ACCT6010 · Financial Reporting For Business Groups
Consolidated Cash Flows and Segments
Two disclosure-heavy topics close the consolidation cycle. The consolidated statement of cash flows (AASB 107) classifies cash into operating, investing and financing, and the exam favours the indirect method, reconciling group profit to cash from operations. The twist unique to groups is the acquisition effect: when a subsidiary is bought mid-year, its opening balances (receivables, payables, inventory) enter the group without a corresponding cash flow, so the working-capital movements must be adjusted for what came in via acquisition — and the cash used to acquire the subsidiary, net of cash acquired, is an investing outflow. Operating segments (AASB 8) then disaggregate the group along the lines management actually reviews (the management approach), with the 10% tests on revenue, profit/loss and assets deciding which segments are separately reportable, backed by a 75%-of-external-revenue coverage check. You must reconcile profit to operating cash flow with the acquisition effect, and apply the 10% reportable-segment tests.
What this chapter covers
- 011 Cash-flow basics and classification (AASB 107)
- 022 The indirect-method reconciliation (profit → CFO)
- 03The acquisition effect on working-capital movements
- 04Cash used to acquire the subsidiary, net of cash acquired
- 053 Identifying operating segments (AASB 8 — the management approach)
- 064 Reportable segments — the 10% tests and 75% coverage
Worked example: the 10% reportable-segment tests
- +1Apply the 10% revenue test: a segment is reportable if its revenue is at least 10% of combined revenue ($100k). A ($600k) and B ($250k) pass; C ($90k) and D ($60k) fail.
- +1Remember the other size tests: a segment is also reportable if its profit or loss, or its assets, is at least 10% of the relevant total — here those don't rescue C or D.
- +1Total the reportable segments' external revenue: A + B = 600 + 250 = $850k.
- +1Apply the 75% coverage rule: reportable segments must cover at least 75% of external revenue. $850k / $1,000k = 85% ≥ 75%, so coverage is satisfied.
- +1Conclude: A and B are reportable; C and D are aggregated into an 'all other segments' line. No additional segment need be added because the 75% threshold is already met.
Key terms
- Indirect method (AASB 107)
- A way of presenting cash from operations that starts with profit and adjusts for non-cash items (depreciation), non-operating items, and movements in working capital, to arrive at operating cash flow.
- Acquisition effect
- The adjustment, unique to a group that buys a subsidiary mid-year, that strips the subsidiary's opening working-capital balances out of the apparent movements, because they entered the group by acquisition rather than through cash trading.
- Cash flow on acquisition
- The investing outflow for buying a subsidiary, shown net of the cash and cash equivalents that came with the subsidiary — cash consideration paid minus cash acquired.
- Operating segment (AASB 8)
- A component of the group that earns revenue and incurs expense, whose results are regularly reviewed by the chief operating decision-maker, and for which discrete financial information is available — the management approach.
- The 10% tests
- The size thresholds that make a segment separately reportable: its revenue, its profit or loss (in absolute terms), or its assets is at least 10% of the combined total; reportable segments must then cover at least 75% of external revenue.
Consolidated Cash Flows and Segments FAQ
Why does buying a subsidiary mid-year complicate the cash-flow statement?
Because the subsidiary's opening receivables, payables and inventory enter the consolidated balance sheet on acquisition without any cash changing hands through trading. If you compute working-capital movements as simply closing minus opening, you double-count the acquired balances, so you must adjust for the acquisition effect — remove the balances that arrived via acquisition before deriving operating cash flow.
How is the cash spent on the acquisition presented?
As an investing outflow, shown net of cash acquired: cash consideration paid minus the cash and cash equivalents that came with the subsidiary. Non-cash consideration (shares issued to the vendor) is not a cash flow at all and is disclosed separately as a non-cash transaction.
What is the management approach to segments?
AASB 8 requires segments to be identified the way management actually runs the business — the components whose results the chief operating decision-maker regularly reviews and for which discrete financial information exists. So segment disclosures mirror internal reporting rather than an externally imposed structure, which is why two similar groups can disclose very different segments.
What are the 10% and 75% rules for reportable segments?
A segment is separately reportable if it meets any one of three 10% size tests — its revenue, its absolute profit or loss, or its assets is at least 10% of the relevant combined total. After applying the size tests, the reportable segments together must account for at least 75% of external revenue; if they fall short, additional segments are designated reportable until the 75% coverage is reached.
Exam move
Treat the consolidated cash flow as a standard indirect-method reconciliation with one extra reflex — whenever a subsidiary is acquired mid-year, adjust the working-capital movements for the acquisition effect and show the purchase as an investing outflow net of cash acquired. For segments, drill the sequence: identify segments by the management approach, run the three 10% size tests (revenue, profit or loss, assets), then check the 75% external-revenue coverage and add segments if it falls short. Keep the formulas to hand: receipts from customers via opening receivables plus the acquisition effect, and the investing outflow as cash consideration minus cash acquired.
