For most businesses, the statement of cash flows answers some fairly obvious questions.
How much cash did the company generate from its operations? How much did it invest? How much did it borrow or return to shareholders?
For a bank, those questions become much harder.
Cash is not simply something sitting in a bank account waiting to be used. Cash, deposits, lending and financing sit at the centre of the business model itself. Customer deposits can look like financing when viewed through a normal corporate lens, even though accepting deposits is one of a bank’s core operating activities.
That creates an awkward reporting problem.
A statement designed to show how an industrial or retail company generates and uses cash may be much less informative when applied to a business whose normal activity is moving money between customers, borrowers, markets and financial institutions.
The International Accounting Standards Board is now looking directly at this issue.
As part of its wider project on the statement of cash flows, the IASB is researching whether financial institutions should potentially receive exemptions from some, or even all, of the existing requirements for presenting a statement of cash flows.
No decision has been made. There is no new exemption for banks today.
The fact that the question is being asked at all is significant.
For ACCA SBR candidates, it creates a strong current reporting issue because it requires more than knowing IAS 7. Candidates need to think about investor information, business models, regulatory reporting and whether applying the same accounting requirement to very different companies always produces useful information.
Candidates developing this type of analysis with an ACCA SBR tutor should focus on the underlying question.
Does the statement help users understand how a bank creates value and manages liquidity, or are investors looking somewhere else?
Why the normal cash flow story works
Consider a manufacturer.
It buys raw materials, pays employees, sells finished products and collects money from customers.
The statement of cash flows helps investors see whether those operations are actually generating cash.
A company can report a healthy accounting profit while cash flow tells a more uncomfortable story.
Receivables may be increasing because customers are paying slowly.
Inventory may be absorbing working capital.
The company may be borrowing heavily to fund normal operations.
A major acquisition may explain a large investing cash outflow.
Dividends may be funded from accumulated cash rather than current operating performance.
The statement helps investors separate these activities.
Operating cash flow gives an indication of cash generated through the main business.
Investing cash flow shows where long-term resources are being deployed or sold.
Financing cash flow shows how the business raises capital and returns it to providers of finance.
It is not perfect, but the broad story makes sense.
Then apply the same framework to a bank.
The lines become much less obvious.
Lending money is part of the operation
A manufacturer normally spends cash to buy equipment and treats that as an investing activity.
A bank spends enormous amounts of cash making loans.
But lending is not an occasional investment decision sitting outside the bank’s normal operation.
It is the operation.
The bank advances money to borrowers and expects to earn interest and fees from those loans. Lending is one of the primary ways the business generates income.
Customer deposits create the opposite problem.
For many ordinary companies, borrowing money is clearly a financing activity.
For a bank, taking deposits from customers is part of its everyday commercial activity. Deposits provide funding, but they are also a product sold to customers.
This is one reason the operating, investing and financing categories can feel less intuitive for financial institutions.
The categories themselves were designed to help users distinguish different types of cash movement.
Where the business model involves financial assets and liabilities as part of normal trading activity, those distinctions can become less informative.
Banks do not manage liquidity through the cash flow statement
This is another important point.
A corporate finance director may use cash forecasts, working capital information and debt maturity schedules to understand whether a company can meet its obligations.
Banks operate in a much more heavily regulated liquidity environment.
Management monitors regulatory capital and liquidity measures, funding profiles, deposit behaviour, collateral, maturity mismatches and access to market funding.
Regulators impose detailed requirements because the consequences of a bank running short of liquid resources can be severe.
Investors therefore often look at information outside the statement of cash flows when assessing a bank’s financial resilience.
They may focus on regulatory capital.
They may analyse liquidity ratios.
They may look at the composition and stability of deposits.
They may consider funding concentration and maturity.
They may assess loan growth, credit quality and the bank’s ability to distribute capital to shareholders.
This does not necessarily mean the cash flow statement contains no useful information.
It does raise a fair question about whether it is the best place to understand bank liquidity.
Customer cash is not the same as shareholder cash
There is also a conceptual difficulty in looking at the sheer volume of cash moving through a financial institution.
A large proportion of that money may relate to customers.
Depositors place money with a bank. Borrowers receive funds. Loans are repaid. Interest is collected. Market transactions settle.
Those cash movements can be enormous compared with the bank’s own capital.
The presence of a large amount of cash movement therefore does not automatically tell investors how much cash is economically available to shareholders.
That distinction matters.
An investor may be much more interested in the capital the institution can generate and distribute than in the gross volume of cash passing through its operations.
This helps explain why some investors place more weight on regulatory capital information than on the conventional statement of cash flows.
They want to know how much capital the bank has, what constraints apply to that capital and how much could ultimately be returned through dividends or share buybacks.
Those questions are not always answered clearly by IAS 7.
The IASB is not saying the statement is useless
This distinction is important for any current issues answer.
The IASB has not decided that banks no longer need a statement of cash flows.
It has not proposed a final exemption.
Current research is considering whether financial institutions should potentially be exempt from some or all IAS 7 presentation requirements and what scope any future changes should have.
That is a very different statement.
There are still cash flows investors may find useful.
For example, information relating to dividend payments, capital raised, share buybacks and changes in debt can help investors understand how the institution funds itself and returns money to shareholders.
The challenge is deciding whether those useful items justify maintaining the full existing statement in its present form.
This is a classic cost-benefit question.
If a report is expensive to prepare but investors rarely use much of it, standard-setters need to consider whether the requirement is producing enough useful information.
The answer may be to improve it.
The answer may be to supplement it.
The answer may eventually be to remove some requirements for certain entities.
Research is intended to establish which option produces the best information.
Not every financial institution is the same
The phrase financial institution creates another difficulty.
A commercial bank is not the same as an insurer.
An insurer is not the same as an investment manager.
An investment manager is not the same as a consumer finance company.
Even within banking, business models vary considerably.
A retail bank funded mainly by customer deposits has a different cash and liquidity profile from an investment bank using wholesale market funding.
A specialist lender may rely heavily on securitisation.
A payments business may move huge volumes of customer money without taking the same lending risks as a conventional bank.
This is why defining the scope of any potential exemption is one of the areas the IASB intends to research.
A simple rule saying “banks are exempt” could create new problems.
Standard-setters would need to determine exactly which entities qualify and why.
The more exceptions a standard introduces, the more opportunities there are for inconsistent application and difficult boundary decisions.
That creates another good SBR point.
A possible improvement may create a new comparability problem.
Comparability still matters
One argument for retaining a common reporting framework is comparability.
Investors often compare businesses across countries and sectors.
Standardised statements help because users do not need to learn a completely different reporting structure for every entity.
If banks were allowed to omit the statement of cash flows while other companies continued to present one, some comparability would inevitably be lost.
The question is whether that comparability is meaningful in the first place.
Comparing operating cash flow from a supermarket with operating cash flow from a bank may create an impression of consistency while comparing businesses with fundamentally different economics.
Uniform presentation does not guarantee useful comparison.
Sometimes forcing very different activities into identical categories reduces understanding rather than improving it.
That is the tension the IASB needs to resolve.
Consistency is valuable.
Relevant information is also valuable.
Sometimes those objectives pull in different directions.
Could better disclosures replace the statement
One possible direction is not simply removing information but replacing less useful information with something investors actually use.
Financial institutions already provide extensive disclosures about financial instruments, liquidity and risk.
Banks also publish regulatory information that can be highly relevant to understanding their financial resilience.
A future reporting model could potentially make greater use of these areas rather than requiring every institution to present the same conventional statement of cash flows.
For example, investors may find greater value in information explaining capital movements, liquidity measures, deposit funding and distributions to shareholders.
That does not mean regulatory information can automatically replace financial reporting information.
The two systems have different purposes.
Regulatory requirements are designed primarily around financial stability, prudential supervision and the ability of institutions to absorb losses.
Financial statements are designed to provide useful information to investors and other users making decisions about providing resources to an entity.
There is overlap, but the objectives are not identical.
Any replacement would therefore need careful thought.
Regulatory ratios are not a perfect substitute
It would be easy to say that banks already publish liquidity ratios, so the cash flow statement is unnecessary.
That conclusion is too simple.
Regulatory measures are often defined by detailed prudential rules. They may use prescribed assumptions, classifications and time horizons.
Those measures are extremely important, but investors may still want information that is not captured within a regulatory ratio.
A regulatory liquidity measure might indicate that the institution meets a minimum requirement.
It does not necessarily explain every important movement in capital or financing during the year.
A good reporting package may therefore require a combination of information.
This is why supplementary disclosure could ultimately be more useful than a simple decision between keeping and deleting the cash flow statement.
Financing cash flows may still tell an important story
Even critics of the statement of cash flows for financial institutions can find value in certain financing information.
Dividends are an obvious example.
Investors want to know how much cash has been returned to shareholders.
Capital issuance matters too.
A bank raising new equity may be strengthening its regulatory capital position, funding growth or responding to financial stress.
Share buybacks provide another signal.
They may indicate that management believes the institution has surplus capital that can be distributed.
Changes in certain forms of debt funding can also be informative.
These cash flows relate directly to the relationship between the institution and the providers of its capital.
A future approach could potentially give greater prominence to these items rather than requiring users to work through a large statement containing cash movements that are less relevant to their analysis.
Operating cash flow becomes difficult to interpret
For many non-financial companies, operating cash flow is one of the first numbers an investor checks.
It is often compared with operating profit to assess cash conversion.
If profit rises by 20 per cent while operating cash flow falls sharply, investors usually want to know why.
Perhaps customers have not paid.
Perhaps inventory has increased.
Perhaps supplier terms have changed.
The same comparison is harder for a bank.
Changes in loans and customer deposits can create enormous movements in operating cash flow. Those movements may reflect normal growth in the bank’s business rather than a deterioration in its ability to generate cash.
A rapidly growing bank may make significantly more loans.
That requires cash.
At the same time, customer deposits may increase.
That provides funding.
Trying to interpret these movements through the same cash-conversion logic used for a manufacturer may be misleading.
This is one of the strongest arguments for reconsidering whether the existing statement communicates the right story.
The issue is about usefulness rather than compliance
Candidates sometimes approach current issues as though the objective is simply to identify the new rule.
That misses the point here.
There is no new rule yet.
The interesting discussion is about why financial reporting exists.
A requirement should provide information that helps users make decisions.
If investors consistently say that a statement has limited usefulness for a particular sector, the standard-setter needs to investigate why.
Perhaps the format is wrong.
Perhaps classifications are wrong.
Perhaps more disaggregation is needed.
Perhaps alternative disclosure would be better.
Or perhaps the existing statement remains useful once certain changes are made.
The purpose of research is to understand the problem before choosing the solution.
That is exactly how an SBR candidate should discuss the issue.
A good answer should acknowledge both sides
A weak current issues answer might say:
“Banks should not prepare cash flow statements because investors do not use them.”
That is far too absolute.
A stronger answer recognises competing arguments.
The current statement may have limited usefulness because operating, investing and financing classifications do not reflect the business model particularly well. Regulatory capital and liquidity information may provide investors with more relevant information about a bank’s financial resilience.
However, the statement can still provide useful information about dividends, capital raising, debt and other financing movements.
Removing it completely could also reduce comparability and create difficult questions about which financial institutions qualify for an exemption.
That is a balanced discussion.
The candidate can then conclude that further research is appropriate before any exemption is introduced.
This is also a professional judgement question
The topic gives candidates an opportunity to demonstrate professional judgement rather than simply technical recall.
You need to ask who uses the information.
What decisions are they making?
Which numbers help them make those decisions?
Which disclosures duplicate information available elsewhere?
What information might disappear if the statement were removed?
Would an alternative provide better information?
How much would the change cost preparers?
These are standard-setting questions, but they are also business questions.
They demonstrate why high-quality financial reporting is not achieved merely by applying the same template to every entity.
Current requirements still apply
This needs to be clear.
Financial institutions preparing financial statements under IFRS Accounting Standards still apply IAS 7 where it is applicable to them.
The IASB’s current work does not create an immediate accounting change.
Research into possible exemptions should not be described as an approved amendment.
This is particularly important in an exam.
Candidates can earn marks by discussing emerging developments, but they can lose credibility by presenting a tentative idea as though it were already mandatory.
A useful phrase is:
“The IASB is researching whether financial institutions should potentially receive exemptions from some or all of the IAS 7 presentation requirements. No final decision has been made.”
That is accurate and appropriately cautious.
This sits inside a much wider cash flow project
The work on financial institutions is only one part of a broader reconsideration of the statement of cash flows.
The IASB is also examining areas including disaggregation, non-cash investing and financing transactions, alternative cash flow measures, classification and the definition of cash equivalents.
That wider work matters because some improvements designed for ordinary companies may also benefit financial institutions.
The IASB therefore needs to understand those changes before deciding whether banks or other institutions need a different approach.
This is sensible.
There is little value in exempting financial institutions from requirements that may themselves change.
The board can first determine how IAS 7 can be improved generally and then assess whether those improvements solve any of the problems identified in the financial sector.
How this could appear in an SBR scenario
Imagine an exam scenario involving a large banking group.
Management argues that its statement of cash flows provides little value because investors focus mainly on regulatory capital and liquidity information.
The finance director proposes removing the statement from next year’s financial statements because the IASB is considering exemptions.
There are several issues.
First, management cannot apply a potential future exemption that does not yet exist.
Current requirements remain applicable.
Second, the board’s concern about usefulness may still be valid and could be discussed as part of the current IASB project.
Third, the candidate should explain why conventional cash flow categories may be less informative for a bank.
Fourth, the answer should acknowledge that some cash flows, particularly capital raising and shareholder distributions, remain useful.
Finally, management should monitor the IASB project rather than changing its accounting prematurely.
That answer combines current requirements, current issues and professional judgement.
Do not turn the answer into a banking lecture
You do not need detailed knowledge of every prudential banking rule to discuss this topic effectively.
The reporting problem can be explained in simple terms.
Banks manage liquidity using specialist regulatory and internal measures.
Many investors analyse those measures.
The conventional operating, investing and financing categories may not reflect banking activities particularly well.
Customer deposits and lending transactions sit at the heart of the business model.
Some financing-related cash flows remain useful.
The IASB is therefore exploring whether the current requirements can be improved or reduced for certain financial institutions.
That is enough to build a strong current issues discussion.
Connect the issue to investor needs
One of the best habits for SBR current issues answers is to return repeatedly to the user of the financial statements.
Do not simply say a disclosure is better.
Explain why.
A bank investor may want to know whether capital is available for distribution.
They may want to understand whether funding has become less stable.
They may want to know whether management has raised new capital.
They may want to understand major cash distributions through dividends or buybacks.
They may want to assess liquidity resilience.
If another disclosure communicates those matters more effectively than the traditional statement of cash flows, that is relevant to the standard-setting debate.
The aim is not fewer disclosures for the sake of making reporting easier.
The aim is better information.
Cost matters as well
Standard-setters also have to consider preparation costs.
Financial institutions already operate complex reporting systems and produce extensive financial and regulatory information.
If a particular financial statement has limited usefulness to investors, continuing to require significant work to produce it may not provide a good cost-benefit outcome.
However, cost alone should not decide the issue.
Almost every useful financial statement costs money to prepare.
The question is whether the benefit to users justifies that cost.
This is another reason why the IASB’s current research is important.
The board needs evidence from investors, preparers and other stakeholders before deciding whether exemptions would improve financial reporting.
Why this topic matters beyond banks
There is a broader reporting principle behind the debate.
Financial statements should reflect economic reality, not simply provide identical-looking documents.
Standardisation helps investors.
But genuine differences between industries also matter.
An accounting requirement designed around one type of business may become less informative when applied to another.
That does not automatically justify sector-specific accounting.
Too many special rules can make financial reporting fragmented and difficult to compare.
The challenge is finding the right balance.
The financial institutions cash flow debate is a good example of that tension.
How to revise this as a current issue
Do not memorise every detail of the IASB project.
Understand the story.
IAS 7 is being reviewed more broadly.
Stakeholder research has suggested that the statement of cash flows is less useful for financial institutions than for many other businesses.
Investors often focus instead on capital, liquidity and specific financing cash flows.
The IASB is researching whether some financial institutions might eventually receive exemptions from part or all of the existing presentation requirement.
No final decision has been made.
Then practise explaining why.
That final step is where most marks will come from.
Candidates following an ACCA SBR course should use current issues such as this to practise balanced analysis rather than memorising news updates. The useful skill is being able to explain the reporting problem, consider both sides and advise management using the requirements that apply today.
What the debate really tells us
The question is not simply whether banks need a cash flow statement.
The bigger question is whether financial reporting gives investors the information they actually use.
For many businesses, the statement of cash flows remains essential because it shows whether accounting performance converts into cash and how that cash is invested and financed.
Banks are different.
Lending, deposits and financial instruments are part of their normal business. Regulatory capital and liquidity measures play a much bigger role in assessing resilience. Some of the distinctions that make IAS 7 useful elsewhere can therefore become harder to interpret.
That gives the IASB a legitimate reason to reconsider the current approach.
It does not mean banks should stop producing cash flow statements tomorrow.
It means the reporting system should be willing to ask whether a long-standing requirement is still doing the job it was designed to do.
For SBR candidates, that is the most useful lesson.
Do not assume that applying a rule consistently always produces the most useful information.
Understand what the rule is trying to achieve.
Understand the business model.
Understand what investors need.
Then make the judgement.
