CONSOLIDATED STATEMENT OF CASH FLOWS

The special features of a consolidated statement of cash flows

A consolidated statement of cash flows is prepared largely from the consolidated statement of financial
position, statement of profit or loss and other comprehensive income and statement of changes in
equity. The rules for preparing a group statement of cash flows are similar to the rules for a statement
of cash flows for an individual entity.

However, there are additional items in a consolidated statement of cash flows that are not found in the
statement of cash flows of an individual company. The most significant of these are cash flows (or
adjustments to profit before tax) relating to:

• non-controlling interests;
• associates (or JVs);
• and acquiring or disposing of subsidiaries during the year.

Exchange rate differences

A gain or loss arising from exchange rate differences is not a cash flow item. When the indirect method
is used to present cash flows from operating activities, it is therefore necessary to make an adjustment
to get from ‘profit’ to ‘cash flow’.

• A loss arising from exchange rate differences must be added back.

• A gain arising from exchange rate differences must be subtracted.

NON-CONTROLLING INTERESTS AND ASSOCIATES (OR JVS) IN THE STATEMENT OF CASH FLOWS

Key learnings are:

1. Obtaining the required figures for cash flows

2. Non-controlling interests and the group statement of cash flows
3. Dividends paid to non-controlling interests and foreign exchange adjustments
4. Associates (or JVs) and the group cash flow statement
5. Calculating dividends received from an associate

1. Obtaining the required figures for cash flows

The cash flows and adjustments in a group statement of cash flows are obtained from the other group
financial statements. You should expect an examination question to provide you with an opening and
closing consolidated statement of financial position, together with the related consolidated statement
of profit or loss and other comprehensive income, and possibly a statement of changes in equity. Other
relevant information may also be provided.

A group statement of cash flows reports the cash flows that affect the group’s consolidated cash (and
cash equivalents). Any transactions not affecting the group cash position should not be shown in the

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statement of cash flows , except (with the indirect method) where a non-cash item is presented as an
adjustment to the profit before tax to calculate the ‘Cash generated from operations’.

2. Non-controlling interests and the group statement of cash flows

Unless there is an acquisition or a disposal of a subsidiary during the year, the only cash flow relating to
non-controlling interests is the amount of dividends paid to the non-controlling interests by subsidiaries.

This might have to be calculated as a balancing figure, using the following calculation:

Illustration: Dividends paid to NCI N

Non-controlling interest in group net assets at the beginning of the year X

Non-controlling interest in profits after tax for the year (X)
X
Dividends paid to non-controlling interests (balancing figure) (X)
Non-controlling interest in group net assets at the end of the year (X)

The dividends paid to non-controlling interests by subsidiaries are usually included in the ‘Cash flows
from financing activities’ part of the statement of cash flows. (This is the same part of the statement of
cash flows where dividends paid to the parent company shareholders are usually shown.)

Example 1: Dividends paid to NCI

The following information has been extracted from consolidated financial statements of P, a holding
company which prepares accounts to 31 December. P has a subsidiary Q, for which a final dividend is
declared before the end of the financial year.

2007 2006

N’000 N’000

Non-controlling interests in group net assets 1,510 1,380

Non-controlling interest in consolidated profit after tax 250 470

What figure should appear in the consolidated statement of cash flows for the year to 31 December
20X7 for the dividends paid to non-controlling interests? Under what heading will this figure appear in
the group statement of cash flows?

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Practice question 1

The following information has been extracted from the consolidated financial statements of P, a holding
company which prepares accounts to 31 December each year:

Year 4 Year 3
N’000 N’000
Dividend payable to non-controlling interest 200 320
Non-controlling interest in group’s equity 1,560 1,380
Non-controlling interest in profit for the year 240 220

What figure will appear in the consolidated statement of cash flows for the year to 31 December Year 4
for dividend paid to non-controlling interests?

Practice question 2

The following information has been extracted from the consolidated financial statements of P, a holding
company which prepares accounts to 31 December each year:

Year 4 Year 5
N’000 N’000
NCI dividends payable at 31 December 20 25
NCI share of group profits after tax for the year 270 300
NCI share in group net assets as at 31 December 600 630

What figure will appear in the consolidated statement of cash flows for the year to 31 December Year 5
in respect of non-controlling interests?

Practice question

The consolidated financial statements of Entity P for the year ended 31 March Year 6 showed the
following balances:

Non-controlling interests in the consolidated statement of financial position at 31 March Year 6 are ₦6
million (₦3.6 million at 31 March Year 5).

Non-controlling interests in the consolidated profit for the year ended 31 March Year 6 is ₦2 million.
During the year ended 31 March Year 6, the group acquired a new 75% subsidiary whose net assets at
the date of acquisition were ₦6.4 million.

On 31 March Year 6, the group revalued all its properties and the non-controlling interest in the
revaluation surplus was ₦1.5 million.

There were no dividends payable to non-controlling interests at the beginning or end of the year. What
is the dividend paid to non-controlling interests that will be shown in the consolidated statement of cash
flows of Entity P for the year ended 31 March Year 6?

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Dividends paid to non-controlling interests and foreign exchange adjustments

If there is a gain or loss on translation for a foreign subsidiary, the non-controlling interest has a share of
this exchange gain or loss. This means that the amount shown as the non-controlling interest in the
consolidated statement of financial position includes the non-controlling interest share of any foreign
exchange gains or is after deducting any foreign exchange losses.

A gain or loss arising from exchange rate differences is not a cash flow, but it changes the amount for
non-controlling interest in the consolidated statement of financial position. When the figures for non-
controlling interest in the opening and closing statements of financial position are used to calculate
dividend payments to non-controlling interests, we must therefore remove the effect of exchange rate
differences during the year.

Illustration: Dividends paid to NCI N

Non-controlling interest in group net assets at the beginning of the year X

Non-controlling interest in profits after tax for the year (X)
Add non-controlling interest share of foreign exchange gain (or subtract NCI share of a loss X/(X)
X
Dividends paid to non-controlling interests (balancing figure) (X)
Non-controlling interest in group net assets at the end of the year (X)

Associates (or JVs) and the group statement of cash flows

When a group has an interest in an associate entity, the consolidated statement of cash flows must
show the cash flows that occur between the associate (or JV) and the group. The consolidated
statement of cash flows shows the effect on the group’s cash position of transactions between the
group and its associate (or JV).

The cash held by an associate (or JV) is not included in the group’s cash figure in the consolidated
statement of financial position. This is because the equity method of accounting does not add the
associate’s (or JV’s) cash to the cash of the holding company and subsidiaries. As far as cash flows are
concerned, the associate (or JV) is outside the group. (The same principles apply to other investments
accounted for under the equity method, such as joint ventures accounted for by the equity method).

Share of profit (or loss) of an associate (or JV)

In the consolidated statement of profit or loss, the group profit includes the group’s share of the profits
of associates (or JVs). These profits are not a cash flow item. When the indirect method is used to
present the cash flows from operating activities, an adjustment is therefore needed to get from ‘profit’
to ‘cash flow’.

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 • The group’s share of the profit of an associate (or JV) must be deducted from profit.
• The group’s share of the loss of an associate (or JV) must be added to profit

Cash flows involving associates (or JVs)

The cash flows that might occur between a group and an associate (or JV), for inclusion in the
consolidated statement of cash flows are as follows:

Investing activities

• cash paid to acquire shares in an associate (or JV) during the year
• cash received from the disposal of shares in an associate (or JV) during the year
• dividends received from an associate during the year.

Financing activities

• cash paid as a new loan to or from an associate (or JV) during the year
• cash received as a repayment of a loan to or from an associate (or JV) during the year.

Note that dividends received from an associate (or JV) are shown as cash flows from investing activities;
whereas dividends paid to non-controlling interests in subsidiaries are (usually) shown as cash flows
from financing activities.

Calculating dividends received from an associate (or JV)

In an examination, you may be required to calculate the dividends received from an associate (or JV),
using information in the opening and closing consolidated statements of financial position and the
consolidated statement of profit or loss. The technique is similar to the calculation of dividends paid to
non-controlling interests

Illustration: Dividends received from an associate (or JV)

N

Group investment in net assets of associate (or JV) at the beginning of the year X
Group share of associate’s (or JV’s) profits before tax (X)
X
Dividends received from associate (or JV) in the year (X)
Group investment in net assets of associate (or JV) at the end of the year (X)

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Example: Dividends received from an associate (or JV)

The following information has been extracted from the consolidated financial statements of P for the
year ended 31 December 20X7. The group has neither purchased nor disposed of any investment during
this period.

Group statement of profit or loss

₦000

Group operating profit 1,468

Share of associate’s profit after tax 136
1,604
Tax on profit on ordinary activities:
Income taxes: group (648)

Profit on ordinary activities after tax 956

Group statement of financial position at 31 December

20X7 20X6
₦000 ₦000
Investments in associates
Share of net assets 932 912

Required

(a) What figure should appear in the group statement of cash flows for the year to 31 December 20X7
for the associate?

(b) Under which heading would you expect this figure to appear in the group statement of cash flows?

Practice question

The following information has been extracted from the consolidated financial statements of P, a holding
company which prepares accounts to 31 December each year:

Consolidated statement of financial position (extract):

Year 4 Year 3

₦000 ₦000

Investments in associated undertakings 932 912

Current assets

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Dividend receivable from associate 96 58

Consolidated statement of profit or loss (extract):

Investments in associated undertakings Year 4

₦000

Group operating profit 1,468

Share of operating profit of associate 136
1,604
Income taxes: (648)
Profit after tax 956

What figure will appear in the consolidated statement of cash flows for the year to 31 December Year 4
in respect of dividend received from associates?

ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES IN THE STATEMENT OF CASH FLOWS

Learning Objectives are:

1. Acquisition of a subsidiary in the statement of cash flows

2. Note to the statement of cash flows on acquisitions
3. Avoiding double counting when a subsidiary has been acquired
4. Disposal of a subsidiary in the statement of cash flows

Acquisition of a subsidiary in the statement of cash flows

When a subsidiary is acquired:

• the group gains control of the assets and liabilities of the subsidiary, which might include some
cash and cash equivalents, and
• the group pays for its share of the subsidiary, and the purchase consideration might consist
partly or entirely of cash.

In the group statement of cash flows, a single figure is shown (under the heading ‘Cash flows from
investing activities’) for the net effect of the cash flows from acquiring the subsidiary. This net effect is:

Illustration: Cash paid for a subsidiary

₦

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Cash element in the purchase consideration X

Minus: Cash assets of the subsidiary at the acquisition date (X)

Cash payments on acquisition of subsidiary, net of cash received X

This net cash payment is the amount shown in the group statement of cash flows.

Inventory, trade receivables, trade payables

When the indirect method is used to present cash flows from operating activities, the changes in
receivables, inventory and trade payables are shown as adjustments to the profit figure, to get to a
figure for cash flow.

When preparing a statement of cash flows for an individual company, the changes in these items are
calculated by calculating the difference in the figure in the closing statement of financial position and
the corresponding value in the opening statement of financial position.

However, when a subsidiary has been acquired, the working capital brought into the group (receivables
plus inventory minus trade payables of the acquired subsidiary) is paid for in the purchase price to
acquire the subsidiary. As we have seen, this is treated as a separate item in the investing activities
section of the statement of cash flows.

To avoid double counting of the effects of the working capital in the subsidiary at the acquisition date,
we need to deduct from the value in the closing statement of financial position, or add to the value in
the opening statement of financial position:

• the receivables in the net assets of the subsidiary acquired, as at the acquisition date
• the inventory in the net assets of the subsidiary acquired, as at the acquisition date, and
• the trade payables in the net assets of the subsidiary acquired, as at the acquisition date.

Example: Adjustment to calculation

D Group is preparing a group statement of cash flows for the year using the indirect method. In the
group opening and closing statements of financial position, inventories were:

At the beginning of the year ₦120,000

At the end of the year ₦190,000

During the year, the group acquired a 75% interest in a new subsidiary, Entity S, which had inventories
of ₦40,000 at the acquisition date.

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Required

What figure should be shown in the group statement of cash flows as the adjustment for the increase or
decrease in inventories?

Purchases of non-current assets

When non-current assets are shown at their carrying amount (net book value) and a subsidiary has been
acquired during the year, purchases of non-current assets (assumed to be cash payments) are calculated
as follows.

Example: Cash paid to buy non-current assets

₦
Non-current assets at carrying amount, at the beginning of the year X
Net book value of disposals of non-current assets during the year (X)
Depreciation charge for the year (X)
Cash paid to acquire non-current assets during the year (BF) X
Non-current assets acquired on acquisition of the subsidiary X
Total additions (first balancing figure) X
Non-current assets at carrying amount, at the end of the year X

Other items

Similar principles can be applied to all other assets and liabilities to find the cash effect, for example to
calculate loan repayments and repayments of leasing obligations

Example: Tax paid

The Spot Group had the following items in its opening and closing group statements of financial position
at the beginning and at the end of 20X6:

At 1 January 20X6 At 31 December 20X6

₦000 ₦000

Current tax payable 250 325

Deferred tax (liability) 136 165

The Spot Group acquired a 60% holding in a subsidiary, Entity B, on 7 May 20X6. The total tax liability of
Entity B at this date was ₦120,000. The total charge for taxation in the consolidated statement of profit
or loss of the Spot Group for the year to 31 December 20X6 was ₦950,000.

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Required

What was the cash payment for taxation during the year, for inclusion on the group statement of cash
flows?

Example: dividends paid to non-controlling interest when a subsidiary has been acquired

The Spot Group had the following items in its opening and closing group statements of financial position
at the beginning and at the end of 20X6:

At 1 January 20X6 At 31 December 20X6

₦000 ₦000

Non-controlling interest 350 415

The Spot Group acquired a 60% holding in a subsidiary, Entity B, on 7 May 20X6. The net assets of Entity
B at this date were ₦800,000 at fair value. The profit attributable to non-controlling interests in the
group’s statement of profit or loss for the year to 31 December 20X6 was ₦270,000.

Required

What dividends were paid to the non-controlling interests during the year to 31 December 20X6?

Example: adjustment for the impairment of goodwill

The Spot Group had the following items in its opening and closing group statements of financial position
at the beginning and at the end of 20X6:

At 1 January 20X6 At 31 December 20X6

₦000 ₦000

Goodwill 600 540

The Spot Group acquired a 60% holding in a subsidiary, Entity B, on 7 May 20X6. Purchased goodwill
arising on the acquisition of Entity B was ₦110,000. The Spot Group uses the indirect method to present
its group statement of cash flows.

Required

What is the impairment to goodwill for the year, and where would it appear in the group statement of
cash flows?

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Disposal of a subsidiary in the statement of cash flows

The procedures for reporting the cash effect of disposals of subsidiaries in a group statement of cash
flows are similar to those used for acquisitions, except that the process applies in reverse.

In the group statement of cash flows, the cash received from the disposal is the cash actually received
from the disposal, minus any cash in the subsidiary at the disposal date.

A note to the statement of cash flows should show the details of the disposal, including the cash
received from the sale minus the cash in the subsidiary at the disposal date.

The assets and liabilities disposed of, and the non-controlling interest leaves the group on the disposal.
To avoid double counting the other cash flow items in the statement of cash flows.

Example: Disposal

Entity D disposed of its 80% interest in the equity capital of Entity S for a cash sum of ₦550 million. The
statement of financial position of Entity S at the date of disposal showed the following balances:

₦000
Tangible non-current assets 500
Inventories 200
Trade receivables 300
Trade payables (200)
Taxation (including deferred taxation) (80)
Bank overdraft (320)
400
D acquired its interest in S at the date of incorporation of that company, so no goodwill arose.

Required

Prepare a statement summarising the effect of the disposal as a note to the consolidated statement of
cash flows.

Example: Disposal

Suppose that the group in the previous example uses the indirect method of computing the cash flow
from operating activities. Inventories were ₦1,600,000 in the opening group statement of financial
position at the beginning of the year and ₦1,500,000 in the closing group statement of financial
position.

Required

What figure in respect of inventories would be used as an adjustment in calculating the cash flows from
operating activities?

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