Disclosures on the Sources and Uses of Cash a Lab Project Report
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Disclosures on the sources and uses of cash A Lab project report September 2019 Financial Reporting Council Disclosures on the sources and uses of cash 2 Contents Quick read 3 Examples used Introduction 10 Our report highlights some examples of current practice that were identified by the Financial Reporting Lab (Lab) 1 Focus on drivers 12 team and investors. Not all of the examples are relevant Focus on drivers 13 for all companies, and all circumstances, but each provides an example of a company that demonstrates an Bringing it all together 17 approach to useful disclosures. Highlighting aspects of 2 Disclosures supporting the sources of cash 20 reporting by a particular entity should not be considered an evaluation of that entity’s annual report as a whole. Where is the cash coming from? 21 Investors have contributed to this project at a conceptual Connecting ashc and working capital 26 level. The examples used are selected to illustrate the principles that investors have highlighted and, in many Cash generation within groups 30 cases, have been tested with investors. However, they 3 Disclosures supporting the uses of cash 32 are not necessarily examples chosen by investors, and should not be taken as confirmation of acceptance of the Uses of cash 33 company’s reporting more generally. Priorities orf generated and available cash 34 Responding to feedback Priorities in action 38 In 2019 the Lab ran a stakeholder survey. As part of this Distributions to shareholders 41 survey we asked users of the reports for feedback. We received feedback that the example disclosures were of Variabilities, isksr and restrictions 46 particular value to users. Responding to this feedback, we Appendix 1 Reverse factoring 51 have included more examples within this report than in previous Lab reports. Whilst it makes the report longer, we hope it adds to the overall value of this report. If you have any feedback, or would like to get in touch with the Lab, please email us at: [email protected] Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 3 Quick read The understanding of the generation, availability, What investors want: Cash disclosures that and use of cash is fundamental to the investment process, both in the assessment of management’s historical stewardship of a company’s assets, and Provide a clear description of the drivers of current (and future) performance and position, in supporting analysis of future expectations. in the context of cash, supported by appropriate metrics. The core disclosure that supports these investor needs is the cash flow statement. This clearly provides information about the flow of cash (and equivalents), but does it do a good job of explaining And further detailed disclosures on: how that cash is, and more critically will be generated and used? Our project would suggest that the disclosures that are most helpful to investors in answering their questions about cash are often The sources of cash The uses of cash provided outside of the cash flow statement, and may be outside of the annual report completely. This report focuses on this supplemental cash flow Which explain Which cover Which link Which explain Which support Which highlight disclosure; disclosures that are principally about the how the the drivers of to strategy, a framework understanding relevant risks, sources and uses of cash. company’s performance working of priorities of the priorities restrictions and business model that generated capital and for the cash in action. variabilities. What do investors want? generates cash. cash in the risks to allow generated. current period. an assessment Investors told us that what they want, at a high- of future cash level, is an overall discussion on a company's cash generation. drivers, supported by further details. We have summarised their needs into the following model, and used this model as a structure to explore the All underpinned by strong processes, controls and clearly communicated assurance. topic in more detail. Quick read Introduction 1 Focus on drivers 2 Disclosures supporting 3 Disclosures supporting Appendix 1 the sources of cash the use of cash Reverse factoring Disclosures on the sources and uses of cash 4 Focus on drivers Examples of cash Key Performance Indicators include: Strategic report Investors want disclosures that: 28 Strategic02 ReportStrategic Report J SainsburyJ plcSainsbury Annual plcReport Annual 2019 Report 2019 Governance Disclosures on the sources and uses of cash 15 Disclosures on the sources and uses of cash 16 Linked to remuneration £ Financialstatements Revenue Average Revenue Operating profit Basic EPS Cash generated Directors’ remuneration report £m Per Retailer (‘ARPR’) £m pence per share from operations page 64 2018/19 highlights £ per month £m Chairman’s letter Focus areas relevant to our KPIs Provide a clear description of the driversOur KPIs What is useful? 1 Maintain the best consumer experience for buying and What is useful? Chairman Martin Scicluna sets out how 11.0p 8.5% In these extracts, Sainsbury’s free cash fl ow KPI is shown from the narrati ve secti on of the annual selling vehicles Proposed full-year dividend Return on capital employed Autotrader provide a clear defi niti on of their KPI (cash generated from operati ons) and explain we plan to deliverFinancial on ourkey strategy performance and grow indicators are critical to £355.1m £1,844 report. The up-front£243.7m focus is supported by a rati onale and narrati ve context (not 21.00pshown). Further £258.5m 2 Create and maintain high-performing, understanding and measuring our financial health. support for the number is provided by way of a clear breakdown of its calculation +18%in the audited +13% data-orientated teams why they consider it useful. They also provide some context to the KPI by linking through to their value for shareholders. fi nancials. This allows investors to understand the use of the KPI and adjust the reported number if 3 Grow ARPR in a balanced and strategic focus areas and risks, providing cross-references to other sections. of current (and future) performance they wish to do so. 2019 2019 sustainable way, by creating value 21.00p £258.5m They provide a supporti ng bridge in the investor presentati on showing how they go from operati ng p m for our customers 22.0 £461 2018 17.74p 2018 £228.4m profit to the KPI. Underlying basic Free cash flow J Sainsbury plc - Annual Report 2019 4 mprove I stock choice, volumes, accuracy and transparency in both earnings per share 186 Financial Statements J Sainsbury plc Annual Report 2019 2017 15.62p 2017 £212.9m AutoTrader Group plc – Annual report 2019 and Results presentati on 2019 Alternative performance measures continued new and used vehicles and position, in the contextGroup of measures cash, 5 Develop a more efficient way for retailers to source, dispose and Relevant focus areas Relevant focus areas Relevant focus areas Relevant focus areas Relevant focus areas Underlying profit Underlying basic earnings Retail operatingI joined cash the flow Sainsbury’s (£m) Retail freeBoard cash in flow the (£m) knowledge Closest equivalent move vehicles 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 before tax (£m)1 per share (pence)1 Definition: Retailthat cash it generatedis a highly respected,Definition: Net values-drivencash generated APM IFRS measure Definition/Purpose Reconciliation 6 Extend our product offering further Definition: Profit before tax adjusted Definition: Earnings per share using from operations after changes from retail operations, adjusted for Cash flows and net debt down the buying funnel, towards business, known for quality, valueDefinition and Definition Definition Definition Definition online transactions supported by appropriate mefor certain trics.items in note 3 which, by underlying profit in working capital and pension exceptional pensionThe contributions, Group generates revenue fromCash three flow itemsAverage in No Revenue direct Per Retailer (‘ARPR’)To help is the readerOperating understand profit cash is as flows reported in the Basic earnings2019 per2018 share is defined as Cash generated from operations is as Ref £m £m virtue of their size and/or nature, do contributions,customer and before service. Sainsbury’safter cash capital hasexpendituredifferent a long streams: but and Trade, ConsumerFinancial Reviewcalculatedequivalent by taking the averageof monthly the business, aConsolidated summarised income cash flow statement on page profit for the year attributable to equity reported in the Consolidated statement not reflect the Group’s underlying exceptional pension contributions before strategic capitalServices expenditure and Manufacturer and Agency. revenue generated from retailer 83. This is defined as revenueNet less interest paid a holders(89) of the parent(105) divided by the of cash flows on page 87. This is defined Our strategy statement is included within the Financial pages 18-19 performance distinguished heritageand after and investments I’mTrade delighted in is joint broken down to into three customers and dividing by the averageReview. As part ofadministrative this a number expenses, of line plus share of weighted average number of shares in as cash generated from operating categories: Retailer, Home Trader and monthly number of retailer forecourts profit from joint ventures. OperatingStrategic capital expenditure b issue during(36) the year.Comparative(80) periods activities, before corporation tax paid. ventures and associates and items have been combined. The cash Risks relevant to our KPIs have become Chairman duringOther, the with Company’s Consumer Services similarly who subscribe to an Auto Trader profit margin is Operating profitAcquisition as a of subsidiaries c have been– restated135 to reflect the Group’s This is considered to be a more meaningful Sainsbury’s Bank capitalsplit into injections Private and Motoring Services.