Reporting on a Net Basis, and the Financial Enterprise

In one line

Cash flows are reported gross, except where they are made on a customer's behalf, where they turn over fast in large amounts on short maturities, or where a financial enterprise is taking and repaying deposits and making and collecting loans.

The general rule, restated

Paragraph 21: an enterprise should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis.

So netting is the exception and it has exactly two doors.

The first door: paragraph 22

Cash flows arising from the following operating, investing or financing activities may be reported on a net basis.

Three conditions in (b), and all three must hold. Quick turnover, large amounts, short maturities. A borrowing that is large and short but rolled over once a year does not qualify, because the turnover is not quick.

Paragraph 23's examples

Of (a), flows on behalf of customers:

1. The acceptance and repayment of demand deposits by a bank.
2. Funds held for customers by an investment enterprise.
3. Rents collected on behalf of, and paid over to, the owners of properties.

Of (b), quick and large and short: advances made for, and the repayments of:

1. Principal amounts relating to credit card customers.
2. The purchase and sale of investments.
3. Other short-term borrowings, for example those with a maturity period of three months or less.

The third row of (b) is the practical one. A company that draws and repays a short-term borrowing many times a year may show the net movement rather than a list of every drawing and repayment.

And the property manager in (a)(3) is the clearest illustration of the principle. The rent belongs to the owner and passes through; showing Rs 50 lakh in and Rs 50 lakh out would swell the statement with money that was never the enterprise's.

The second door: paragraph 24

Cash flows arising from each of the following activities of a financial enterprise may be reported on a net basis.

Three permissions and they are the whole of a bank's business. Without them a bank's cash flow statement would be tens of thousands of lines long and would tell a reader nothing.