IND AS 7
Statement of Cash Flows
Objective:
Ø Information about the cash flows of an
entity is useful in providing users of financial statements with a basis to
assess the ability of the entity to generate cash and cash equivalents:
Ø Cash flow information is useful in
assessing the ability of the entity to generate cash and cash equivalents and
enables users to develop models to assess and compare the present value of the
future cash flows of different entities:
Cash & Cash Equivalents:
Meaning
Ø Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.
Ø Cash equivalents are held for the purpose
of meeting short-term cash commitments rather than for investment or other
purposes.
What includes in cash and cash equivalents?
Investment:
Ø For an investment to qualify as a cash
equivalent it must be readily convertible to a known amount of cash and be
subject to an insignificant risk of changes in value.
Therefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition.
Bank borrowings
Ø Bank
borrowings are generally considered to be financing activities. However,
where bank overdrafts which are
repayable on demand form an integral part of an entity's cash management, bank
overdrafts are included as a component of cash and cash equivalents.
Presentation of a statement of cash flows:
The statement of cash flows shall report cash flows during the period classified
under the following activities:
OPERATING
Ø The amount of cash flows arising from
operating activities is a key indicator of the extent to which the operations
of the entity have generated sufficient cash flows to repay loans, maintain the
operating capability of the entity, pay dividends and make new investments
without recourse to external sources of financing.
Ø Cash flows from operating activities are
primarily derived from the principal revenue-producing activities of the
entity.
Examples of cash flows from operating activities are:
Ø cash receipts from the sale of goods and
the rendering of services;
Ø cash receipts from royalties, fees,
commissions and other revenue;
Ø cash payments to suppliers for goods and
services;
Ø cash payments to and on behalf of
employees;
Ø cash receipts and cash payments of an
insurance entity for premiums and claims, annuities and other policy benefits;
Ø cash payments or refunds of income taxes
unless they can be specifically identified with financing and investing
activities;
Ø cash receipts and payments from contracts
held for dealing or trading purposes.
Notes:
Ø An entity may hold securities and loans
for dealing or trading purposes, in which case they are similar to inventory
acquired specifically for resale. Therefore, cash flows arising from the
purchase and sale of dealing or trading securities are classified as operating
activities.
Ø Cash advances and loans made by financial
institutions are usually classified as operating activities since they relate
to the main revenue-producing activity of
that entity.
INVESTING
The separate disclosure of cash flows
arising from investing activities is important because the cash flows represent
the extent to which expenditures have been made for resources intended to
generate future income and cash flows:
Examples of cash flows arising from investing
activities are:
CASH PAYMENTS
|
CASH RECEIPTS
|
to acquire property, plant and equipment,
intangibles and other long-term assets.
|
from sales of property, plant and equipment,
intangibles and other long-term assets
|
to acquire equity or debt instruments of other
entities and interests in joint ventures
|
from sales of equity or debt instruments of other
entities and interests in joint venture
|
advances and loans made to other parties
|
from the repayment of advances and loans made to other parties
|
for futures contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes,
or the payments are classified as financing activities;
|
from futures contracts, forward contracts, option contracts
and swap contracts except when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing activities
|
FINANCING
The separate disclosure of cash flows
arising from financing activities is important because it is useful in
predicting claims on future cash flows by providers of capital to the entity.
Examples of cash flows arising from financing
activities are:
Ø
Cash proceeds from issuing shares or other equity
instruments;
Ø
Cash payments to owners to acquire or redeem the
entity’s shares;
Ø
Cash proceeds from issuing debentures, loans, notes,
bonds, mortgages and other short-term or long-term borrowings;
Ø
Cash repayments of amounts borrowed
Ø
Cash payments by a lessee for the reduction of the
outstanding liability relating to a lease.
INTEREST
& DIVIDENDS
Particulars
|
Institution
|
Classification
|
Interest Paid
|
Financial
|
Operating Activity
|
Other
|
Financing Activity
|
|
Interest Received
|
Financial
|
Operating Activity
|
Other
|
Investment activity
|
|
Dividend Received
|
Financial
|
Operating Activity
|
Other
|
Investment activity
|
Note:
Dividend paid should be classified
as a financing activity.
TAXES
ON INCOME
It is generally classified as an operating activity unless they can be
specifically identified with financing and investing activity.
FOREIGN
CURRENCY CASH FLOWS
Ø
Cash flows arising from transactions in a foreign
currency shall be recorded in an entity’s functional currency by applying to
the foreign currency amount the exchange rate between the functional currency
and the foreign currency at the date of the cash flow.
Ø
The cash flows of a foreign subsidiary shall be
translated at the exchange rates between the functional currency and the
foreign currency at the dates of the cash flows.
Ø
Cash flows denominated in a foreign currency are
reported in a manner consistent with Ind AS 21. This permits the use of an
exchange rate that approximates the actual rate. However, Ind AS does not
permit use of the exchange rate at the end of the reporting period when
translating the cash flows of a foreign subsidiary.
Ø
Un realised gains and losses arising from
changes in foreign currency exchange rates are not cash flows. However, the
effect of exchange rate changes on cash and cash equivalents held or due in a
foreign currency is reported in the statement of cash flows in order to
reconcile cash and cash equivalents at the beginning and the end of the period.
This amount is presented separately from cash flows from operating, investing
and financing activities and includes the differences.
REPORTING
CASH FLOWS FROM OPERATING ACTIVITIES
An entity shall report cash flows from operating activities using either
The direct method, whereby major classes of gross cash
receipts and gross cash payments are disclosed and such information may be
obtained by the following;
Ø
From the accounting records of the entity;
Ø
by adjusting sales, cost of sales (interest and
similar income and interest expense and similar charges for a financial
institution)
Ø
Other items in the statement of profit and loss for:
(i) changes during the period in inventories and operating receivables and
payables; (ii) other non-cash items; and (iii) other items for which the cash
effects are investing or financing cash flows.
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.
Under the indirect method, the net cash flow from operating activities
is determined by adjusting profit or loss for the effects of: (a) changes
during the period in inventories and operating receivables and payables; (b)
non-cash items such as depreciation, provisions, deferred taxes, unrealised
foreign currency gains and losses, and undistributed profits of associates;
Comparison
with IAS 7
1. In case of other than financial entities,
IAS 7 gives an option to classify the interest paid and interest and dividends
received as item of operating cash flows. Ind AS 7 does not provide such an
option and requires these items to be classified as item of financing activity
and investing activity, respectively.
2. IAS
7 gives an option to classify the dividend paid as an item of operating
activity. However, Ind AS 7 requires it to be classified as a part of financing
activity only.
Written by : Bhanu Jain
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