The Development of Funds Flow Reporting in the U.K

The historical development of cash flow reporting in the U.K. followed a very similar pattern to the U.S., with one noteworthy exception, U.K. firms were a lot slower in their mass acceptance and use of the funds flow statement.6Davies et al. (1994), providing an overview of the history of cash flow reporting in the U.K. up to the issuance of FRS 1, comment that prior to the 1970’s there was little evidence of the same widespread use of the funds flow statement in the U.K. compared to what had been observed in America. However, much like in America, Rosen and Don (1969) noted that a form of funds flow statement had been used by some U.K. companies from as early as 1862.

Table 2-4 Summary of the development of cash flow reporting in the U.K. Key Date Key Development

1974, April Issue of Exposure Draft (ED) 13: Statements of Source and Application of Fundsfor comment

1975, July Issue of Statement of Accounting Practice (SSAP) 10: Statements of Source and Application of Funds effective for fiscal years ending on or after 1 January 1976

1978, June Part 4 added to SSAP 10 highlighting the alignment of the standard with IAS 7: Statement of Changes in Financial Position

1990, July Issue of ED 54: Cash flow statements issued by the ASC for comment

1991, September Issue of Financial Reporting Standard (FRS) 1: Cash Flow Statements by the Accounting Standards Board (ASB) to supersede SSAP 10 effective for fiscal years ending on or after 23 March 1992

1994, March Issue of Financial Reporting Exposure Draft (FRED) 10: Revision of FRS 1 Cash Flow Statements for comment

1996, October Issue of FRS 1 (Revised 1996): Cash Flow Statements by the ASB effective for fiscal years ending on or after 23 March 1997 2002, July Issue of Regulation (EC) No 1606/2002 of the European Parliament and of the Council requires that the consolidated accounts of all listed European firms be prepared in accordance with International Financial Reporting Standards (IFRS)

2005, January The application of IFRS including IAS 7 becomes mandatory for all consolidated accounts of listed U.K. companies with annual reporting periods on or after this date

Based on FRS 1 (1991), Davieset al.(1994), FRS 1 (1996), Cox and Pendersen (2002), and Rutherford (2007).

By the 1970’s, however, the Institute of Chartered Accountants in England and Wales (ICAEW) surveys of published accounts show rapid acceptance and common use of the funds flow statement within U.K. companies. While only 13% of firms reported a funds flow statement in 1970, this had risen to 100% by 1979 (Rutherford, 2007, page

82). Driving the quick adoption of funds flow statements was the initial issue of Exposure Draft (ED) 13 “Statements of Source and Application of Funds” in April 1974 from the recently formed Accounting Standards Steering Committee (ASSC).7ED 13 offered U.K. companies guidance on how to disclose a funds flow statement, and received widespread support that resulted in the issuance of SSAP 10 “Statements of Source and Application of Funds”in July 1975, fifteen months later. SSAP 10 targeted all enterprises with turnover or gross income greater than £25,000 per annum and argued that companies should adopt it if their accounts were to provide a“true and fair view of financial position and profit or loss” (ICAEW, 1985, page 219; paragraph 9). Firms were, therefore, pressurised by the ASSC to adopt SSAP 10, since according to the Companies Act (1967), failing to adopt SSAP 10 could lead to a qualified audit opinion.8

It was not long, however, before SSAP 10 received similar criticisms to those levelled against the U.S. equivalent, APB No. 19. One of the standard’s main weaknesses was its vague objective, which portrayed the funds flow statement as a reconciliation of the opening balance sheet and current year profits with the closing balance sheet (Davies et al., 1994). From the standard’s objective it was, therefore, unclear whether the ASSC anticipated SSAP 10 would provide any new information to financial statement users. In fact, the objective of SSAP 10 appeared to view the funds flow statement as a mere “reclassification” of information that was already available to the reader when it stated that:

7

The ASSC was formed by the ICAEW in 1970 with the purpose of carrying out the objectives of the ICAEW Council’s statement of intent as agreed on December 12, 1969 to publish authoritative standards, increase the uniformity of accounting practice and encourage the on-going improvement of accounting standards (Rutherford, 2007, pages 26 and 31).

8_{The Companies Act (1967) clearly stated in section 14 that the auditor had to express an opinion as to}

whether the accounts provided a “true and fair view” of the financial position and performance of the entity.

“The funds statement is in no way a replacement for the profit and loss account and Balance Sheet although the information which it contains is a selection, reclassification and summarisation of information contained in those two statements. The objective of such a statement is to show the manner in which the operations of a company have been financed and in which its financial resources have been used…”

(ICAEW, 1985, pg 218; paragraph 2)

Further to these criticisms, were those that noted the inadequate definition of “funds”, and the lack of guidance to encourage a consistent format of disclosure. The missing emphasis on “cash” flow in the funds flow statement was demonstrated within the appendix of general guidance to SSAP 10. For example, an entity issuing shares in return for an interest in a subsidiary company was recommended to disclose the transaction as both a “source” and “application” of funds, even though there was no impact on the firm’s cash resources (ICAEW, 1985, pg 224; example 3).