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Common errors in cash flow statement

The cash flow statement is a vital part of a company's financial statements that offers essential insights into its liquidity, cash-generating ability, and overall financial stability. It is crucial for both shareholders & regulators including Financial Reporting Council (FRC) as it provides a transparent view of a company's financial health and liquidity.

The FRC continues to identify errors in cash flow statements and its various reviews examine many of the issues in their preparation; specifically issues around classification, incorrect inclusion of non-cash items, and inappropriate netting of cash flows.

Following are the common errors (also raised by FRC) in the cash flow statements.

Error type	Description
General	The amounts and description of line items in the cash flow statement inconsistent with those reported elsewhere in the financial statement.
Interest – inconsistent classification	Portion of interest payment of lease liabilities classified as operating activities, while interest payment on loans classified as financing activities.
Bank overdrafts – cash equivalent	Bank overdrafts payable on demand and integral part of the entity’s cash management constitute cash equivalents and incorrectly excluded from cash and cash equivalents in the cash flow statement.
Intragroup loans – offsetting	Intragroup borrowing and lending incorrectly offsetted in the cash flow statement.
Right-of-use (ROU) asset – non-cash item	Additions to ROU asset constitute non-cash item but incorrectly included in cash flow statement.
Costs incurred in acquiring subsidiary – (standalone & consolidated books)	The cost of acquiring an investment in a subsidiary in the separate financial statements incorrectly classified under operating activities instead of investing activities. Acquisition-related costs are expensed in the consolidated profit or loss and classified as operating activities in the consolidated financial statements.
Business combination – contingent consideration	The payment made to settle the initially recognized contingent consideration should be classified under investing activities. However, any excess amount paid beyond the initially recognized amount incorrectly classified as investing activities instead of operating activities.
Changes in ownership interest – control retained & control lost	When ownership interest changes but control is retained, the transaction is an equity transaction, with cash flows classified under financing activities. If control is lost, cash flows should be classified under investing activities. However, these were incorrectly recorded in the consolidated financial statements.
Disclosure – material non-cash transactions	Material non-cash transactions not disclosed as per the requirements of IAS 7.

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