IAS 7 - Empirisk analyse af dansk praksis og anbefalinger til revision af standarden

Anders Kok Bønvad

Student thesis: Master thesis


The thesis at hand aims at analysing how the ”IAS 7 Statement of Cash Flows” standard can be improved, in order to better fulfil the information needs of the users. The statement of cash flows is an important element in the financial reporting of a company. The statement provides the users with information about the financial liquidity of the reporting company. This information is a valuable addition to the Statement of Profit and Loss. Cash flow from operations is, to some extent, even more important than the Profit/Loss figure of the year, as it provides a strong indication about the general ”health” of the company’s operations. One of the primary concerns for the users of financial reports is comparability between different reporting entities. One of the overall goals of the IFRS standards is to assure this comparability. The IAS 7 standard has been criticised for offering too many optional methods for the reporting company, and thus causing different practices to arise amongst the companies. Furthermore, the IAS 7 standard contains a relatively unclear guidance on a number of issues, which results in heterogeneous practices. This thesis seeks to identify and map out all the problematic issues surrounding the IAS 7 standard. In order to do so, the literature on the subject is reviewed, primarily focusing on writers who address one, or more, problematic issues. A problematic issue is one, which causes impaired information to be offered to the users. If the writer offers a possible solution to the issue in question, this solution will be included in the mapping of the field of literature. The literature identifies a number of areas, including the optionality between direct or indirect method, the use of Alternative Performance Measures, and the definition of cash and cash equivalents. An empirical analysis of 115 Danish companies is carried out in order to investigate, whether the identified problematic issues from the literature review are in fact also issues that can be observed in practice. In other words, the empirical analysis seeks to assess whether the market has come up with possible solutions to the issues, or whether the issues are in fact causing problems for the users of financial reports. This is particularly focused on impaired comparability between different companies, due to differences in reporting practice caused by the optionality in IAS 7. The empirical analysis reveals that the market has created its own solutions to a number of the problematic issues identified in the literature review, for example the classification of interest and paid dividends. However, the majority of the identified issues have not been solved by the market, and thus differences in practice are impairing the users’ ability to compare companies. Some of these issues include; the reporting of AlterKandidatafhandling cand.merc.aud – Anders Kok Bønvad IAS 7 - Empirisk analyse af dansk praksis og anbefalinger til revision af standarden 2 native Performance Measures, the reconciliation from Profit or Loss to Operating Cash Flow, and finally the elements included in cash equivalents. The empirical data is segmented based on company size, in order to search for best practices among the top companies, as they generally spend more resources on financial reporting than smaller companies. The segmentation reveals a number of trends among the top companies, for example in relation to the reporting of the Alternative Performance Measure ”Free cash flow”. The data is further segmented based on the “signing off” accounting firms. This reveals a number of interesting practices amongst the accounting firms, for example that Deloitte is emphasising the use of EBIT in the reconciliation from Profit or Loss. Finally, a list of recommendations is prepared for a possible future audit of the IAS 7 standard. The proposed recommendations are backed by either: a) the results from the empirical study; b) the solutions offered by the academic writers; c) the observed best practice among the top companies or accounting firms; or d) the author’s own opinion if needed – or a combination of the above. The compiled list of recommendations are summarised in a figure, providing an overview of how the IASB could update the IAS 7 standard to better fulfil the users’ information needs. The proposals include a recommendation to mandate the use of the direct method and to make the reporting of ”Free cash flow” mandatory. However, the recommendations are only proposals and may not be fully applicable for the IASB. The most important goal of a future update of IAS 7 is to get rid of the optionality and unclear guidance, which results in different practices amongst companies and impairs the users’ ability to compare financial information.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2015
Number of pages153