I would use the warp tool for this.
1) Find flag
2) Rotate flag and scale down
3) Bring up the transform options (edit - transform or ctrl + T) and select warp.
4) I first lowered the opacity of the flag layer to see easily transform the edges. Bring the edges of the flag to cover up the American flag :(
5) I then traced the arm thing with the pen tool and added a layer mask to the flag to show the arm thing. You fill the selection with black.
6) I then added a solid black color to clip the flag and then used a clipping mask to not show some of the black