Compound interest and IAS 7: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Update link.)
 
(Add quote.)
 
Line 1: Line 1:
Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.
''Financial reporting - International Financial Reporting Standards (IFRS).''


Compound interest per year is the usual quotation basis for periods of more than a year.
International Accounting Standard 7, dealing with statement of cash flows.


To calculate compound interest for different periods we compound up or de-compound the interest depending on the relative lengths of the periods being considered.
IAS 7 prescribes how to present information in a statement of cash flows about how a reporting entity’s cash and cash equivalents changed during the financial reporting period under review.  




<span style="color:#4B0082">'''Example 1'''</span>
IAS 7 is issued by the International Accounting Standards Board.


Interest quoted at 6% per annum,


compounded annually,
:<span style="color:#4B0082">'''''Direct method of presentation is encouraged'''''</span>


for two years maturity,
:"An entity shall report cash flows from operating activities using either:


with all of the interest paid at the final maturity,  
:(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or


means that the interest paid after two years will be (compounding up for two periods):
:(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.


= (1.06 x 1.06) - 1


= 12.36% periodic interest for the two year period.
:Entities are encouraged to report cash flows from operating activities using the direct method.  


:The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method."


Decompounding is used to calculate periodic interest for a shorter period.
:''IAS 7 - paragraphs 18 and 19.''




<span style="color:#4B0082">'''Example 2'''</span>
== See also ==
 
* [[ASC 230]]
If periodic interest is 12.36% for a two-year period, this means the total accumulated interest payable/receivable at the end of the two years is 12.36%.
* [[Cash]]
 
* [[Cash equivalents]]
Decompounding the 12.36% (per two years) to calculate the interest for just one year. One year's interest:
* [[Cash flow]]
 
* [[Cash flow statement]]
= (1 + 0.1236)<sup>(1/2)</sup> - 1
* [[Direct method]]
* [[Financial reporting]]
* [[FRS 102]]
* [[Indirect method]]
* [[International Accounting Standards Board]]
* [[International Financial Reporting Standards]]
* [[Reporting entity]]
* [[Statement of cash flows]]


= 6.00% per one-year period.


== Other resources ==
*[https://www.iasplus.com/en/standards/ias/ias7 IAS 7 - IAS Plus]
*[https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2022/issued/part-a/ias-7-statement-of-cash-flows.pdf?bypass=on IAS 7 text - IFRS]


== See also ==
[[Category:Accounting,_tax_and_regulation]]
* [[Compound]]
[[Category:Compliance_and_audit]]
* [[Compound annual growth rate]]
* [[Compounding effect]]
* [[Day count conventions]]
* [[Effective annual rate]]
* [[Interest]]
* [[Interest rate]]
* [[Nominal annual rate]]
* [[Periodic rate of interest]]
* [[Periodic yield]]
* [[Simple interest]]
 
[[Category:Cash_management]]
[[Category:Financial_products_and_markets]]
[[Category:Liquidity_management]]

Revision as of 07:40, 1 February 2024

Financial reporting - International Financial Reporting Standards (IFRS).

International Accounting Standard 7, dealing with statement of cash flows.

IAS 7 prescribes how to present information in a statement of cash flows about how a reporting entity’s cash and cash equivalents changed during the financial reporting period under review.


IAS 7 is issued by the International Accounting Standards Board.


Direct method of presentation is encouraged
"An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.


Entities are encouraged to report cash flows from operating activities using the direct method.
The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method."
IAS 7 - paragraphs 18 and 19.


See also


Other resources

Retrieved from ‘https://wiki.treasurers.org/w/index.php?title=Compound_interest&oldid=54418’