Chapter 4 IAS 7: Statement OF CASH FLOWS nn SYNOPSIS Objective of JAS 7 Fundamental Principle in [AS 7 ion of the Statement of Cash Flows in Liabilities Arising from Financing Activities Components of Cash and Cash Equivalents wens SRELR 1, OBJECTIVE OF IAS 7 The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according 10 operating, investing, and financing activities. 2. FUNDAMENTAL PRINCIPLE IN TAS 7 All entities that prepare financial statements in conformity with Ind AS are required to present a statement of cash flows. ‘The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Fquity investments are normally excluded, unless they are in substance a cash equivalent (c.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. 3. PRESENTATION OF THE STATEMENT OF CASH FLOWS Cash flows must be analysed between operating, investing and financing activities The key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows: © — operaling activities are the main revenuc-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees © investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents «financing activities are activities that alter the equity capital and borrowing structure of the entity Cash flows from interest and dividends received and paid shall cach be disclosed separately. Cash flows arising from interest paid and interest and dividends received in the case of a financial institution should be classified as cash flows‘Chap. 4 JAS 7. Statement of Cash Flows 65 arising from operating activities. In the case of other entities, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flows from financing activities * cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities © for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable The direct method shows each major class of gross cash receipts and gross cash “payments. The operating cash flows section of the statement of cash flows under the Grect method would appear something like this: sh receipts from customers ‘Wash paid to suppliers (Cash paid for other operating expenses lnterest paid | | XX XXX ‘income taxes paid Net cash from operating activities The indirect method adjusts accrual basis net profit or loss for the effects of non- cash transactions. The operating cash flows section of the statement of cash flows under ‘the indirect method would appear something like this: AXAXX Add back depreciation Add back amortisation of goodwill Increase in receivables Decrease in inventories AAAKA | Increase in trade payables XX,KXX Interest expense XXKAXX, ‘Less. Interest accrued but not yet paid (XX XXX] XXXX Interest paid XX,XXX Income taxes paid XX, XXX, Net cash from operating activities XX,XXX the exchange rate used for translation of transactions denominated in a foreign currency should be the rate in effect at the date of the cash flows cash flows of joreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place as regards the cash flows of associates and joint ventures, where the equity method is used, the statement of cash flows should report only cash flows between the investor and the investee: where proportionate consolidation is66 Ind-AS & IFRS Chap. 4 used, the cash flow statement should include the venturer’s share of the cash flows of the investee * aggregate cash flows relaling to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of. * cash flows from investing and financing activitics should be reported gross by major elass of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: 5 cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property) © cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from eredit card customers, and purchase and sale of investments) © cash receipls and payments relating to deposits by financial institutions © cash advances and loans made to customers and repayments thereof +> investing and financing transactions which do not require the use of cash should be excluded from the statement of cash flows, but they should be separately disclosed elsewhere in the financial statements the components of cash and cash equivalents. should be disclosed, and a reconciliation presented to amounts reported in the statement of financial position «the amount of cash and cash equivalents held by the entity that is not available for use by the group should be disclosed, together with a commentary by management ¢ Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities 4, CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES ‘An entity shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activitics, including both changes arising from cash flows and non-cash changes. To the extent necessary to satisfy the requirement in paragraph 44A, an entity shall disclose the following changes in liabilities arising from financing activities: (a) changes from financing cash flows: (b) changes arising from obtaining or losing control of subsidiaries or other businesses; (6). the effect of changes in foreign exchange rates; (@) changes in fair values; and (e) other changes. ‘One way ‘0 fulfil the disclosure requirement as above-said is by providing 0 reconciliation between the opening and closing balances in the balance shect for liabilities arising from financing activities. Where an entity discloses such aChap. 4 IAS 7: Statement of Cash Flows 67 reconciliation, it shall provide sufficient information to enable users of the financial statements to link items included in the reconciliation to the balance sheet and the ‘statement of cash flows. 5. COMPONENTS OF CASH AND CASH EQUIVALENTS, An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the balance sheet. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. 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. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preference shares acquired within a short period of their maturity and with a specified redemption date. 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 eash management, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an entity rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents. An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group. There are various circumstances in which cash and cash equivalent balances held by an entity are not available for use by the group. Examples include cash and cash equivalent balances held by a subsidiary that operates in a country where exchange controls or other legal restrictions apply when the balances are not available for general use by the parent or other subsidiaries. cS She Ler S) Si An OF IS) gry7T3No\ © 1 ie UibRaRY }é \ a) NY * Ons ype ITN