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The cash flow statement is prepared according to the cash basis of accounting, adjusting the profit information under the accrual basis to cash flow information under the cash basis, reflecting the inflow and outflow of cash and cash equivalents of the enterprise over a certain period. Compared to the balance sheet and income statement, the cash flow statement is generally considered to be more difficult to manipulate and reflects more accurate information. The author has compiled some common cash flow questions based on research from Zhongshang Zhonghuan, Q&A from the Accounting Vision Forum, and summaries of regulatory materials over the years for everyone to learn and discuss. If there are any errors, please feel free to point them out.
Compilation of Common Questions on Cash Flow Statements
1. Cash and Cash Equivalents
Application Guide for Enterprise Accounting Standards No. 31 – Cash Flow Statement:
Cash refers to the cash on hand and deposits that can be used for payment at any time. Deposits that cannot be used for payment at any time do not belong to cash.
Cash equivalents refer to investments held by the enterprise that are short-term, highly liquid, easily convertible to known amounts of cash, and have minimal risk of value changes. Short-term generally refers to investments that mature within three months from the date of purchase. Cash equivalents typically include bond investments maturing within three months. The amount realized from equity investments is usually uncertain, thus not classified as cash equivalents. Enterprises should determine the scope of cash equivalents based on specific circumstances, and once determined, it should not be changed arbitrarily.
According to the Q&A on the implementation of accounting standards by the Ministry of Finance, enterprises should determine the scope of cash equivalents based on specific circumstances, and once determined, it should not be changed arbitrarily; if changes occur, they should be handled according to accounting policy changes.The “Cash and Cash Equivalents” in the cash flow statement does not necessarily equal the “Monetary Funds” in the balance sheet, and the difference includes two types: first, deposits that cannot be paid at any time, such as court-frozen funds or fixed deposits held by enterprises for investment purposes; second, non-monetary funds that have characteristics of cash equivalents, such as short-term bonds purchased by enterprises to avoid idling cash, which can be converted to cash at any time when needed, and thus belong to cash equivalents.The definition of “cash equivalents” includes four judgment criteria: short-term, high liquidity, easily convertible to known amounts of cash, and minimal risk of value changes. The first two emphasize liquidity, while the latter two emphasize payment capability. Although not cash, their payment capability is not much different from cash and can be regarded as cash.The purpose of holding cash and cash equivalents is to meet liquidity needs for external payments in the short term, rather than primarily for earning interest income or investment returns.
2. Time Deposits
Whether time deposits belong to cash and cash equivalents needs to be judged based on their nature. For time deposits held by enterprises for payment purposes, if there are no restrictions on withdrawal at any time, they meet the definition of cash and cash equivalents (CSRC <“Analysis of Cases of Listed Companies Implementing Enterprise Accounting Standards”).2.1. Do time deposits that can be withdrawn at any time belong to cash and cash equivalents?In the question 5-2-1 of Zhongshang Zhonghuan Research (2020), it is divided into two situations:Situation 1: The amount of interest loss is calculated based on the number of days between the early withdrawal date and the scheduled maturity date,Situation 2: When withdrawing early, the bank calculates interest based on the actual number of deposit days and the interest rate for demand deposits during that period, and the interest loss equals the difference between the interest rates for time and demand deposits during that period.Zhongshang Zhonghuan believes that for a time deposit to be classified as “cash”, the key lies in its holding purpose to meet the cash demand for external payments in the short term. If the interest loss at the time of early withdrawal is significantly important at the reporting level (i.e., the amount recoverable at the time of early withdrawal differs significantly from the amount received at maturity), it indicates that the management’s holding purpose is more inclined towards investment rather than short-term payment. In situation 1, since the interest loss at the time of early withdrawal is significant, it indicates that the time deposit is not held to meet the cash demand for external payments in the short term, and it is generally considered that time deposits with such clauses do not belong to “cash” in the cash flow statement. In situation 2, this time deposit can usually be classified as “cash” in the cash flow statement, as the interest calculated at the time of early withdrawal based on the actual deposit days and demand deposit interest rate makes the amount recoverable at early withdrawal roughly consistent with the amount that could be obtained if short-term financial products were purchased from the beginning, and there is effectively no interest loss compared to the two.In current financial and accounting practices in China, the vast majority of time deposits belong to the type referred to in situation 2. Therefore, under normal circumstances, if management can make a clear written statement that their holding purpose is “to meet the cash demand for external payments in the short term, rather than for earning interest income (as an investment) or other purposes”, it is generally acceptable to recognize this portion of time deposits as “cash” in the cash flow statement.2.2. Considerations Regarding Time Deposit Interest RatesThe CSRC pointed out in the “2019 Annual Report Accounting Regulatory Report for Listed Companies” that “some companies calculate interest income on time deposits based on the time deposit interest rate (rather than the demand deposit interest rate), which usually indicates that their holding purpose is not to meet liquidity needs for external payments in the short term, but primarily to earn interest income; however, listed companies incorrectly classify these time deposits as cash and cash equivalents.”According to the relevant provisions of CAS No. 14 and No. 22, if management does not have a clear intention to hold until maturity, interest income cannot be recognized based on the interest rate corresponding to the term of the time deposit before maturity. This means: If the enterprise management intends to hold the time deposit until maturity for investment purposes and has the corresponding financial capability, and does not need to withdraw early, then this time deposit cannot be classified as “cash” in the cash flow statement, but interest income can be accrued at the time deposit interest rate at the end of the period; conversely, if the possibility of early withdrawal is high, it can be classified as “cash”, but interest income cannot be accrued at the time deposit interest rate at the end of the period.2.3. Pledge and Release of Time Deposit CertificatesThe CSRC’s “Guidelines for the Application of Regulatory Rules – Accounting No. 1” states: “Enterprises should first consider whether there are restrictions on the time deposit certificate and whether it can be withdrawn at any time to determine whether it belongs to cash and cash equivalents. If the time deposit certificate itself does not belong to cash and cash equivalents, its pledge or release will not generate cash flow; if the time deposit certificate itself belongs to cash and cash equivalents, being used for pledge no longer meets the definition of cash and cash equivalents, and the release of the pledge that re-qualifies as cash and cash equivalents will generate cash flow.In the latter case, when classifying the relevant cash flow, it should be judged based on the characteristics of the industry to which the enterprise belongs. If the enterprise belongs to the financial industry, obtaining short-term loans through the pledge of time deposits may belong to operating activities, and the related cash flow should be classified as operating cash flow; if the enterprise is a general non-financial enterprise, obtaining short-term loans through the pledge of time deposits belongs to financing activities, and the related cash flow should be classified as financing cash flow.In the “2021 Annual Report Accounting Regulatory Report for Listed Companies”, it was pointed out that “some non-financial listed companies incorrectly classified the cash flow generated from the pledge and release of bank deposits as operating cash flow.”2.4. Acquisition of Time Deposit CertificatesForum question (vinceself1120): A company purchased a large time deposit from a bank, with a principal of 50 million yuan, and paid 150,000 yuan in interest for the period held by the transferor, with an interest rate of 3.35%, for a term of 3 years (the transferor held it for about 1 month), with interest paid at maturity. This large time deposit cannot be withdrawn early but can be transferred (it is understood that if transferred, the success rate is high). The management of the company purchased this deposit solely to earn interest income, but will also consider transferring it if funds are needed (but transfer is not the purpose of purchasing the deposit). How should this deposit be handled?Response: 1. The accounting subject can use monetary funds. However, based on the business model described in the main post (the management purchased this deposit solely to earn interest income, but will also consider transferring it if funds are needed (but transfer is not the purpose of purchasing the deposit), it is recommended to report it as other debt investments. However, since the transfer price is generally calculated based on principal + accumulated interest, its fair value change is generally zero.2. This large time deposit does not belong to cash and cash equivalents, and its cash flow at the time of purchase is classified as “cash paid for investments”.3. At the end of the period, interest can be accrued at the time deposit rate, recognized as investment income, and added to “other debt investments – accrued interest”.
3. Acceptance Bills / Letter of Credit DepositsIf acceptance bills, letter of credit deposits, etc., are frozen before maturity and cannot be withdrawn for payment purposes, they cannot be classified as cash and cash equivalents. Although the “Interpretation of Enterprise Accounting Standards” includes the term “letter of credit guarantee deposits” in the enumeration of cash, enterprises should still consider whether the related guarantee deposits themselves meet the definition of cash and cannot simply classify them as cash and cash equivalents.The opening of bill guarantees should be reported in the cash flow statement according to their purpose. Generally, bank acceptance bills with a genuine transaction background should be identifiable at the time of issuance for payment of material costs or fixed asset purchase prices, and should be included in “cash paid for purchasing goods and receiving services” or “cash paid for purchasing and constructing fixed assets and other long-term assets”. Bank acceptance bills opened purely for financing purposes without a genuine transaction background should have their guarantee deposits classified as financing activities.The treatment of letter of credit deposits follows the above principles.
4. Guarantee Deposits for Performance BondsIn the Zhongshang Zhonghuan Research (2020) case 5-2-5 regarding the cash flow statement presentation of guarantee deposits for performance bondsBackground: After signing a sales contract with a customer, the company applies to the bank for a performance bond and deposits a certain amount of guarantee deposit into a designated bank account.Response: Unlike bill guarantees, applying to the bank for a performance bond is not for financing and does not lead to changes in the scale and structure of the enterprise’s capital and debt. Accordingly, the guarantee deposit deposited in the bank and frozen for the issuance of the performance bond should be treated as cash flow from operating activities, recorded as “cash paid related to operating activities” at the time of deposit, and as “cash received related to operating activities” at the time of release.【Analysis】 Court-frozen deposits also do not belong to cash and cash equivalents, and the treatment principles for freezing and unfreezing are the same as above.
5. Regulatory Funds for Real Estate Pre-salesIn the Zhongshang Zhonghuan Research (2020) question 5-2-6 (whether regulatory funds for real estate pre-sales belong to cash and cash equivalents)Background: Some subsidiaries of Company A are engaged in real estate development and sales, property leasing, etc. In the real estate development business of Company A, according to the local government’s “Implementation Rules for the Supervision of Pre-sale Funds for Commercial Housing”, “the pre-sale funds for commercial housing must be deposited into a regulatory account, and the retained pre-sale regulatory funds in the regulatory account must ensure the smooth completion of the remaining project construction. When the retained pre-sale regulatory funds reach the specified regulatory amount, the real estate development enterprise can use the pre-sale funds beyond the specified retained amount, prioritizing their use for project-related construction.”Company A requires that the pre-sale funds for commercial housing be deposited into the pre-sale regulatory account, and this portion of funds can only be used for construction according to the pre-sale fund regulatory implementation rules.Response: We understand that the government’s establishment of the “supervision of pre-sale funds for commercial housing” system is primarily to “ensure the smooth completion of the remaining project construction”, thus it is a protective and compliance measure; at the same time, within the broader scope of “used for project-related construction”, the enterprise still has considerable discretion over how to use this portion of funds, so although the use direction and purpose of the pre-sale regulatory funds are restricted by regulations, they differ from funds that are completely frozen or pledged, which would completely limit the enterprise’s right to use them, and thus still belong to the category of cash and cash equivalents. However, in the notes to the financial statements under “supplementary information to the cash flow statement”, this portion of pre-sale funds should be disclosed as “of which: cash and cash equivalents restricted for use by the parent company or subsidiaries within the group”.
6. Bank Deposits for Specific PurposesForum question (gotoschool): A customer prepaid 5 million yuan, requiring it to be deposited into a separate bank account opened by Company A, and the funds can only be used for constructing a warehouse for the customer. Does this 5 million belong to cash in the cash flow statement?Response: This amount only limits its purpose and is not frozen, pledged, or subject to other rights, thus it still belongs to cash and cash equivalents. However, it should be disclosed in the notes as “cash and cash equivalents restricted for use by the parent company or subsidiaries within the group”.
7. Funds in TransitForum question (Yudongdong): On December 31, 2019, the company received a bank notice that a foreign exchange payment had not been remitted due to control and timing issues, and the bank confirmation did not show this balance. On January 9, 2020, the company received this payment. Does this in-transit fund belong to cash and cash equivalents?Response: At the balance sheet date, the enterprise cannot use it for payment purposes without restrictions, thus it does not belong to cash and cash equivalents, even if the restriction lasts less than three months.
8. Third-Party Payment PlatformsFor amounts on third-party platforms (e.g., Alipay, WeChat, securities accounts), they are usually reported as “other monetary funds” on the balance sheet, while on the cash flow statement, those that meet the four conditions of cash equivalents (indicating they can be paid or withdrawn at any time) belong to cash and cash equivalents.
9. Funds in Stock AccountsForum question (Anhao): Does the balance of funds in the account used by the enterprise to purchase stocks belong to restricted monetary funds, and does it belong to cash and cash equivalents in the cash flow statement?Response: Generally, outgoing investment funds, if not frozen due to the subscription of a certain security, do not belong to restricted funds; funds that are frozen due to the subscription of a certain security belong to restricted funds and do not belong to cash and cash equivalents, and the related cash flow belongs to investment activities.
10. Funds Collected by Group Financial Management CompaniesFunds collected by member units through an internal settlement center to the parent company’s account belong to other receivables, thus do not belong to cash and cash equivalents. The collection and allocation of funds belong to cash flows related to receiving or paying other activities.
11. Project Guarantee DepositsForum question (Xiaoyou Liangfeng): The enterprise commissioned a contractor to build an office building, and received a quality guarantee deposit of 2 million yuan from the contractor. Which item should this deposit be placed in the cash flow statement? Should it be placed in cash received related to investment activities?Response: This can be understood. The guarantee deposit is related to the purchase and construction of long-term assets, especially when the expected time from obtaining to returning the deposit exceeds one year.
12. Financial Products12.1. Gross and Net AmountsIn the “2022 Shanghai Stock Exchange Accounting Regulatory Dynamics” question [Cash Flow Statement Reporting Issues for Financial Products]: During the holding period of large short-term financial products, should the cash flows generated from purchases and redemptions be reported on a net or gross basis?Case: Company A, a non-financial listed company, frequently rolled over idle self-owned funds to purchase financial products in the year 20X1, with a total purchase amount of 1.1 billion yuan, of which 90% of the financial products held for less than 60 days. Company A reported the cash inflows and outflows from the purchase and redemption of financial products with amounts greater than 5 million yuan and held for less than 60 days in the cash flow statement for investment activities on a net basis, while other financial products were reported on a gross basis. If the reporting of short-term financial products on a net basis changes to a gross basis, it would lead to an increase of 1 billion yuan in both “cash paid for investments” and “cash received from investment recoveries” in Company A’s consolidated cash flow statement. For the large short-term financial products held during the period, can Company A report the cash flows generated from purchases and redemptions on a net or gross basis?Analysis: According to Enterprise Accounting Standards No. 31 – Cash Flow Statement, cash flows should be reported separately for total cash inflows and outflows, but cash inflows and outflows for items that are fast-moving, large in amount, and short-term can be reported on a net basis. There is no unified standard for “fast-moving, large amount, short-term” in enterprise accounting standards.In practice, both net and gross reporting methods for financial products purchased by non-financial listed companies exist, but most adopt the gross method. When considering cash flow reporting, listed companies should comprehensively consider transaction habits, purchase amounts, frequency, and other factors, and if they believe that adopting net reporting complies with the relevant provisions of enterprise accounting standards and is more helpful for users of the statements to understand the cash flow situation of the enterprise, they should generally consistently implement and fully disclose it. Additionally, it should be noted that although some financial products in the cash flow statement are selected to be reported on a net basis, in the annual report’s “Overall Situation of Entrusted Financial Management” and other related sections, the situation of purchasing financial products in the current year, including product types and total amounts, should still be fully disclosed.In the “2021 Annual Report Accounting Regulatory Report for Listed Companies”, it was pointed out that “some non-financial listed companies reported cash inflows and outflows from the purchase and redemption of financial products on a net basis this period, but did not disclose the facts and reasons for the change, nor did they disclose the relevant analysis and judgment on whether the financial product investments meet the requirements for net reporting“.12.2. Redemption at MaturityForum question: Is the cash flow from the investment income of financial products classified as trading financial assets counted as cash received from investment recoveries or cash received from investment income?Response: The investment income received at maturity along with the principal is generally reported as “cash received from investment recoveries”.
13. Net Reporting MethodAccording to Article 5 of CAS No. 31, cash flows should be reported separately for total cash inflows and outflows, and the following three categories can be reported on a net basis:(1) Cash collected or paid on behalf of customers.(2) Cash inflows and outflows for fast-moving, large amounts, and short-term items.(3) Relevant items of financial enterprises, including the issuance and recovery of short-term loans, the absorption and payment of demand deposits, the deposits and withdrawals of interbank deposits, the borrowing of funds from other financial enterprises, and the buying and selling of securities.In this regard, the “Interpretation of Enterprise Accounting Standards” (2010) lists several situations: Securities companies collecting customer securities trading settlement fees, stamp duties, etc., travel companies paying for tourists’ accommodation, meals, transportation, entertainment, luggage handling, tickets, visa fees, etc. These items, due to fast turnover, short time in the enterprise, and limited room for enterprise utilization, net amounts better reflect their impact on the enterprise’s payment ability and solvency; conversely, if reflected in total amounts, it may mislead the evaluation of the enterprise’s payment ability and solvency and analysis of future cash flows.Forum question: Can temporary fund borrowing between enterprises be presented on a net basis?Answer: No, this does not comply with the three categories of business (refer to the response). The CSRC mentioned in the “2017 Annual Report Accounting Regulatory Report for Listed Companies” that some listed companies presented cash flows related to transactions with other units or individuals, guarantee deposits, financial products, etc., that do not meet the net reporting criteria on a net basis“.
14. Government SubsidiesThe Ministry of Finance clearly stated in the “Interpretation of Issues Related to the Format of Financial Statements for General Enterprises in 2018” that “government subsidies actually received by enterprises, whether related to assets or income, should be reported as cash flows generated from operating activities in the cash flow statement”.However, for policy grants that are clearly required by government documents to be included in capital reserves, it seems more appropriate to classify them as cash flows from financing activities (refer to the response).
15. Tax RefundsCAS No. 31 stipulates that tax payments made by enterprises are generally reported in the cash flow statement under “cash paid for various taxes”. Regarding tax refunds, there are two common situations: one is the refund of overpaid taxes, usually reported as a deduction item of “cash paid for various taxes”, for example, after the corporate income tax settlement, the tax authority refunds the overpaid tax amount; the second is in cases of VAT refunds, export tax refunds, etc., which are usually reported under “cash received from tax refunds”.According to the Q&A on the implementation of accounting standards by the Ministry of Finance, “the cash flows generated from the receipt or payment of VAT refunds belong to cash flows generated from operating activities, and the cash flows related to the receipt of VAT refunds should be reported under “cash received from tax refunds”, while the cash flows related to the payment of VAT refunds that continue to be deducted from input tax should be reported under “cash paid for various taxes”.”
16. Employee CompensationThe Ministry of Finance’s accounting treatment Q&A states: Enterprises should judge and report according to the relevant provisions of “Enterprise Accounting Standards No. 31 – Cash Flow Statement” (Caihui [2006] No. 3) and others. The item “cash paid to employees and cash paid for employees” reflects the cash actually paid to employees and cash paid for employees, including various forms of compensation actually given to employees for services provided in the current period and other related expenses, such as salary, bonuses, various allowances and subsidies, withholding and paying individual income tax for employees, union fees, etc., as well as other expenses paid for employees, excluding wages paid to personnel in construction projects.
17. Disability Insurance FundThe Ministry of Finance’s accounting treatment Q&A states: According to the relevant provisions of “Enterprise Accounting Standards No. 31 – Cash Flow Statement” (Caihui [2006] No. 3), the disability insurance fund paid by enterprises is included in the item “cash paid for other activities related to operating activities“.
18. Capitalized InterestThe Ministry of Finance’s accounting treatment Q&A states: According to the relevant provisions of “Enterprise Accounting Standards No. 31 – Cash Flow Statement” (Caihui [2016] No. 3), the capitalized amount of borrowing interest incurred for the purchase and construction of fixed assets is reflected in the item “cash paid for distributing dividends, profits, or paying interest”.
19. Lease Expenses and Lease DepositsThe Ministry of Finance’s accounting standards implementation Q&A stipulates that according to CAS No. 21 lease standards, enterprises should include cash paid for the repayment of lease liabilities and interest in financing activities cash outflows, while cash paid for short-term lease payments and low-value asset leases that are simplified under the lease standards and not included in lease liabilities should be included in operating activities cash outflows.Cash paid for prepaid rent and lease deposits should be included in financing activities cash outflows, while cash paid for prepaid rent and lease deposits related to short-term leases and low-value asset leases that are simplified under the lease standards should be included in operating activities cash outflows.
20. Commercial Bills20.1. Bill Guarantee DepositsAccording to the content of the CSRC’s 2017 accounting regulatory coordination meeting, acceptance bills that are frozen before maturity and cannot be withdrawn for payment purposes cannot be classified as cash and cash equivalents (even if the maturity is within 3 months), and should be reported in the cash flow statement according to their purpose.On this basis, Zhongshang Zhonghuan Research (2020) suggests that the guarantee deposits for bank acceptance bills in the cash flow statement should be treated in two different situations:(1) If the bill is paid directly from the guarantee deposit after maturity, it should be classified according to the purpose of issuing the bill, such as “cash paid for purchasing goods, receiving services” or “cash paid for purchasing and constructing fixed assets, intangible assets, and other long-term assets”. (If the company immediately discounts the bill after issuance for financing purposes, it belongs to cash flow from financing activities.)(2) If after maturity, the original guarantee deposit is released and the bill is paid with funds from other sources, then the guarantee deposit is frozen, classified as “cash paid for other activities related to financing activities” at the time of freezing, and as “cash received for other activities related to financing activities” at the time of release.20.2. Endorsement Transfer of BillsAcceptance bills do not meet the definition of cash and cash equivalents, and their endorsement transfer does not generate cash flow, and does not need to be reflected in the main cash flow statement.It should be noted that because the cash flow statement cannot reflect the situation of bill payments and receipts, if an enterprise engages in a large number of bill endorsement transfers, it may mislead users of the statements, for example: if customers pay with bills, the amount in the cash flow statement for “cash received from sales of goods and services” is 0, leading users to mistakenly believe that the company’s collection ability is low. Therefore, the enterprise should supplement relevant impacts in the notes to the financial statements. The CSRC’s accounting department also mentioned in the 2017 accounting regulatory coordination meeting that “for transactions involving cash payments for goods, project payments, etc., that do not involve cash inflows and outflows, cash flows should not be simulated in the cash flow statement, but enterprises should disclose relevant supplementary information on bill payments.”The CSRC mentioned in the “2014 Annual Report Accounting Regulatory Report for Listed Companies” that “in practice, the use of bills for settlement is a widely accepted and adopted settlement method. Many companies obtain bank acceptance bills from their customers for sales of goods or services, and then endorse the bills to suppliers based on their own business needs and funding plans. Since this transaction does not involve cash, it cannot be reflected in the cash flow statement under “cash received from sales of goods and services”, “cash paid for purchasing goods and receiving services” or “cash paid for purchasing and constructing fixed assets, intangible assets, and other long-term assets”. Annual report analysis has found that the amount reported in the cash flow statement under “cash received from sales of goods and services” is far lower than the amount in the income statement under “operating income”, while the increase in asset amounts is much greater than “cash paid for purchasing goods and receiving services” or “cash paid for purchasing and constructing fixed assets, intangible assets, and other long-term assets”. To help users of the statements gain a more comprehensive understanding of the overall cash flow situation, listed companies should disclose the amount of bank acceptance bills received from sales of goods in the notes to the cash flow statement. However, most companies with such situations have not provided this explanation in the notes to the cash flow statement.”20.3. Cash Obtained from Discounting BillsRegarding the cash flow treatment of cash obtained from discounting bills, there have been two viewpoints in practice:Viewpoint 1: Cash flow from financing activities. On one hand, the essence of bill discounting is an enterprise’s behavior of financing from the bank for early payment, and bills with recourse can be understood as bill pledge loans; on the other hand, the acceptance bills that do not meet the derecognition conditions are reported as “short-term loans” in the balance sheet, leading to an increase in the enterprise’s debt scale, and CAS 31 states that “financing activities refer to activities that lead to changes in the scale and structure of the enterprise’s capital and debt”, thus keeping the treatment of the balance sheet and cash flow statement consistent. However, this has two major flaws: ① bill discounting has cash inflow without cash outflow, ② it cannot reflect cash inflows from operating activities, leading users of the statements to believe that the enterprise’s ability to obtain cash from operating activities is poor, and that all funds needed for operations must come from external financing, thus creating misunderstandings.Viewpoint 2: Cash flow from operating activities. Regardless of whether the bill is accepted at maturity or discounted early, its cash flow originates from the enterprise’s operating behavior, thus should be classified as operating activities. Its drawbacks are: ① the cash flow statement does not match the balance sheet; ② sometimes enterprises do discount for financing needs, and viewpoint two does not reflect the essence of the transaction.In this regard, the CSRC in the “Analysis of Cases of Listed Companies Implementing Enterprise Accounting Standards” (June 2020) classified it based on the credit risk of the bills: If it does not meet the derecognition conditions, it is classified as cash inflow from financing activities; if it meets the derecognition conditions, it is classified as cash inflow from operating activities.In 2023, the CSRC clarified in the “Guidelines for the Application of Regulatory Rules – Accounting No. 1”: “If the bank acceptance bill discounting does not meet the derecognition conditions for financial assets, the cash obtained from bill discounting should be recognized as a loan in the balance sheet, and the cash inflow in the cash flow statement should be classified as cash flow from financing activities; if the bank acceptance bill discounting meets the derecognition conditions for financial assets, the related cash inflow should be classified as cash flow from operating activities. If the bank acceptance bill discounting does not meet the derecognition conditions, subsequent bill maturity payments and other events leading to the derecognition of receivables and loans do not involve cash payments, and cash flows should not be simulated in the cash flow statement. When the company engages in transactions such as purchasing raw materials with bank acceptance bills, the same principle should be applied.”Regarding the consideration of discount interest: when receivable bills are discounted, the cash inflow amount is not the face amount of the receivable bills, and the discount interest does not constitute a real cash outflow, thus the reported cash inflow amount should be the actual cash received (i.e., net amount), rather than the face amount of the receivable bills.20.4. Non-Financial Institutions DiscountingForum response: First, generally non-financial enterprises should not engage in transactions involving cash purchases of receivable bills held by other enterprises, as this may involve illegal financial activities. For compliance risks arising from this, it is recommended to consult legal opinions.Secondly, regardless of the compliance issues of the transaction itself, regarding the cash flow reporting involved, since this enterprise is a non-financial enterprise, engaging in this business is not a routine activity, equivalent to providing financing to other enterprises. Correspondingly, the cash outflow and cash received at maturity should belong to the investment activities in the cash flow statement (cash received/paid related to other investment activities).
21. Interest IncomeOnly interest income generated from classified monetary funds is reported in the operating activities as “cash received from other activities related to operating activities”; interest income generated from classified financial instruments is reported in the investment activities as “cash received from other activities related to investment activities”, such as interest income generated from installment sales of goods with financing nature.
22. Fund Transactions between Non-Financial InstitutionsThe CSRC’s accounting department mentioned in the 2017 accounting regulatory coordination meeting that “for fund borrowing between enterprises and related parties, under normal circumstances, if both parties have clearly agreed on the use period and interest of the funds, both parties should report the cash flows generated from investment activities and financing activities accordingly; if the related party does not charge interest and no repayment period is agreed, the enterprise should analyze and judge the essence of the transaction based on whether there is business cooperation, whether there are real transactions for cash collection and payment, etc., to correctly classify and report the related cash flows“.[Interpretation] ① With interest: For interest-bearing fund transactions, their nature is essentially borrowing, thus cash received from interest-bearing loans should be reported under “financing activities – cash received from other activities related to financing activities”, and cash outflows for repaying the principal and interest of interest-bearing loans should be reported under “financing activities – cash paid for other activities related to financing activities”. ② Without interest: If the nature of the transaction with non-financial institutions is essentially borrowing, it is recommended to report the related cash inflows and outflows under financing activities; if the nature of the transaction with non-financial institutions cannot be defined, it can be considered to report the related cash inflows and outflows under operating activities.It should be noted that if this kind of fund transaction has a significant impact on operating cash flows, its reasonableness should be scrutinized. Enterprises may artificially change the situation for the purpose of beautifying operating cash flows, shifting cash inflows that are essentially financing activities to operating activities. The CSRC also mentioned in the “2018 Annual Report Accounting Regulatory Report for Listed Companies” that “some listed companies, when preparing cash flow statements, did not comprehensively consider whether there were business transactions with related enterprises, and simply classified all fund transactions with related enterprises as cash flows from operating activities“.In the Zhongshang Zhonghuan Research (2020) question 5-2-13 (reporting issues of fund borrowing between related parties in the cash flow statement)Question: If the parent company lends funds to the subsidiary (which is in the construction period and has no operating activities), and no loan agreement is signed, no interest is charged, and no repayment period is agreed, is it appropriate for the subsidiary to report the received funds as “cash received from other activities related to investment activities”, while the parent company reports the paid funds as “cash paid for other activities related to investment activities”?Response: There is no unified practice regarding the reporting method of fund borrowing between related parties in the cash flow statements of the borrowing and lending parties, which may be classified as investment or financing activities, or as operating activities, mainly considering the following factors:1. Whether there is a clear repayment period agreement;2. The frequency of borrowing and repayment transactions during the reporting period;3. The size of the principal amount involved;4. The actual borrowing period.If there is no loan agreement, the borrowing period is uncertain, borrowing and repayment transactions occur frequently and involve large amounts, and there is no interest, it is closer to being classified as cash flow from operating activities; conversely, if the lending party is closer to being classified as cash flow from investment activities, the borrowing party is closer to being classified as cash flow from financing activities. The borrowing party reporting the received funds as cash flow from investment activities, although it simplifies the consolidation of the cash flow statement when the parent company prepares the consolidated cash flow statement, is inappropriate for its individual cash flow statement reporting.Therefore, in this case, it is inappropriate for the subsidiary to report the borrowed funds as “cash received from other activities related to investment activities”; it should be reported as “cash received from other activities related to operating activities” or “cash received from other activities related to financing activities” based on specific circumstances; correspondingly, the lending parent company should report it as “cash paid for other activities related to operating activities” or “cash paid for other activities related to investment activities”.
23. Entrusted LoansIn the Zhongshang Zhonghuan Research (2020) question 5-2-12 (reporting issues of cash flow statements for entrusted loans)Question: How should the principal and interest of entrusted loans be reported in the cash flow statements of the borrowing and lending parties?Response: In entrusted loans, for the lending party, the issuance of the loan principal can be reported as “cash paid for other activities related to investment activities”, and the recovery can be reported as “cash received from other activities related to investment activities”; for the borrowing party, the receipt of the loan principal can be reported as “cash received from borrowing”, and the repayment of the loan principal can be reported as “cash paid for repaying debts”. The interest paid by the borrowing party can be reported as “cash paid for distributing dividends, profits, or paying interest”.For the interest income of the lending party, there is no unified regulation on this issue, and the following two practices should both be acceptable, and once an enterprise chooses one, it should maintain consistency: (1) consistent with the practice of recognizing interest income as “other business income” in the income statement, reported as “cash received from other activities related to operating activities”; (2) considering that the issuance and recovery of principal are classified as investment activities in the cash flow statement, thus reporting interest income as “cash received from other activities related to investment activities”.
24. Purchase of Minority Shareholder Rights in SubsidiariesThe cash outflow for the parent company purchasing minority shareholder rights in subsidiaries should be classified as cash flow from investment activities in the parent company’s financial statements, while in the consolidated financial statements, the purchase of minority shareholder rights and partial disposal of subsidiary equity without losing control should be classified as cash flow from financing activities (excerpted from the CSRC’s accounting department’s 2017 accounting regulatory coordination meeting).
25. Acquisition and Disposal of SubsidiariesThe Ministry of Finance’s accounting standards implementation Q&A states: The cash portion of the purchase price paid in cash for the acquisition of subsidiaries and other operating units, minus the cash and cash equivalents held by the subsidiaries or other operating units, should be reported in the cash flow statement under the investment activities item “net cash paid for acquiring subsidiaries and other operating units”.The acquisition of subsidiaries and other operating units is an overall transaction, and subsidiaries and other operating units may hold cash and cash equivalents in addition to fixed assets and inventory. Thus, the overall cash flow of acquiring subsidiaries or other operating units should be reflected as the cash portion of the purchase price paid in cash, minus the cash and cash equivalents held by the subsidiaries or other operating units, and if negative, it should be reflected in the item “cash received from other activities related to investment activities”.The cash obtained from the disposal of subsidiaries and other operating units, minus the cash and cash equivalents held by the subsidiaries or other operating units and related disposal costs, should be reported in the cash flow statement under the investment activities item “net cash received from disposing of subsidiaries and other operating units”.The disposal of subsidiaries and other operating units is an overall transaction, and subsidiaries and other operating units may hold cash and cash equivalents. Thus, the overall cash flow of disposing of subsidiaries or other operating units should be reflected as the cash portion received from the disposal price, minus the cash and cash equivalents held by the subsidiaries or other operating units and related disposal costs, and if negative, it should be reflected in the item “cash paid for other activities related to investment activities”.
26. Monetary Funds of Subsidiaries Held for SaleThe CSRC mentioned in the “2022 Annual Report Accounting Regulatory Report for Listed Companies” that “some listed companies plan to dispose of all equity in subsidiaries, and at the end of the reporting period, incorrectly classified the monetary funds of the subsidiary as “cash paid for other activities related to investment activities” in the investment activities cash flow. According to the relevant provisions, the monetary funds of the subsidiary at the end of the reporting period, which have not yet been disposed of, still belong to cash and cash equivalents in the consolidated financial statements and should not be reported as a cash outflow“.
27. Capital Reduction by ShareholdersCapital reduction by shareholders will lead to changes in the scale and structure of the enterprise’s capital and debt, and should be reported in the item “cash paid for other activities related to financing activities”.
28. Liquidation of SubsidiariesIn the Zhongshang Zhonghuan Research (2020) question 5-2-7 (cash flow statement issues for the liquidation of subsidiaries)Question: Does the liquidation of a subsidiary belong to the “disposal of subsidiaries” as stipulated in “Enterprise Accounting Standards No. 31 – Cash Flow Statement”? Should the cash paid to minority shareholders for their share of the remaining net assets be included in the consolidated cash flow statement under “cash paid for other activities related to investment activities”?Response: Whether the liquidation of a subsidiary belongs to the “disposal of subsidiaries” as stipulated in “Enterprise Accounting Standards No. 31 – Cash Flow Statement” should depend on the specific method of liquidation:(1) If the method involves selling assets, settling liabilities, and dismissing personnel, followed by shareholders receiving their remaining net assets in cash, it is essentially the same as disposing of a subsidiary, meaning that based on the principle of “substance over form”, the remaining cash recovered after liquidation can be filled in the consolidated cash flow statement under the item “cash received from disposing of subsidiaries or other operating units”.(2) If the method involves merging the original assets, liabilities, personnel, and business of the subsidiary into the parent company (or other subsidiaries controlled by the parent company) for continued operation after the liquidation of the subsidiary, then the economic resources controlled by the parent company have not changed, and it does not belong to “disposal of subsidiaries”.According to Article 14 of “Enterprise Accounting Standards No. 31 – Cash Flow Statement”: “Financing activities refer to activities that lead to changes in the scale and structure of the enterprise’s capital and debt.” Since the distribution of cash to minority shareholders after the distribution of their share of the remaining net assets will reduce the total equity in the consolidated balance sheet, the relative structure of “equity attributable to shareholders of the parent company” and “minority interests” will also change, thus the cash distributed to minority shareholders during the liquidation of the subsidiary belongs to cash flow from financing activities and should be filled in the consolidated cash flow statement under the item “cash paid for other activities related to financing activities”.
29. Compensation for Business BettingThe “2021 Annual Report Accounting Regulatory Report for Listed Companies” mentioned that “for performance compensation paid due to the failure of the acquired target company to meet performance commitments, it was incorrectly classified as cash paid for other activities related to operating activities, and not correctly classified as cash flow from investment activities“.
30. Stock BuybacksCash used to repurchase company stock for employee incentive plans should be classified as cash flow from financing activities.