IPSAS 2
Active
Cash Flow Statements
Prescribes the presentation of a cash flow statement as an integral part of the financial statements for each period presented, requiring classification by operating, investing, and financing activities, and disclosures for non-cash transactions, changes in financing liabilities, and cash-equivalent components.
Active Standard
IPSAS 2 Cash Flow Statements is the current, active cash-flow presentation standard issued by the IPSASB. It is effective for annual financial statements covering periods beginning on/after 1 July 2001 (earlier application encouraged). Former paras. 3–4 were deleted; the current Standard comprises paras. 1–64, all of equal authority.
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Objective, Scope & Benefits of Cash Flow Information
Objective & scope
The cash flow statement identifies (a) sources of cash inflows, (b) items on which cash was expended, and (c) the cash balance at the reporting date. It requires information about historical changes in cash and cash equivalents, classified by operating, investing, and financing activities.
An entity preparing financial statements under the accrual basis shall prepare a cash flow statement AND present it as an integral part of its financial statements for each period presented Required regardless of the nature of the entity's activities – even where cash is the "product" of the entity, as with a public financial institution
Paras. 3–4 [Deleted]. All paragraphs (objective + 1–64) have equal authority.
Why cash flow information matters
Predicts future cash requirements, ability to generate future cash flows, and ability to fund changes in scope/nature of activities Discharges accountability for cash inflows and outflows during the period Evaluates changes in net assets/equity, financial structure (liquidity, solvency), and ability to adapt to changing circumstances Enhances comparability by eliminating the effects of different accounting treatments for the same transactions
Users assess (a) the entity's cash flows, (b) compliance with legislation/regulations including authorized budgets, and (c) whether to provide resources to, or transact with, the entity.
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Definitions (paras. 8–17)
Core cash-flow definitions
Cash
Cash on hand and demand deposits.
Cash equivalents
Short-term, highly liquid investments readily convertible to known amounts of cash, subject to an insignificant risk of changes in value – normally a maturity of 3 months or less from acquisition.
Cash flows
Inflows and outflows of cash and cash equivalents.
Control
An entity controls another when it is exposed, or has rights, to variable benefits from involvement with the other entity and can affect the nature or amount of those benefits through power over it.
Activity definitions & cash management
Operating activities
Activities that are NOT investing or financing activities.
Investing activities
Acquisition and disposal of long-term assets and other investments not included in cash equivalents.
Financing activities
Activities resulting in changes in the size and composition of contributed capital and borrowings.
Bank overdrafts repayable on demand are generally FINANCING, but where they form an integral part of cash management (balance fluctuates positive/overdrawn), they're included in cash and cash equivalents.
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Presentation of a Cash Flow Statement – Three Activity Classes (paras. 18–20)
Classify by operating, investing, and financing – in whatever manner suits the entity's activities
The cash flow statement shall report cash flows classified by operating, investing, and financing activities. Classification lets users assess the impact of those activities on financial position and the amount of cash/cash equivalents, and evaluate the relationships among them.
Split transactions: a single transaction may include cash flows classified differently – e.g. a loan repayment combining interest (operating) and capital (financing) elements.
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Operating Activities (paras. 21–24)
Why operating cash flow is a key indicator
Net cash flow from operations shows the extent to which operations are funded – e.g. by taxes, other compulsory contributions/levies, transfers, or provision of goods/services in a binding arrangement. It also shows ability to maintain operating capability, repay obligations, pay distributions, and make new investments without external financing.
Whole-of-government consolidated operating cash flows indicate the extent government has financed current activities through taxation and charges.
Examples of operating cash flows (para. 22)
Receipts from taxes, levies, fines; charges for goods/services; grants, transfers, budget authority Royalties, fees, commissions; payments to beneficiaries of social benefit schemes Payments to other public sector entities to finance operations (not loans); to suppliers; to/on behalf of employees Insurance entity premiums/claims/annuities; contracts held for dealing/trading; litigation settlements
Dealing/trading securities and public financial institution loans/advances are classified as operating, since they relate to the main cash-generating activity – similar to inventory acquired for resale.
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Investing & Financing Activities (paras. 25–26)
Investing activities
Important because they show cash outflows made for resources intended to contribute to future service delivery. Only cash outflows resulting in a recognized ASSET on the SOFP qualify.
Payments to acquire / receipts from sale of PP&E, intangibles, other long-term assets Payments/receipts for equity or debt instruments of other entities, and interests in joint ventures Advances and loans to other parties, and repayments received (excl. public financial institutions) Futures, forwards, options, swap contracts – unless held for trading or classified as financing
Financing activities
Useful in predicting claims on future cash flows by providers of capital.
Proceeds from issuing debentures, loans, notes, bonds, mortgages, other borrowings Repayments of amounts borrowed Payments by a lessee for the reduction of the outstanding lease liability
When a contract is a hedge of an identifiable position, its cash flows are classified the same way as the cash flows of the hedged position.
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Reporting Operating Cash Flows – Direct vs Indirect Method (paras. 27–31)
Direct method – ENCOURAGED
Major classes of gross cash receipts and gross cash payments are disclosed. Provides information useful in estimating future cash flows that is not available under the indirect method.
SOURCED FROM
The accounting records directly; or Adjusting operating revenue/expenses for changes in inventories, operating receivables/payables, other non-cash items, and items with investing/financing cash effects
Entities using the direct method are also encouraged to reconcile surplus/deficit to net operating cash flow (in the statement or notes).
Indirect method
Surplus or deficit is adjusted for the effects of non-cash transactions, deferrals/accruals, and investing/financing items.
ADJUSTMENTS INCLUDE (PARA. 30)
Changes in inventories and operating receivables/payables Non-cash items: depreciation, provisions, deferred taxes, unrealized FX gains/losses, undistributed associate surpluses, non-controlling interests All other items with investing/financing cash effects
Both methods report separately the major classes of gross investing and financing cash receipts/payments (para. 31) – netting is the exception, not the rule (see §7).
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Reporting on a Net Basis & Foreign Currency Cash Flows (paras. 32–39)
When net reporting is permitted (para. 32)
Cash receipts/payments on behalf of customers, taxpayers, or beneficiaries – where the flows reflect the OTHER party's activities, not the entity's own Items where turnover is quick, amounts are large, and maturities are short (e.g. investment purchases/sales; borrowings ≤3 months)
Examples: tax collection by one government level for another; demand deposit acceptance/repayment by a public financial institution; funds held for customers by a trust entity; rents collected on behalf of property owners. A public financial institution may also net deposits with fixed maturity, inter-institution placements, and customer advances/loans (para. 35).
Foreign currency cash flows (paras. 36–39)
Recorded in the functional currency using the exchange rate at the DATE OF THE CASH FLOW Foreign controlled entity's cash flows translated at rates at the dates of the cash flows A weighted average rate approximation is permitted (IPSAS 4) – but NOT the reporting-date rate for translating a foreign controlled entity's cash flows
Unrealized FX gains/losses are not cash flows, but the effect of rate changes on cash/cash equivalents held or due in a foreign currency IS reported – as a separate reconciling item between opening and closing cash and cash equivalents.
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Interest, Dividends & Taxes on Net Surplus (paras. 40–46)
Interest & dividends – disclosed separately, classified consistently
Cash flows from interest and dividends/similar distributions received and paid shall each be disclosed separately, and classified consistently period to period as operating, investing, or financing.
PUBLIC FINANCIAL INSTITUTIONS
Interest paid, and interest/dividends received, are usually classified as operating cash flows.
OTHER ENTITIES – NO CONSENSUS
Operating (enters surplus/deficit) OR financing/investing (cost of financing / return on investment) – either is acceptable.
Total interest paid is disclosed whether expensed or capitalized under IPSAS 5's allowed alternative treatment.
Taxes on net surplus (paras. 44–46)
Cash flows from taxes on net surplus shall be separately disclosed and classified as operating, unless specifically identifiable with financing/investing activities.
Public sector entities are generally tax-exempt, though some operate under tax-equivalent regimes. Tax cash flows are usually impracticable to match to the underlying transaction's own classification, so default to operating – unless practicably identifiable, in which case classify as investing/financing (with the total disclosed if allocated across classes).
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Investments in Controlled Entities, Associates & Acquisitions/Disposals (paras. 47–53)
Equity/cost-method investees
An investor restricts its cash flow statement to cash flows between itself and the investee – e.g. dividends/distributions and advances. An entity using the equity method for an associate/joint venture includes cash flows re: its investment and distributions/payments/receipts to and from it.
Acquisitions & disposals of controlled entities (para. 50)
Presented separately, classified as investing, reported net of cash/cash equivalents acquired or disposed of. Disclose in aggregate, for both acquisitions and disposals:
Total purchase/disposal consideration Portion discharged by cash and cash equivalents Cash and cash equivalents in the entity/unit acquired or disposed of Assets/liabilities (other than cash) recognized, by major category
Cash flow effects of disposals are NOT netted against those of acquisitions. An investment entity (IPSAS 35) need not apply the (c)/(d) disclosures to an investment measured at FV through surplus/deficit. Changes in ownership NOT resulting in loss of control → classified as financing cash flows (para. 52A–52B).
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Noncash Transactions & Changes in Liabilities from Financing Activities (paras. 54–55E)
Noncash transactions – excluded, but disclosed elsewhere
Investing/financing transactions not requiring cash shall be excluded from the cash flow statement, but disclosed elsewhere in the financial statements to convey all relevant information.
Acquisition of assets through exchange of assets, assumption of directly related liabilities, or by lease Conversion of debt to equity
Changes in liabilities arising from financing activities (paras. 55A–55E)
An entity shall disclose enough to let users evaluate changes in financing liabilities – both cash-flow-driven and non-cash changes.
DISCLOSE THESE CHANGES (55B)
Changes from financing cash flows Changes from obtaining/losing control of controlled entities or operations Effect of FX rate changes; changes in fair values; other changes
Commonly met via a reconciliation between opening and closing SOFP balances for financing liabilities (para. 55D) – kept separate from changes in other assets/liabilities if combined with other disclosures (55E). See §14 for an illustrative reconciliation.
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Components of Cash & Cash Equivalents / Other Disclosures (paras. 56–62)
Components & reconciliation
Disclose the COMPONENTS of cash and cash equivalents Present a reconciliation between the cash flow statement amount and the equivalent SOFP line item Disclose the policy for determining the composition of cash and cash equivalents (given variety of cash management practices/banking arrangements)
A change in that policy (e.g. reclassifying an investment previously in the investment portfolio) is accounted for under IPSAS 3.
Encouraged & required "other" disclosures
REQUIRED (PARA. 59)
Significant cash/cash-equivalent balances not available for use by the economic entity, with management commentary – e.g. controlled-entity balances subject to foreign exchange controls or legal restrictions.
ENCOURAGED (PARA. 61)
Undrawn borrowing facilities available for future operating activities/capital commitments, with any restrictions noted The amount and nature of restricted cash balances
Where budgets are prepared on a cash basis, the cash flow statement may help users link entity activities to the government's budgetary information (cross-ref IPSAS 1).
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Effective Date & Amendment Timeline (paras. 63–64)
Amendment history at a glance
Base Standard: periods beginning on/after 1 July 2001 (earlier application encouraged).
EffectiveChange
1 Jan 2011Para. 22 – Improvements to IPSAS (Jan 2010)
1 Jan 2012Para. 25 – Improvements to IPSAS (Nov 2010)
2015 (with IPSAS 35/37)Paras. 8, 30(b), 47, 48, 61(b); new 50A, 52A, 52B
1 Jan 2018Paras. 3, 4, 16 deleted – The Applicability of IPSAS (Apr 2016)
1 Jan 2021New paras. 55A–55E – Improvements to IPSAS, 2018 (financing-liability reconciliation)
–Para. 22 – IPSAS 42, Social Benefits (Jan 2019)
1 Jan 2025Paras. 26, 55 (IPSAS 43, Leases); para. 22 (IPSAS 44); para. 22 (IPSAS 45)
1 Jan 2026Paras. 21, 22 – IPSAS 47, Revenue
Para. 64: when an entity adopts accrual-basis IPSAS after the effective date (per IPSAS 33), this Standard applies from the date of adoption.
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Relationship to IAS/IFRS – Comparison with IAS 7
Comparison – IPSAS 2 vs IAS 7
IPSAS 2 is drawn primarily from IAS 7, Statement of Cash Flows, including an amendment from the IASB's April 2009 Improvements to IFRS.
TopicIPSAS 2IAS 7
Terminology"Revenue," "statement of financial performance," "net assets/equity""Income," "income statement," "equity"
Definitions (para. 8)Distinct set of technical-term definitionsDifferent definition set
Direct vs indirect methodBoth allowed; direct method encourages a reconciliation note (para. 29)Both allowed, same general approach
Illustrative examplesNo financial-institution cash flow statement illustrationN/A
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Statement Templates – Illustrative Cash Flow Statements
Direct method (para. 27(a)) – condensed
Line item20X2
Operating – Receipts
Taxation, sales, grants, interest receivedX
Operating – Payments
Employee costs, suppliers, social benefits, interest paid(X)
Net cash flows – operatingX
Purchase/sale of plant & equipment, investmentsX/(X)
Net cash flows – investing(X)
Proceeds/repayment of borrowings, distributions to governmentX/(X)
Net cash flows – financingX
Net increase/(decrease) in cashX
Cash at beginning / end of periodX
Indirect method (para. 27(b)) – condensed
Line item20X2
Surplus/(deficit)X
Depreciation, amortizationX
Increase in provision for doubtful debts, payables, borrowings, social benefits/employee-cost provisionsX
(Gains)/losses on sale of PP&E, investments(X)
Increase in other current assets, investments (revaluation), receivables(X)
Net cash flows from operating activitiesX
Investing and financing sections are identical to the direct-method example above – only the operating section differs between the two methods.
Reconciliation of liabilities arising from financing activities (paras. 55A–55E)
Liability20X1Cash flowsNon-cash changes20X2
Long-term borrowingsXXXX
Short-term borrowingsXXXX
Lease liabilitiesXXXX
Assets held to hedge long-term borrowingsXXXX
Total financing liabilitiesXXXX
"Non-cash changes" is itself often split into acquisitions, foreign exchange movements, and fair value changes – one possible way of satisfying paras. 55A–55E; comparative-period amounts are also required per IPSAS 1.
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Statement / Process Mapping
Classification decision map
- Does the cash flow relate to the entity's principal cash-generating activities, or is it not investing/financing? → OPERATING
- Does it involve acquisition/disposal of long-term assets or investments not in cash equivalents, resulting in a recognized SOFP asset? → INVESTING
- Does it change the size/composition of contributed capital or borrowings? → FINANCING
- Does the flow reflect another party's activity (collections on behalf of others) or is it high-turnover/large/short-maturity? → may report NET
- Is it a non-cash investing/financing event (e.g. debt-to-equity conversion, asset-for-asset exchange)? → EXCLUDE from the cash flow statement; disclose elsewhere
Concept-to-statement mapping table
IPSAS 2 conceptStatementNotes
Direct/indirect method choiceCash FlowDirect method encouraged; reconciliation note optional
Interest/dividend classification policyCash FlowPolicy choice, applied consistently period to period
Components of cash & cash equivalentsNotes SOFPReconciliation to the SOFP line item required
Restricted / unavailable cash balancesNotesRequired if significant; undrawn facilities encouraged
Changes in financing liabilitiesNotesReconciliation of opening to closing balances
Noncash transactionsNotesExcluded from the primary statement entirely
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Related Standards – Cross-Reference Map
How IPSAS 2 connects across the IPSAS body of literature
StandardNature of the connection
IPSAS 1Complete-set-of-statements requirement; comparison of budget and actual figures (§1, §11)
IPSAS 3Governs accounting for a change in the policy for determining cash-equivalent components (§11)
IPSAS 4Governs the exchange rates used for translating foreign currency and foreign-operation cash flows (§7)
IPSAS 5Allowed alternative treatment for capitalized interest – affects the total interest-paid disclosure (§8)
IPSAS 35 / 37Consolidation and joint arrangement mechanics behind acquisitions/disposals and investment entity exceptions (§9)
IPSAS 41Interest expense calculated using the effective interest method (§2 definitions)
IPSAS 43Lessee lease liability reduction payments classified as financing cash flows (§5, §10)
IPSAS 45Cash flows on assets held for rental then sale (para. 68 of IPSAS 45) – classified as operating (§4)
IPSAS 47Revenue classification examples feeding operating cash receipt categories (§4)
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Quick-Reference Glossary
Cash equivalents
Short-term, highly liquid investments readily convertible to known cash amounts, insignificant risk of value change.
Reporting date
The date of the last day of the reporting period to which the financial statements relate.
Net investment approach (financing liabilities)
A reconciliation between opening/closing SOFP balances of financing liabilities, distinguishing cash-flow-driven from non-cash changes.
Direct method
Discloses major classes of gross cash receipts and gross cash payments for operating activities.
Indirect method
Adjusts surplus/deficit for non-cash items and investing/financing effects to derive operating cash flow.
Economic entity
A controlling entity and its controlled entities, for financial reporting purposes.
Financial statement key
Cash Flow Cash flow statement Notes Notes to the financial statements