Reporting changes in financial position; Opinions of the Accounting Principles Board 19;APB Opinion 19;

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Reporting changes in 8nancial position; Opinions of the Reporting changes in 8nancial position; Opinions of the

Accounting Principles Board 19;APB Opinion 19; Accounting Principles Board 19;APB Opinion 19;

American Institute of Certi8ed Public Accountants. Accounting Principles Board

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8nancial position; Opinions of the Accounting Principles Board 19;APB Opinion 19;" (1971).

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OPINIONS OF THE

ACCOUNTING PRINCIPLES

BOARD

Reporting Changes

in Financial Position

In view of the broadened concept of the Funds Statement

adopted in this Opinion, the Board has recommended that

the title of the statement be changed to "Statement of

Changes in Financial Position."

INTRODUCTION

1. In 1963 the Accounting Principles Board issued Opinion

No. 3, The Statement of Source and Application of Funds.

Support of that Opinion by the principal stock exchanges and

its acceptance by the business community have resulted in a

significant increase in the number of companies that present a

statement of sources and uses of funds (funds statement) in

annual financial reports to shareholders. Several regulatory

agencies have acted recently to require funds statements in cer-

tain reports filed with them.

2. APB Opinion No. 3 encouraged but did not require pre-

sentation of a funds statement. In view of the present wide-

spread recognition of the usefulness of information on sources

and uses of funds, the Board has considered whether presenta-

tion of such a statement should be required to complement the

income statement and the balance sheet. APB Opinion No. 3

also offered considerable latitude as to form and content of

funds statements, and practice has varied widely. The Board

has therefore also considered establishing guides for presenting

such statements.

Issued by the Accounting Principles Board of the

American Institute of Certified Public Accountants

666 FIFTH AVENUE, NEW YORK, NEW YORK 10019

MARCH 1971

372

Opinions of the Accounting Principles Board

3. This Opinion sets forth the Board's conclusions and super-

sedes APB Opinion No. 3, The Statement of Source and Appli-

cation of Funds.

DISCUSSION

4. The objectives of a funds statement are (1) to summarize

the financing and investing activities of the entity, including

the extent to which the enterprise has generated funds from

operations during the period, and (2) to complete the disclo-

sure of changes in financial position during the period. The

information shown in a funds statement is useful to a variety

of users of financial statements in making economic decisions

regarding the enterprise.

5. The funds statement is related to both the income state-

ment and the balance sheet and provides information that can

be obtained only partially, or at most in piecemeal form, by

interpreting them. An income statement together with a state-

ment of retained earnings reports results of operations but does

not show other changes in financial position. Comparative

balance sheets can significantly augment that information, but

the objectives of the funds statement require that all such

information be selected, classified, and summarized in mean-

ingful form. The funds statement cannot supplant either the

income statement or the balance sheet but is intended to pro-

vide information that the other statements either do not provide

or provide only indirectly about the flow of funds and changes

in financial position during the period.

6. The concept of funds in funds statements has varied some-

what in practice, with resulting variations in the nature of the

statements. For example, funds is sometimes interpreted to

mean cash or its equivalent, and the resulting funds statement

This Opinion amends APB Statement No. 4, Basic Concepts and Accounting

Principles Underlying Financial Statements of Business Enterprises, to the

extent that it relates to reporting changes in financial position.

Reporting Changes in Financial Position

373

is a summary of cash provided and used. Another interpretation

of funds is that of working capital, i.e., current assets less cur-

rent liabilities, and the resulting funds statement is a summary

of working capital provided and used.

However, a funds state-

ment based on either the cash or the working capital concept

of funds sometimes excludes certain financing and investing

activities because they do not directly affect cash or working

capital during the period. For example, issuing equity secur-

ities to acquire a building is both a financing and investing

transaction but does not affect either cash or working capital.

To meet all of its objectives, a funds statement should disclose

separately the financing and investing aspects of all significant

transactions that affect

financial

position during a period. These

transactions include acquisition or disposal of property in ex-

change for debt or equity securities and conversion of long-term

debt or preferred stock to common stock.

OPINION

Applicability

7. The Board concludes that information concerning the

financing and investing activities of a business enterprise and

the changes in its financial position for a period is essential for

financial statement users, particularly owners and creditors, in

making economic decisions. When financial statements pur-

porting to present both financial position (balance sheet) and

results of operations (statement of income and retained earn-

ings) are issued, a statement summarizing changes in financial

position should also be presented as a basic financial statement

for each period for which an income statement is presented.

Examples of different uses of the term funds are found in "Cash Flow"

Analysis and the Funds Statement, by Perry Mason, Accounting Research

Study No. 2, published by the American Institute of Certified Public Ac-

countants in November 1961, pp. 51-56. This study contains numerous

examples of other aspects of these statements. (Accounting research studies

are not pronouncements of the Board or of the Institute but are published

for the purpose of stimulating discussion on important accounting issues.)

The Board recognizes that a statement of changes in financial position will

be omitted in some circumstances; for example, from financial statements

restricted for internal use only (see Statements on Auditing Procedure

No. 38, paragraphs 5 and 6) and financial statements prepared for special

purposes (see Statements on Auditing Procedure No. 33, Chapter 13).

374

Opinions of the Accounting Principles Board

These conclusions apply to all profit-oriented business entities,

whether or not the reporting entity normally classifies its assets

and liabilities as current and noncurrent.

Concept

8. The Board also concludes that the statement summarizing

changes in financial position should be based on a broad con-

cept embracing all changes in financial position and that the

title of the statement should reflect this broad concept. The

Board therefore recommends that the title be Statement of

Changes in Financial Position (referred to below as "the State-

ment'' ).

The Statement of each reporting entity should disclose

all important aspects of its financing and investing activities

regardless of whether cash or other elements of working capital

are directly affected. For example, acquisitions of property by

issuance of securities or in exchange for other property, and

conversions of long-term debt or preferred stock to common

stock, should be appropriately reflected in the Statement.

Format

9. The Board recognizes the need for flexibility in form,

content, and terminology of the Statement to meet its objectives

in differing circumstances. For example, a working capital

format is not relevant to an entity that does not distinguish

between current and noncurrent assets and liabilities. Each

entity should adopt the presentation that is most informative

in its circumstances. The Board believes, however, that the

guides set forth in the paragraphs that follow should be applied

in preparing and presenting the Statement.

10. The ability of an enterprise to provide working capital

or cash from operations is an important factor in considering

its financing and investing activities. Accordingly, the State-

ment should prominently disclose working capital or cash

provided from or used in operations for the period, and the

Board believes that the disclosure is most informative if the

effects of extraordinary items (see APB Opinion No. 9, Report-

ing the Results of Operations, paragraphs 21 and 22) are re-

ported separately from the effects of normal items. The State-

Reporting Changes in Financial Position

375

ment for the period should begin with income or loss before

extraordinary items, if any, and add back (or deduct) items

recognized in determining that income or loss which did not use

(or provide) working capital or cash during the period. Items

added and deducted in accordance with this procedure are not

sources or uses of working capital or cash, and the related cap-

tions should make this clear, e.g., "Add

—

Expenses not requir-

ing outlay of working capital in the current period." An accept-

able alternative procedure, which gives the same result, is to

begin with total revenue that provided working capital or cash

during the period and deduct operating costs and expenses that

required the outlay of working capital or cash during the period.

In either case the resulting amount of working capital or cash

should be appropriately described, e.g., "Working capital pro-

vided from [used in] operations for the period, exclusive of

extraordinary items." This total should be immediately fol-

lowed by working capital or cash provided or used by income

or loss from extraordinary items, if any; extraordinary income or

loss should be similarly adjusted for items recognized that did

not provide or use working capital or cash during the period.

11. Provided that these guides are met, the Statement may

take whatever form gives the most useful portrayal of the

financing and investing activities and the changes in financial

position of the reporting entity. The Statement may be in bal-

anced form or in a form expressing the changes in financial

position in terms of cash, of cash and temporary investments

combined, of all quick assets, or of working capital. The State-

ment should disclose all important changes in financial position

for the period covered; accordingly, types of transactions re-

ported may vary substantially in relative importance from one

period to another.

As stated in paragraph 24 of Accounting Research Bulletin No. 51, Consoli-

dated Financial Statements, in some cases parent-company financial state-

ments (including, in conformity with this Opinion, a statement of changes

in financial position) may be needed in addition to consolidated financial

statements for adequate disclosure.

376

Opinions of the Accounting Principles Board

Content

12. Whether or not working capital flow is presented in the

Statement, net changes in each element of working capital (as

customarily defined) should be appropriately disclosed for at

least the current period, either in the Statement or in a related

tabulation.

a. If the format shows the flow of cash, changes in other

elements of working capital (e.g., in receivables, inven-

tories, and payables) constitute sources and uses of cash

and should accordingly be disclosed in appropriate detail

in the body of the Statement.

b. If the format shows the flow of working capital and

two-year comparative balance sheets are presented, the

changes in each element of working capital for the current

period (but not for earlier periods) can be computed by

the user of the statements. Nevertheless, the Board be-

lieves that the objectives of the Statement usually require

that the net change in working capital be analyzed in

appropriate detail in a tabulation accompanying the State-

ment, and accordingly this detail should be furnished.

13. The effects of other financing and investing activities

should be individually disclosed. For example, both outlays for

acquisitions and proceeds from retirements of property should

be reported;

both long-term borrowings and repayments of

long-term debt should be reported; and outlays for purchases

of consolidated subsidiaries should be summarized in the con-

solidated Statement by major categories of assets obtained and

obligations assumed. Related items should be shown in prox-

imity when the result contributes to the clarity of the Statement.

Individual immaterial items may be combined.

However, normal trade-ins to replace equipment should ordinarily be re-

ported on a net basis.

When a business combination is accounted for as a pooling of interests,

financial statements (including, in conformity with this Opinion, statements

of changes in financial position) of the separate companies should be restated

on a combined basis for all periods presented. See APB Opinion No. 16,

Business Combinations, paragraph 57.

Reporting Changes in Financial Position

377

14. In addition to working capital or cash provided from

operations (see paragraph 10) and changes in elements of

working capital (see paragraph 12), the Statement should

clearly disclose:

a. Outlays for purchase of long-term assets (identifying

separately such items as investments, property, and in-

tangibles ).

b. Proceeds from sale (or working capital or cash provided

by sale) of long-term assets (identifying separately such

items as investments, property, and intangibles) not in the

normal course of business, less related expenses involving

the current use of working capital or cash.

c. Conversion of long-term debt or preferred stock to com-

mon stock.

d. Issuance, assumption, redemption, and repayment of

long-term debt.

e. Issuance, redemption, or purchase of capital stock for

cash or for assets other than cash.

f. Dividends in cash or in kind or other distributions to

shareholders (except stock dividends and stock split-ups

as defined in ARB No. 43, Chapter 7B

—

Stock Dividends

and Stock Split-Ups).

Terminology

15. The amount of working capital or cash provided from

operations is not a substitute for or an improvement upon

properly determined net income as a measure of results of

operations and the consequent effect on financial position.

Terms referring to "cash" should not be used to describe

amounts provided from operations unless all non-cash items

have been appropriately adjusted. The adjusted amount should

be described accurately, in conformity with the nature of the

adjustments, e.g., "Cash provided from operations for the

period" or "Working capital provided from operations for the

period" as appropriate. The Board strongly recommends that

isolated statistics of working capital or cash provided from

operations, especially per-share amounts, not be presented in

378

Opinions of the Accounting Principles Board

annual reports to shareholders. If any per-share data relating

flow

of working capital or cash are presented, they should as

a minimum include amounts for inflow from operations, inflow

from other sources, and total outflow, and each per-share

amount should be clearly identified with the corresponding total

amount shown in the Statement.

EFFECTIVE DATE

16. This Opinion shall be effective for fiscal periods ending

after September 30, 1971. However, the Board encourages

earlier application of the provisions of this Opinion.

The Opinion entitled "Reporting Changes in Fi-

nancial Position" was adopted by the assenting

votes of seventeen members of the Board. Mr.

Halvorson dissented.

Mr. Halvorson dissents to this Opinion because he believes

the Board is going outside its province, if not its authority, in

imposing a requirement that a summary of changes in financial

position become one of the basic financial statements. He does

not dispute the usefulness of such a statement in connection

with many, if not most, financial reports but he believes the

requirement of it as a necessary submission is not supported

by the Opinion because he is unable to find a basis for con-

cluding that a balance sheet may be issued alone without the

necessity for submission of a statement of changes in financial

position, and that an income statement similarly may be issued

alone without the necessity for an accompanying statement of

changes in

financial

position, but that if a balance sheet is issued

in conjunction with an income statement, the joint presentation

must be supplemented by a statement of changes in financial

position.

NOTES

Opinions of the Accounting Principles Board present the

conclusions of at least two-thirds of the members of the Board,

which is the senior technical body of the Institute authorized

to issue pronouncements on accounting principles.

Reporting Changes in Financial Position

379

Board Opinions are considered appropriate in all circum-

stances covered but need not be applied to immaterial items.

Covering all possible conditions and circumstances in an

Opinion of the Accounting Principles Board is usually imprac-

ticable. The substance of transactions and the principles,

guides, rules, and criteria described in Opinions should control

the accounting for transactions not expressly covered.

Unless otherwise stated, Opinions of the Board are not in-

tended to be retroactive.

Council of the Institute has resolved that Institute members

should disclose departures from Board Opinions in their reports

as independent auditors when the effect of the departures on

the financial statements is material or see to it that such de-

partures are disclosed in notes to the financial statements and,

where practicable, should disclose their effects on the financial

statements (Special Bulletin, Disclosure of Departures from

Opinions of the Accounting Principles Board, October 1964).

Members of the Institute must assume the burden of justifying

any such departures.

Accounting Principles Board (1971)

PHILIP L. DEFLIESE

EMMETT S. HARRINGTON

CHARLES B. HELLERSON

CHARLES T. HORNGREN

LOUIS M. KESSLER

ORAL L. LUPER

DAVID NORR

GEORGE C. WATT

GLENN A. WELSCH

FRANK T. WESTON

Chairman

DONALD J. BEVIS

MILTON M. BROEKER

LEO E. BURGER

GEORGE R. CATLETT

JOSEPH P. CUMMINGS

ROBERT L. FERST

NEWMAN T. HALVORSON

ROBERT HAMPTON, III