IPSAS 2: Cash Flow Statements is an International Public Sector Accounting Standard (IPSAS) that
provides guidance on the presentation and preparation of cash flow statements in public sector entities.
It outlines the reporting of cash flows from operating, investing, and financing activities to give users
insights into how an entity generates and uses cash and cash equivalents.
Here’s a breakdown of IPSAS 2:
1. Objective
IPSAS 2 aims to provide information about an entity’s ability to generate cash and cash equivalents, as
well as how it utilizes cash. This information helps assess an entity's liquidity, solvency, and financial
adaptability.
2. Key Components of the Cash Flow Statement
Operating Activities: These represent the entity’s principal revenue-generating activities. It
includes cash inflows and outflows from delivering services, grants, and other core activities.
o Cash receipts from taxes, transfers, and operating grants.
o Cash payments to suppliers, employees, and others.
Investing Activities: This section shows cash flows related to the acquisition and disposal of long-
term assets and other investments.
o Purchase or sale of property, equipment, and financial assets.
o Cash flows from loans made to others and repayments of those loans.
Financing Activities: It reflects cash flows related to borrowing and repayment of loans, as well
as other activities that affect the entity’s equity.
o Proceeds from issuing debt.
o Repayments of borrowed amounts.
3. Methods of Presentation
Direct Method: Cash flows from operating activities are presented as gross inflows and outflows,
which provides more detail.
Indirect Method: Adjusts net surplus or deficit for non-cash transactions and changes in working
capital to derive cash flows from operating activities.
4. Cash and Cash Equivalents
IPSAS 2 defines cash equivalents as short-term, highly liquid investments that are easily convertible to
known amounts of cash and subject to an insignificant risk of changes in value. These include short-term
investments like treasury bills and money market instruments.
5. Non-Cash Transactions
The standard also requires that significant non-cash transactions, such as asset transfers, are disclosed
separately, as they do not directly result in cash flows but are important for understanding financial
performance.
6. Importance of Cash Flow Statements
Cash flow statements help assess:
The entity’s capacity to generate future cash flows.
The ability to meet its obligations (e.g., pay debts).
The need for external financing.
The overall financial flexibility of the entity.
7. Application in the Public Sector
Public sector entities, like governments, use IPSAS 2 to improve transparency and accountability in how
public resources are managed, ensuring that stakeholders such as taxpayers, lenders, and donor
agencies can assess the fiscal health of these entities.
In summary, IPSAS 2 ensures that public sector entities provide detailed information on their cash flows,
which is essential for assessing their financial stability and for effective financial decision-making.
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