IAS 7 provides guidance on cash flow statements. It requires entities to present a statement of cash flows which classifies cash flows during a period into operating, investing and financing activities. It aims to provide information about the ability of an entity to generate cash, its needs to utilize cash, and the timing and certainty of cash flows. The standard describes the content of the statement of cash flows, including requirements for presentation and disclosures.

1. 1
IAS 7
3/22/2009

2. Classify historic cash flows during a

period into operating, investing and
financing activities
 Basis to assess ability to generate cash
 Assess needs to utilise cash
 Assess timing and certainty of generation
of cash
2
IAS 7 3/22/2009

3. 3
All entities must present a
cash flow statement as part
of financial statements for
each period for which
financial statements are
prepared under IFRS
IAS 7 3/22/2009

4. Evaluate

how net assets have changed
›
financial structure, liquidity and solvency
›
ability to affect amounts, timing and certainty of cash flows
›
ability to adapt to changing circumstances and opportunities
›
ability to generate cash
›
accuracy of past assessments
›
relationship between profit and cash flow
›
impact of changing prices
›
Develop models to assess and compare present value of

future cash flows of different entities (in order to perform
business or project valuations)
 Enhance comparability of operating performance
 Eliminates effects of differences in accounting treatment
between entities
4
IAS 7 3/22/2009

5. Cash: Cash on hand and demand deposits

Cash equivalents: Short-term liquid investments readily

convertible to known amounts of cash with insignificant risk of
changes in value
3 months or less to mature
›
Short term preference shares with definite redemption date
›
Fluctuating bank overdrafts
›
Exclude movements between cash and cash equivalents as cash
›
management is not an operating, investing or financing activity
Cash flows: Inflows and outflows of cash and cash equivalents

Operating activities : Principal revenue-producing activities and

other activities that are not investing or financing
 Investing activities : Acquisition and disposal of long term assets
and other investments not included in cash equivalents
 Financing activities : Changes in the size and composition of
contributed equity and borrowings of the entity
5
IAS 7 3/22/2009

6. Operating activities primarily contribute to profit or

loss
› Indicate if operations generate enough cash to repay
loans, maintain operations, pay dividends and invest
without external sources of cash
Includes:

Receipts from turnover and other income
›
Cash paid to suppliers and employees
›
Insurance payments and receipts
›
Tax payments and receipts
›
Trade or dealing payments and receipts
›
Securities and loans held for sale
›
Cash advances and loans made by financial institutions
›
Excludes profit or loss on sale of property, plant and

equipment
6
IAS 7 3/22/2009

7. Expenditure to generate future income and

cash flows
Includes:

Payments to buy long term assets
›
Development costs
›
Receipts from sale of long term assets
›
Payments and receipts from intangible assets
›
Payments and receipts for debt or equity instruments
›
in other entities, if not held for dealing or trading
› Futures contracts, forward contracts, option
contracts and swap contracts not held for dealing
and trading
7
IAS 7 3/22/2009

8. Financing activities include

› Proceeds from issuing shares and equity
instruments
Payments to acquire or redeem shares
›
Proceeds from
›
debentures, loans, notes, bond, mortgages
and other borrowings
Cash repayments on borrowings
›
Cash repayments on finance leases
›
8
IAS 7 3/22/2009

9. Direct method: disclose major Indirect method: adjust profit or
 
classes of gross cash receipts and loss for :-
payments Non-cash transactions
›
Direct method encouraged by IAS Accruals and deferrals
›

7 Income or expenses with
›
Obtain information from: Investing or financing cash flows

Adjust profit or loss for effects of:
Underlying accounting records
› 
e.g. bank statements or general Changes in inventories
›
ledger
Changes in receivables
›
Adjust income statement for
›
Changes in payables
›
Changes in inventories

Non-cash items
›
Changes in receivables

Depreciation

Changes in payables

Provisions

Non cash items

Deferred tax

Investing cash flows

Unrealised foreign currency gains

Financing cash flows

& losses
Undistributed profits of associates

and minority interests
Investing cash flows
›
Financing cash flows
›
9
IAS 7 3/22/2009

10. ALTERNATIVE TREATMENT UNDER

INDIRECT METHOD:
› Net cash flow from operating activities is
presented by:
Revenues

Expenses

Changes in inventories

Changes in receivables

Changes in payables

10
IAS 7 3/22/2009

11. Present major classes of gross cash payments and receipts

separately but the following may be presented on a net
basis:
› Payments and receipts on behalf of customers for the activities
of the customer
 Demand deposits at banks
 Investment funds
 Rents for property owners
› Payments and receipts for items with quick turnover of large
amounts and short maturities
 Credit card customers
 Purchase and sale of investments
 Short term borrowings with maturity of 3 months or less
› Cash flows from activities of financial institutions
 Deposits with fixed maturity dates
 Placement and withdrawal of deposits
 Loans to customers and repayments of loans
11
IAS 7 3/22/2009

12. Treatment consistent with IAS 21

Permits exchange rates approximate to actual

rate e.g. weighted average rate for a period
Unrealised gains and losses arising on

translation are reported separately in the
statement to reconcile cash and cash
equivalents at the beginning and end of the
period
Convert to reporting currency at date of cash

flow
› Transactions in foreign currency
› Cash flows of foreign subsidiary (use of rate at
balance sheet date not allowed)
12
IAS 7 3/22/2009

13. Cash flows from interest and dividends

received and paid are
› Disclosed separately
 Whether interest is expensed or capitalised
› Classified in a consistent manner from period
to period as
Operating (e.g. for financial institutions)

Investing (cost or returns on investments)

Financing activities (cost of obtaining finance)

There is no consensus for entities other than

financial institutions
13
IAS 7 3/22/2009

14. Disclose cash flows separately under

operating activities
 If specifically identified with financing or
investing activities, classify as
appropriate (usually difficult to identify as
cash flows of tax and transactions arise in
different periods)
 When tax cash flows are allocated over
more than one class, the total amount of
taxes paid is disclosed
14
IAS 7 3/22/2009

15. Only report cash flows between the entity

and investee e.g. dividends and advances
 Joint ventures
› Proportionate consolidation method:
proportionate share of jointly controlled cash
flows are reported in consolidated CFS
› Equity method: disclose cash flows representing
investment in the entity, distributions and other
payments and receipts between entity and
jointly controlled entity
15
IAS 7 3/22/2009

16. Present aggregate cash flows of the following in

separate line items and classify as investing activities
› Cash flow effect of disposals versus acquisitions (not
deducted from each other)
› Cash paid or received as purchase or sale consideration
net of cash and cash equivalents acquired or disposed of
Disclose

› Total purchase and disposal consideration
› Cash and cash equivalent portion of total consideration
› Cash and cash equivalents in the business unit acquired or
disposed of
› Other assets and liabilities in the subsidiary acquired or
disposed of, summarised by each major category
16
IAS 7 3/22/2009

17. Exclude non cash investing and

financing transactions from cash flow
statement e.g.
› Assets purchased with loans or finance
leases
› Acquisition of shares in another entity
› Conversion of debt to equity
17
IAS 7 3/22/2009

18. Reconcile cash and cash equivalents in

the cash flow statement with cash and
cash equivalents in the balance sheet
 Disclose the accounting policy to
determine cash and cash equivalents
 Report changes in accounting policy in
accordance with IAS 8
18
IAS 7 3/22/2009

19. Significant cash and cash equivalent balances

held but not available for use by the group
› E.G. cash held by a subsidiary in a country with
exchange controls
Information about financial position and

liquidity of an entity
› Undrawn borrowing facilities and restrictions on use
› Cash flows of joint ventures reported using
proportionate consolidation
› Cash flows that increase operating capacity vs cash
flows that maintain operating capacity
› Segmental cash flows by industry and geographical
segment
19
IAS 7 3/22/2009

20. All IFRS financial statements must contain a

cash flow statement
Cash flows are presented using the direct

method or the indirect method
Non-cash transactions are excluded

Cash flows are classed as operating

activities, investing activities or financing
activities
Cash flows are reconciled to movements of

cash and cash equivalents in the balance
sheet
Accounting policy and major restrictions on

cash flow are disclosed
20
IAS 7 3/22/2009

21. Cash flows from operating activities

Cash receipts from customers
›
Cash paid to suppliers and employees
›
Cash generated from operations
›
Interest paid
›
Income taxes paid
›
Cash flows from investing activities

Acquisition of subsidiary net of cash acquired
›
Purchase of property, plant and equipment
›
Proceeds from sale of equipment
›
Interest received
›
Dividends received
›
Cash flows from financing activities

Proceeds from issue of share capital
›
Proceeds from long-term borrowings
›
Payment of finance lease liabilities
›
Dividends paid
›
Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

21
IAS 7 3/22/2009

22. Cash flows from operating activities

Profit before taxation
›
Adjustments for:
›
 Depreciation
 Foreign exchange loss
 Investment income
 Interest expense
 (Increase)/decrease in trade and other receivables
 (Increase)/decrease in inventories
 Increase/(decrease) in trade payables
 Interest paid
 Income taxes paid
Cash flows from investing activities

Acquisition of subsidiary net of cash acquired
›
Purchase of property, plant and equipment
›
Proceeds from sale of equipment
›
Interest received
›
Dividends received
›
Cash flows from financing activities

Proceeds from issue of share capital
›
Proceeds from long-term borrowings
›
Payment of finance lease liabilities
›
Dividends paid
›
Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

22
IAS 7 3/22/2009