6010A412.docx - Week 7 Demand for cash flow reduction in scope for opportunism early warning sign to solvency may be useful to understand the

6010A412.docx - Week 7 Demand for cash flow reduction in...

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Week 7 Demand for cash flow: reduction in scope for opportunism, early warning sign to solvency, may be useful to understand the relationship between cash flows and profits. For financial analysis, provides insight into the utility of a number of ratios. Disposal of subsidiary : inflow of cash on sale of subsidiary= cash proceeds on sale + bank overdraft of subsidiary- cash held by subsidiary. Evaluation of AASB 107 strengths : significant non-cash financing and investing transactions must be disclosed, relevance of cash flows supported by empirical evidence, cash flow disclosures have info content, users are able to predict default more accurately with cash flow data. Weaknesses : Does not require disclosure using the direct method which shows a better predictor of future CF than indirect method(Gordon,2002); CF is not immune from opportunist manipulation(Tergesen,2002); Opportunities to manipulate&reduce the apparent cost of acquiring subsidiaries because subsidiary’s debt is not also disclosed(Reily, 2008); Other alternatives proposed-dissection of CF into “core” & “non-core” CFs(Cheng &Holie,2008).Disclosure:1.Components of CCE& Reconciliations of CCE;2.Important non-cash financing&investing trasactions;3.Acq&disposal of subsidiaries&other business units in aggregation. Income tax (1) revaluation entry dr Land cr R.R. \ dr R.R. cr DTL (2) opening bal (DTL) + acq of sub + RR – accrual* = closing balance (3) notional tax effect entry: dr income tax expense (for this year given) cr DTL (from 2) cr income tax payable (calculate) In indirect method, we need to add back dep’n exp and goodwill impairment loss “What we need to in order to evaluate group solvency is a separate statement of cash flows for each entity in the group.” (1)The aggregation problem inherent in consolidated income statements and consolidated balance sheets has been remedied to a large extent by the disaggregation of results, revenues and assets required by AASB 8 operating segments. While there is nothing in AASB 107 that requires the disaggregation of consolidated cash flows.(2) In a group where related companies are not responsible for each other’s debts, then a highly aggregated cash flow statement does not help interpret the solvency issue. (3) In a group, when the companies guarantee each other’s debts, the notion of group solvency does have meaning because it’s possible to look to any company in the group for restitution of the debts. Why direct method better predict future cash flows? 1 differences in cash flow disclosure (cash receipts... cash paid to...) 2 enable observation and analysis of trends in components of operating CFs (relationship between cash collected from customers and revenue) 3 some CF components may have different persistence into future CFs than others (indirect m no present components of CF from operation) Week 8 The information value of segment reporting for financial users For The core principle of AASB8 + better understand past performance, assess different risks and returns +
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