In this article, we will outline the rules regarding the repporting of cash flow statements in Brazil, based on the Brazilian Accounting Standards.
The Statement of Cash Flows
In Brazil, the Statement of Cash Flow (Declaração de Fluxo de Caixa, known as DFC) has become a mandatory reporting of accounting of all publicly traded companies or shareholders' equity in excess of USD 2.000.000.00 (two million dollars).
This requirement is in force since 2008, under the Law 11.638/2007, and thus becomes another important report for managerial decision making. The procedures regulating Statements of Cash Flow are mainly oriented by the NBC T 3.8 of the Brazilian Accounting Standards.
The Statement of Cash Flows will indicate which are the exits and entrances of money in cash during the period and the result of that flow. It should be presented in a comparative way through the simultaneous disclosure of information to current and previous period. When released, the statement should be performed as supplementary information to the financial statements, not to be confused with explanatory notes.
Following international trends, cash flow can be incorporated into traditional financial statements published by companies. Basically, the Statement of Cash Flow is segmented into three main areas:
Important: Some companies must subject their statements of cash flow to the review of an audit.
Statement of Cash Flow of Operational Activities
Operational Activities are defined as the main activities that generate business and other activities that differs from investments and financing. For example, sales receipt, payment of suppliers for purchasing materials, paying employees, etc. Cash flows arising from operational activities are primarily derived from the main revenue-producing activities of the company. Examples of cash flows arising from operational activities are:
Cash receipts derived from royalties, fees, commissions and other revenue
Cash payments to suppliers of goods and services
Cash payments to employees or on behalf of employees
Cash receipts and payments for insurance premiums and claims, annuities and other policy benefits
Payments or cash refund of income taxes unless they can be specifically identified with financing activities or investments
Cash receipts and payments from contracts held for trading or available for immediate sale.
Some transactions, such as selling item of property, may result in gain or loss which is included in the determination of net income or loss. Cash flows relating to such transactions are defined as cash flows from investment activities.
In summary, the Statements of Cash Flow of Operational Activities shall contain values regarding:
- Adjustments that do not represent cash input or output
- Depreciation and amortization
- Allowance for doubtful accounts
- Profit on sale of fixed assets
- Increase or decrease in accounts receivable
- Increase or decrease in inventories
- Increase or decrease in prepaid expenses
- Increase or decrease in liabilities
- Increase or decrease of other adjustments
- Net Cash from Operating Activities
Income tax and social contribution on net income
Cash flows relating to Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) shall be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified as financial or investment activities.
Statement of Investment Activities
Those are the activities that result in changes in the size and composition of the company and loans paid by the company, such as:
Cash payments to acquire fixed assets, intangible assets and other long-term assets. These payments include those relating to development costs and fixed assets enabled the construction itself
Cash payments to acquire equity instruments or debt instruments of other entities and interests in joint ventures (other than payments for those securities considered to be cash equivalents or those held for trading or immediate future)
Cash advances and loans made to third parties (except those advances and loans made by a financial institution)
Cash receipts from the repayment of advances or settlement of loans to third parties (except those advances and loans of a financial institution)
Cash payments for futures contracts, forward, option and swap, except when the contracts are held for trading or immediate future, or the payments are classified as financing activities
In summary, the Statement of Cash Flow of Investment Activities shall contemplate:
- Disposal of fixed assets
- Disposal of investments
- Purchase of fixed assets
- Acquisition of investments
- Net Cash from Investing Activities
Statement of Cash Flow of Financial Activities
Here, should be included loans and short term financing. The outputs corresponding to the amortization of these debts and the amounts paid to shareholders as dividends, profit distribution.
The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of capital to the entity. Examples of cash flows arising from financial activities are:
- Cash proceeds from issuing shares or other equity instruments
- Cash payments to investors to purchase or redeem shares of the entity
- Cash proceeds from issuing debentures, loans, notes, other debt securities, mortgage loans and other short and long term
- Amortization of loans and financing
- Cash payments by the lessee to reduce the liability relating to financial leases.
In summary, the Statement of Cash Flow of Financial Activities shall contain the value regarding:
- Paid-up capital
- Interest income from loans
- Increase in share capital
- Payment of lease (principal)
- Payments of dividends and profits
- Interest paid on loans
- Repayment of loans / debentures
- Net Cash from Financing Activities
- Increase or Decrease in Cash.
Cash flows arising from transactions in foreign currency shall be recorded in the entity's functional currency by applying to the foreign currency amount, the exchange rate between the functional currency and the foreign currency observed in the occurrence of the cash flow.
Cash flows from foreign subsidiary shall be translated by applying the exchange rates between the functional currency and the foreign currency at the date of the observed occurrence of cash flows. The cash flows that are denominated in foreign currency shall be made according to NBC T 7.
Presentation of Cash Flows: Direct and Indirect model
It consists in the presentation of cash flows based on a net basis. The Cash Flow Statement summarizes all payments and receipts arising from the operating activities of the company and should present the components of the flow by its gross. Cash flows arising from operating, investing and financing may be presented on a net basis in situations where there is:
Cash receipts and cash payments for or on behalf of customers when the cash flows reflect the activities of the customers more than the entity itself
Cash receipts and cash payments related to items whose turnover is quick, the amounts are significant and the maturities are short term.
Under the indirect method, the net cash flow arising from operating activities is determined by adjusting the profit or loss for the effects of:
- Changes during the period in inventories and operating receivables and payable;
- Items not affecting cash, such as depreciation, provisions, deferred taxes, gains and losses and unrealized equity earnings where applicable, and
- All other items treated as cash flows arising from investing activities and financing activities.
Alternatively, the net cash flow arising from operating activities may be presented under the indirect method by showing the revenues and expenses disclosed in the income statement or other comprehensive income and changes during the period in inventories and operating receivables and payable.