPOSALS OF CONTROLLED

ENTITIES AND OTHER OPERATING UNITS
51. The aggregate cash flows arising from acquisitions and from disposals of
controlled entities or other operating units should be presented separately
and classified as investing activities.
52. An entity should disclose, in aggregate, in respect of both acquisitions and
disposals of controlled entities or other operating units during the period,
each of the following:
(a) the total purchase or disposal consideration;
(b) the portion of the purchase or disposal consideration discharged by
means of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the controlled entity or
operating unit acquired or disposed of; and
(d) the amount of the assets and liabilities other than cash or cash
equivalents recognized by the controlled entity or operating unit
acquired or disposed of, summarized by each major category.
53. The separate presentation of the cash flow effects of acquisitions and
disposals of controlled entities and other operating units as single line items,
together with the separate disclosure of the amounts of assets and liabilities
acquired or disposed of, helps to distinguish those cash flows from the cash
flows arising from the other operating, investing and financing activities.
The cash flow effects of disposals are not deducted from those acquisitions.
54. The aggregate amount of the cash paid or received as purchase or sale
consideration is reported in the cash flow statement net of cash and cash
equivalents acquired or disposed of.
55. Assets and liabilities other than cash or cash equivalents of a controlled
entity or operating unit acquired or disposed of are only required to be
disclosed where the controlled entity or unit had previously recognized those
assets or liabilities. For example, where a public sector entity which
prepares reports under the cash basis is acquired by another public sector
entity, the acquiring entity would not be required to disclose the assets and
liabilities (other than cash and cash equivalents) of the entity acquired as
that entity would not have recognized non-cash assets or liabilities.

NON-CASH TRANSACTIONS
56. Investing and financing transactions that do not require the use of cash or
cash equivalents should be excluded from a cash flow statement. Such
transactions should be disclosed elsewhere in the financial statements in a
way that provides all the relevant information about these investing and
financing activities.
57. Many investing and financing activities do not have a direct impact on
current cash flows although they do affect the capital and asset structure of
an entity. The exclusion of non-cash transactions from the cash flow
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statement is consistent with the objective of a cash flow statement as these

items do not involve cash flows in the current period. Examples of non-cash
transactions are:
(a) the acquisition of assets through the exchange of assets, the assumption
of directly related liabilities or by means of a finance lease; and
(b) the conversion of debt to equity.

COMPONENTS OF CASH AND CASH EQUIVALENTS

58. An entity should disclose the components of cash and cash equivalents
and should present a reconciliation of the amounts in its cash flow
statement with the equivalent items reported in the statement of financial
position.
59. In view of the variety of cash management practices and banking
arrangements around the world and in order to comply with International
Public Sector Accounting Standard IPSAS 1 Presentation of Financial
Statements, an entity discloses the policy which it adopts in determining the
composition of cash and cash equivalents.
60. The effect of any change in the policy for determining components of cash
and cash equivalents, for example, a change in the classification of financial
instruments previously considered to be part of an entity’s investment
portfolio, is reported in accordance with IPSAS 3.

OTHER DISCLOSURES
61. An entity should disclose, together with a commentary by management in
the notes to the financial statements, the amount of significant cash and
cash equivalent balances held by the entity that are not available for use
by the economic entity.
62. There are various circumstances in which cash and cash equivalent balances
held by an entity are not available for use by the economic entity. Examples
include cash and cash equivalent balances held by a controlled entity that
operates in a country where exchange controls or other legal restrictions
apply when the balances are not available for general use by the controlling
entity or other controlled entities.
63. Additional information may be relevant to users in understanding the
financial position and liquidity of an entity. Disclosure of this information,
together with a description in the notes to the financial statements, is
encouraged and may include:
(a) the amount of undrawn borrowing facilities that may be available for
future operating activities and to settle capital commitments, indicating
any restrictions on the use of these facilities;

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(b) the aggregate amounts of the cash flows from each of operating,
investing and financing activities related to interests in joint ventures
reported using proportionate consolidation; and
(c) the amount and nature of restricted cash balances.
64. Where appropriations or budget authorizations are prepared on a cash basis,
the cash flow statement may assist users in understanding the relationship
between the entity’s activities or programs and the government’s budgetary
information. Refer to IPSAS 1 for a brief discussion of the comparison of
actual and budgeted figures.

EFFECTIVE DATE
65. This International Public Sector Accounting Standard becomes effective
for annual financial statements covering periods beginning on or after 1
July 2001. Earlier application is encouraged.
66. When an entity adopts the accrual basis of accounting, as defined by
International Public Sector Accounting Standards, for financial reporting
purposes, subsequent to this effective date, this Standard applies to the
entity’s annual financial statements covering periods beginning on or after
the date of adoption.

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Appendix

Cash Flow Statement (for an Entity other than a Financial Institution)

This appendix is illustrative only and does not form part of the standards. The
purpose of this appendix is to illustrate the application of the standards to assist in
clarifying their meaning.

Direct Method Cash Flow Statement (paragraph 27(a))

PUBLIC SECTOR ENTITY — CONSOLIDATED CASH FLOW STATEMENT
FOR YEAR ENDED 31 DECEMBER 20X2

(in thousands of currency units)

20X2 20X1
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts
Taxation X X
Sales of goods and services X X
Grants X X
Interest received X X
Other receipts X X
Payments
Employee costs (X) (X)
Superannuation (X) (X)
Suppliers (X) (X)
Interest paid (X) (X)
Other payments (X) (X)
Net cash flows from operating activities X X

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of plant and equipment (X) (X)
Proceeds from sale of plant and equipment X X
Proceeds from sale of investments X X
Purchase of foreign currency securities (X) (X)
Net cash flows from investing activities (X) (X)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings X X
Repayment of borrowings (X) (X)
Distribution/dividend to government (X) (X)
Net cash flows from financing activities X X

Net increase/(decrease) in cash and cash equivalents X X

Cash and cash equivalents at beginning of period X X
Cash and cash equivalents at end of period X X

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Notes to the Cash Flow Statement

(a) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and balances with banks and
investments in money market instruments. Cash and cash equivalents included in
the cash flow statement comprise the following statement of financial position
amounts:
20X2 20X1
Cash on hand and balances with banks X X
Short-term investments X X
X X

The entity has undrawn borrowing facilities of X, of which X must be used on

infrastructure projects.
(b) Property, Plant and Equipment
During the period, the economic entity acquired property, plant and equipment with
an aggregate cost of X of which X was acquired by means of capital grants by the
national government. Cash payments of X were made to purchase property, plant
and equipment.
(c) Reconciliation of Net Cash Flows from Operating Activities to Net
Surplus/(Deficit) from Ordinary Activities
(in thousands of currency units)
20X2 20X1
Surplus/(deficit) from ordinary activities X X
Non-cash movements
Depreciation X X
Amortization X X
Increase in provision for doubtful debts X X
Increase in payables X X
Increase in borrowings X X
Increase in provisions relating to employee costs X X
(Gains)/losses on sale of property, plant and equipment (X) (X)
(Gains)/losses on sale of investments (X) (X)
Increase in other current assets (X) (X)
Increase in investments due to revaluation (X) (X)
Increase in receivables (X) (X)
Extraordinary item1 (X) –
Net cash flows from operating activities X X

1 This extraordinary item falls within the definition of operating activities.

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Indirect Method Cash Flow Statement (paragraph 27(b))

PUBLIC SECTOR ENTITY — CONSOLIDATED CASH FLOW STATEMENT
FOR YEAR ENDED 31 DECEMBER 20X2

(in thousands of currency units)

20X2 20X1
CASH FLOWS FROM OPERATING ACTIVITIES
Surplus/(deficit) from ordinary activities X X
Non-cash movements
Depreciation X X
Amortization X X
Increase in provision for doubtful debts X X
Increase in payables X X
Increase in borrowings X X
Increase in provisions relating to employee costs X X
(Gains)/losses on sale of property, plant and equipment (X) (X)
(Gains)/losses on sale of investments (X) (X)
Increase in other current assets (X) (X)
Increase in investments due to revaluation (X) (X)
Increase in receivables (X) (X)
Extraordinary item1 (X) –
Net cash flows from operating activities X X

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of plant and equipment (X) (X)
Proceeds from sale of plant and equipment X X
Proceeds from sale of investments X X
Purchase of foreign currency securities (X) (X)
Net cash flows from investing activities (X) (X)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings X X
Repayment of borrowings (X) (X)
Distribution/dividend to government (X) (X)

Net cash flows from financing activities X X

Net increase/(decrease) in cash and cash equivalents X X
Cash and cash equivalents at beginning of period X X
Cash and cash equivalents at end of period X X

1 This extraordinary item falls within the definition of operating activities.

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Notes to the Cash Flow Statement

(a) Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and balances with banks and
investments in money market instruments. Cash and cash equivalents included in
the cash flow statement comprise the following statement of financial position
amounts:
20X2 20X1
Cash on hand and balances with banks X X
Short-term investments X X
X X

The entity has undrawn borrowing facilities of X, of which X must be used on

infrastructure projects.
(b) Property, Plant and Equipment
During the period, the economic entity acquired property, plant and equipment with
an aggregate cost of X of which X was acquired by means of capital grants by the
national government. Cash payments of X were made to purchase property, plant
and equipment.

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COMPARISON WITH IAS 7

International Public Sector Accounting Standard IPSAS 2, Cash Flow
Statements, is drawn primarily from International Accounting Standard
IAS 7, Cash Flow Statements. The main differences between IPSAS 2
and IAS 7 are as follows:
• Commentary additional to that in IAS 7 has been included in IPSAS 2
to clarify the applicability of the standards to accounting by public
sector entities.
• IPSAS 2 uses different terminology, in certain instances, from IAS 7.
The most significant examples are the use of the terms “entity,”
“revenue,” “statement of financial performance,” “statement of
financial position” and “net assets/equity” in IPSAS 2. The equivalent
terms in IAS 7 are “enterprise,” “income,” “income statement,”
“balance sheet” and “equity.”
• IPSAS 2 contains a different set of definitions of technical terms from
IAS 7 (paragraph 8).
• In common with IAS 7, IPSAS 2 allows either the direct or indirect
method to be used to present cash flows from operating activities.
Where the direct method is used to present cash flows from operating
activities, IPSAS 2 encourages disclosure of a reconciliation of net
surplus from ordinary activities to operating cash flows in the notes to
the financial statements (paragraph 29).
• The Appendix to IPSAS 2 does not include an illustration of a Cash
Flow Statement for a financial institution.

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