FRS 102 Cashflow reporting: why it deserves more attention  

Under FRS 102, that perception no longer holds. The requirements in Section 7 reinforce the importance of cashflow reporting as a core measure of financial performance, linking reported profit to real cash generation and providing critical insight into liquidity, funding and sustainability.

While the Periodic Review 2024 has not fundamentally rewritten this section, the interaction with wider changes, particularly leases, means that cashflow reporting is becoming more visible, more complex and, in some cases, more scrutinised. 

What is the statement really telling you? 

At its core, the statement of cashflows:

• reconciles movements in cash and cash equivalents, not just cash 
• groups cashflows into operating, investing and financing activities 
• explains how a measure of profit translates into cash from operations. 

This is where its value lies. Profit is influenced by judgement, estimates and accounting policies. Cash is not. The statement of cashflows shows whether an entity is generating cash or simply reporting profit. 

Cashflow classification; more judgement than expected 

One of the most underestimated aspects of cashflow reporting is classification. FRS 102 requires cashflows to be split across: 

• operating activities (core trading) 
• investing activities (asset acquisition and disposal) 
• financing activities (funding and capital structure). 

While this seems straightforward in principle, in practice there is flexibility. Interest and dividends paid can be classified as operating or financing cashflows. Interest and dividends received can be classified as operating or investing cashflows.

The key requirement is consistency, not uniformity across entities. 

This means two similar businesses may present cashflows differently, potentially affecting comparability and stakeholder interpretation. 

The operating cashflow bridge, where the story unfolds 

Most UK entities use the indirect method, starting with a profit figure and adjusting to arrive at cash from operations. This reconciliation typically includes:

• non-cash items (e.g., depreciation) 
• working capital movements (e.g. receivables, payables) 
• other adjustments between profit and cash. 

This is where underlying performance becomes visible. 

For example: 

• Profits may be increasing, but cash may be tied up in receivables. 
• Strong EBITDA may mask deteriorating cash conversion. 

The operating cashflow bridge is often the clearest indicator of financial health. 

Cash and cash equivalents: more than just cash 

A common misconception is that the statement focuses purely on cash held. In reality, it includes cash equivalents, short-term, highly liquid investments easily convertible to known amounts of cash. Even overdrafts can be included where they form part of day-to-day cash management. Understanding what sits within this balance is essential when analysing liquidity.

Non-cash transactions are not in the statement but are still important 

Not all significant transactions appear in the statement of cashflows. FRS 102 explicitly excludes the following: 

• transactions that do not involve cash (e.g., assets acquired via leasing arrangements or equity funding). 

These transactions still matter but are disclosed elsewhere. The risk is assuming the cashflow statement captures the full picture of investment and financing activity when it only shows what has moved in cash. 

The growing importance of net debt disclosure 

FRS 102 requires an analysis of changes in net debt, bringing together the following: 

• borrowings 
• lease liabilities 
• cash and cash equivalents. 

This reconciliation provides a clearer view of how financing has changed over the period, including: 

• cash movements 
• new financing arrangements 
• non-cash changes (e.g. new leases). 

This is particularly relevant as lease liabilities become more prominent under the revised lease model. 

Leases are changing the picture 

While Section 7 itself has not been overhauled, changes to lease accounting feed directly into cashflow reporting. 

Previously: 

• operating lease payments were typically included in operating activities 

Now: 

• interest payments may appear in operating or financing
• repayments of lease liabilities are presented within financing activities.  

The result is a shift in how operating cashflow is presented and often an improvement in reported operating cash metrics. Stakeholders will need to understand these changes to interpret trends correctly. 

FRS 102 Cashflow reporting: why cash matters more than profit

The statement of cashflows is often overlooked, but it is one of the most important indicators of financial strength. While other areas of FRS 102 introduce more visible change, cashflow reporting remains the clearest link between accounting results and economic reality.

As standards evolve, particularly in areas such as leasing, the importance of understanding cashflow movements will only increase. In uncertain environments, profit explains performance and cash explains survival.