IAS 7 requires entities to prepare a statement of cash flows that classifies cash flows during the period into operating, investing, and financing activities. It aims to provide information about historical changes in cash and cash equivalents of an entity. Cash comprises cash on hand and demand deposits, while cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. The statement of cash flows excludes cash flows between items that constitute cash and cash equivalents. It can be prepared using either the direct or indirect method.

1. IAS 7: Statement of Cash Flows
Roshankumar S Pimpalkar
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2. IAS 7 requires the provision of information about the historical changes in cash and
cash equivalent of the entity by means of a statement of cash flows which classifies
cash flows during the period into:
Operating activity
Investing activity and
Financing activity
Cash comprises cash on hand and demand deposits
Cash equivalents are held for meeting short term cash commitments rather than for
investment or other purpose. For an investment to qualify as cash equivalent it must
be:
Readily convertible to a known amount of cash i.e. it has short maturity and
Subject to an insignificant risk of changes in value
Equity investments are excluded from cash equivalent unless they are in substance
cash equivalent.
E.g. In case of preferred shares acquired within a short period of their maturity, and
with a specified period of redemption date.
Operating Activities are the principal revenue producing activities of the enterprise
and other activities that are not investing or financing activities. It indicates to what
extent the operations of entity have generated cash flows which are available for use
in other activities.
Investing Activities are the acquisition and disposal of long-term asset and other
investments not included in cash equivalent. It indicates extent of expenditure made
in resources intended to generated future income and cash flows.
Financing Activities are the activities that result in changes in the size and
composition of equity capital and borrowings of the enterprise. It is useful in
predicting the claims that outside providers of capital will have over the future cash
flows.
Bank borrowings are generally considered to be financing activities. But sometimes
Bank overdrafts which are repayable on demand form an integral part of entities
cash management. In such circumstances Bank overdrafts are included as a
component of cash and cash equivalents. Such banking arrangements has the bank
balance which fluctuates from being positive to overdrawn, rather than having a bank
balance consistently in overdraft to finance business.
Cash flow movements disclosed in the cash flow statement excludes movement
between the items that constitute cash and cash equivalent because these are parts
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3. of cash management of entity rather than any of the three activities mentioned
above. E.g. transfer from one bank account to another.
The effect of exchange rate changes on cash and cash equivalents held or due in
foreign currency is reported in the statement of cash flows in order to reconcile cash
and cash equivalents at the beginning and end of the period. This amount is
presented separately from cash flows from operating, investing and financing
activities.
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 operating
activities 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 gross
cash payment from investing and financing activity, except where cash flows are
allowed to be disclosed on net basis. Following cash flows arising from all cash flow
activities 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 Statement
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4. Given below are the details of how cash flows in consolidated financial statements
are accounted for in respect of Subsidiary, Associate and Joint venture
Investment Accounting method Reporting in statement of Cash flow
type
Subsidiary Consolidation Include all the cash flows of subsidiary
except those that are intragroup
Associate Equity Method Cash flows between itself and the
investee e.g. dividends and advances
Joint Venture Proportionate Includes entity’s proportionate share of
consolidation Joint ventures cash flows
Acquisition or Disposal of control
The aggregate of cash flows arising from obtaining and losing control of subsidiaries
or other business units should be:
Presented separately and
Classified as Investing Activity with separate disclosure
Additional 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 category
The cash consideration paid/received on sale is reported in the statement of cash
flows net of cash and cash equivalents acquired or disposed off. The disclosure
regarding obtaining and losing control should be presented separately i.e. not to be
clubbed 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 Statement
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5. In order to determine the effects of lease on statement of cash flow, all you need to
determine 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 a
liability. There is no flow of cash at this stage. So this transaction is not going to
have any effect on statement of cash flow. When the instalment of lease (principal
and interest) is paid it results in outflow of cash. In such case principal portion is
classified under ‘financing activity’ and interest portion is classified in aggregate with
other interest paid and consistently classified as ‘operating’ or ‘financing’ cash
outflow.
Interest payment on day to day transactions should be classified under operating
activity.
A foreign exchange contract close out is a cash transaction.
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