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  1. 1. IAS 7: Statement of Cash Flows Roshankumar S
  2. 2. IAS 7 requires the provision of information about the historical changes in cash andcash equivalent of the entity by means of a statement of cash flows which classifiescash flows during the period into: Operating activity Investing activity and Financing activityCash comprises cash on hand and demand depositsCash equivalents are held for meeting short term cash commitments rather than forinvestment or other purpose. For an investment to qualify as cash equivalent it mustbe: Readily convertible to a known amount of cash i.e. it has short maturity and Subject to an insignificant risk of changes in valueEquity investments are excluded from cash equivalent unless they are in substancecash equivalent.E.g. In case of preferred shares acquired within a short period of their maturity, andwith a specified period of redemption date.Operating Activities are the principal revenue producing activities of the enterpriseand other activities that are not investing or financing activities. It indicates to whatextent the operations of entity have generated cash flows which are available for usein other activities.Investing Activities are the acquisition and disposal of long-term asset and otherinvestments not included in cash equivalent. It indicates extent of expenditure madein resources intended to generated future income and cash flows.Financing Activities are the activities that result in changes in the size andcomposition of equity capital and borrowings of the enterprise. It is useful inpredicting the claims that outside providers of capital will have over the future cashflows.Bank borrowings are generally considered to be financing activities. But sometimesBank overdrafts which are repayable on demand form an integral part of entitiescash management. In such circumstances Bank overdrafts are included as acomponent of cash and cash equivalents. Such banking arrangements has the bankbalance which fluctuates from being positive to overdrawn, rather than having a bankbalance consistently in overdraft to finance business.Cash flow movements disclosed in the cash flow statement excludes movementbetween the items that constitute cash and cash equivalent because these are
  3. 3. of cash management of entity rather than any of the three activities mentionedabove. E.g. transfer from one bank account to another.The effect of exchange rate changes on cash and cash equivalents held or due inforeign currency is reported in the statement of cash flows in order to reconcile cashand cash equivalents at the beginning and end of the period. This amount ispresented separately from cash flows from operating, investing and financingactivities.Relevance of Statement of Cash Flow It eliminates effect of using different accounting treatments for same transaction thereby enhancing comparability of the financial information reported by different entities. It provides the user of financial information with a basis on which to assess the ability of the entity to generate cash and its needs to utilise that cash. It also enables the users to evaluate the changes in net assets of an entity, its financial structure (including liquidity and solvency) and its ability to affect amounts and timings of cash flows.Cash flows arising from taxes on income should be separately disclosed in operatingactivities unless they can be specifically identified with other activities.Reporting of Cash Flows 1. Direct Method: in this format major classes of gross cash receipts and gross cash payments are disclosed. 2. Indirect Method: in this format net profit or loss is adjusted for the effects of – a. Changes in working capital. b. Non cash items such as depreciation, provisions deferred taxes and unrealised foreign currency gains and losses, and c. All other items for which the cash effects are investing or financing.An entity should report separately major classes of gross cash receipt and grosscash payment from investing and financing activity, except where cash flows areallowed to be disclosed on net basis. Following cash flows arising from all cash flowactivities may be reported on net basis Those on behalf of customers when the cash flows represent the activities of customers rather than the entity. E.g. acceptance and repayment of demand deposits by bank For items in which turnover is quick, amounts are large and maturities are short. E.g. the purchase and sale of investment by a broker.Consolidated Cash Flow
  4. 4. Given below are the details of how cash flows in consolidated financial statementsare accounted for in respect of Subsidiary, Associate and Joint ventureInvestment Accounting method Reporting in statement of Cash flowtypeSubsidiary Consolidation Include all the cash flows of subsidiary except those that are intragroupAssociate Equity Method Cash flows between itself and the investee e.g. dividends and advancesJoint Venture Proportionate Includes entity’s proportionate share of consolidation Joint ventures cash flowsAcquisition or Disposal of controlThe aggregate of cash flows arising from obtaining and losing control of subsidiariesor other business units should be: Presented separately and Classified as Investing Activity with separate disclosureAdditional Disclosure: The total consideration The portion of consideration discharged by means of cash and cash equivalents The amount of cash and cash equivalents in the subsidiary or business units The amount of assets and liabilities other than cash and cash equivalents summarized by each major categoryThe cash consideration paid/received on sale is reported in the statement of cashflows net of cash and cash equivalents acquired or disposed off. The disclosureregarding obtaining and losing control should be presented separately i.e. not to beclubbed together.Additional disclosure encouraged by IAS 7 Significant amounts of cash and cash equivalents not available for use by the group. E.g. when the balances are not available for general use by parent or other subsidiary due to some legal restrictions. The amount of undrawn borrowing facility that may be available for future use indicating any restrictions. Separate disclosure of aggregate amounts that increases as opposed to maintain operating capacity. Cash flows arising from activities of each reportable segment.Effects of Operating and financing lease on Cash Flow
  5. 5. In order to determine the effects of lease on statement of cash flow, all you need todetermine is following: Is the transaction cash in nature? What classification in the statement of cash flow best suits the transaction?When any asset is acquired on finance lease it results in creation of an asset and aliability. There is no flow of cash at this stage. So this transaction is not going tohave any effect on statement of cash flow. When the instalment of lease (principaland interest) is paid it results in outflow of cash. In such case principal portion isclassified under ‘financing activity’ and interest portion is classified in aggregate withother interest paid and consistently classified as ‘operating’ or ‘financing’ cashoutflow.Interest payment on day to day transactions should be classified under operatingactivity.A foreign exchange contract close out is a cash