Classification of cash flows in a bank's cash flow statement

A bank's core business, lending and deposit-taking, looks like investing and financing activity by non-bank convention, but IAS 7 requires classifying it as operating because it is the bank's principal revenue-producing activity; misclassifying loan and deposit movements distorts operating cash flow (a key liquidity and quality-of-earnings metric analysts rely on) and can make a bank's cash generation look artificially strong or weak depending on which way the error runs.

Are loans and advances to customers and customer deposits classified as operating activities, consistent with the bank's principal revenue-producing activity, and is this policy applied consistently? Is cash and cash equivalents defined precisely, with restricted balances (statutory reserve deposits with the central bank) explicitly excluded and disclosed? Are interbank placements and borrowings, and investment security purchases/sales, classified according to a documented and consistently applied policy?

1. Establish the accounting policy that loans and advances to customers, and customer deposits, are classified as operating activities, consistent with the bank's principal revenue-producing activity, and apply it consistently.
2. Classify interbank placements and borrowings according to a documented, consistently applied policy (commonly operating, given their role in day-to-day liquidity management, though practice can vary).
3. Classify investment securities purchases and sales, and property/equipment transactions, as investing activities consistent with their nature in any industry.
4. Classify share issuances, subordinated debt issuances/repayments, and dividend payments as financing activities.
5. Define cash and cash equivalents precisely, explicitly identifying any restricted balances (statutory reserve deposits with the central bank) that do not meet the definition because they are not available for use.
6. Choose and consistently apply either the direct or indirect method for the operating section.

Present the statement using either the direct method (major classes of gross cash receipts and payments) or the indirect method (adjusting profit or loss for non-cash items and changes in operating assets/liabilities), applied consistently period to period; reconcile the cash and cash equivalents balance in the statement to the corresponding line items in the statement of financial position, with a clear note identifying restricted balances excluded from the definition and the reasons for the restriction.

Disclose: (1) the accounting policy for classifying loans, deposits, and interbank balances as operating rather than investing/financing, with the rationale; (2) the components of cash and cash equivalents; (3) significant restricted balances not available for use (e.g., central bank statutory reserves) and their amount; (4) a reconciliation of profit before tax to net cash from operating activities if the indirect method is used; (5) non-cash investing and financing transactions, if any, disclosed separately from the cash flow statement itself.

• Classifying customer loan and deposit movements as investing/financing activities by analogy to non-bank entities, which materially distorts operating cash flow
• including statutory reserve balances held with the central bank (typically not available for use) within cash and cash equivalents without disclosure of the restriction, overstating available liquidity
• inconsistently classifying interbank placements/borrowings from period to period
• switching between direct and indirect method presentation without disclosure or restatement of comparatives
• failing to separately disclose significant non-cash transactions (e.g., a debt-for-equity swap in a restructuring).