IndAS 7, Statement of Cash Flows: Ind AS 7 prescribes principles and guidance on preparation and presentation of cash flows of an entity from operating activities, investing activities and financing activities for a reporting period.
The objective of IndAS 7 is to provide information about the historical changes in cash and cash equivalents of an entity during the reporting period from its operating, investing and financing activities.
Cash flows are inflows and outflows of cash and cash equivalents. Cash comprises cash on hand and demand deposits. 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. Cash and cash equivalents include demand deposits, certain short -term investments and in some cases, bank overdrafts.
Ind AS 7, Statement of Cash Flows
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 and the needs of the entity to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation.
Key Requirements of IndAS 7
The statement of cash flows is required to report cash flows classified by operating, investing and financing activities along with the components of cash and cash equivalents at the beginning and end of the reporting period, except in limited circumstances where cash flows are offset and reported on net basis.
Operating Activities
Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss.
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.
An entity shall report cash flows from operating activities using either the ‘direct method’ or the ‘indirect method’. Under direct method, major classes of gross cash receipts and payments are presented. However, under indirect method, profit or loss is adjusted for the effects of transactions of a non -cash nature; deferrals or accruals of past or future operating cash receipts or payments; and items of income or expenses associated with investing or financing cash flows.
Cash flows arising from taxes on income shall be separately disclosed and classified as cash flow from operating activities unless they can be specifically identified with financing or investing activities.
Investing activities
Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. 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.
The aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses shall be presented separately and classified as investing activities.
Financing activities
Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. 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.
An entity shall report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities
Non- cash transactions
Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from the 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.
Foreign currency cash flows
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. 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.
Unrealised 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.
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 equivalent items reported in the balance sheet.
An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalents held by the entity that are restricted for specific purposes.
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 activities, including both changes arising from cash flows and non-cash changes.
An entity shall disclose the following changes in liabilities arisi ng from financing activities:
- changes from financing cash flows;
- changes arising from obtaining or losing control of subsidiaries or other businesses;
- the effect of changes in foreign exchange rates;
- changes in fair values; and
- other
The above disclosures also applies to changes in financial assets (for example, assets that hedge liabilities arising from financing activities) if cash flows from those financial assets were, or future cash flows will be, included in cash flows from financing activities.
An entity may provide reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities, including the changes identified as mentioned above.
Difference Between Ind AS 7 and AS 3
| AS 3 | IndAS 7 |
| AS 3 is silent on this matter. | Bank borrowings are generally considered as a part of financing activities. However, Ind AS 7 requires the bank overdraft, which are repayable on demand, to be considered as a part of cash and cash equivalents, instead of classifying it as cash flow from financing activity. |
| Ind AS 7 requires more disclosures as compared to AS 3. | |
| AS 3 uses the term “Reporting Currency”. | Ind AS 7 uses the term “functional currency” instead of “Reporting Currency”. |
| AS 3 does not deal with cash flows arising from foreign subsidiaries. | IndAS 7 deals with translation of cash flows arising from foreign subsidiaries. |
| AS 3 is silent on this aspect. | Some entities purchases the assets and then give such assets on rent (assets held for rental) and later on, sells such assets in the ordinary course of business. Ind AS 7 requires the classification of cash flows from such activity(eg: payments made to purchase or manufacture the assets and cash receipts from renting out and sale of such assets) to be shown as cash flows from operating activities. |
Ind AS 7 provides some new examples of cash flows from financing activities like:
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| AS 3 does not specifically provide for the same. | Under IndAS 7, the net cash flow from operating activities, using the indirect method, is determined by adjusting profit or loss for the effects of: undistributed profits of associates, and non-controlling interests |
| Cash flows arising from change in ownership interests held in a subsidiary company shall be classified as cash flows from investing activities.* | Cash flows arising as a result of change in ownership interest, held in a subsidiary company shall be classified as cash flows from financing activities, if it do not result into loss of control. * |
| As per AS 3, the cash flows from extra ordinary activities shall be classified as cash flows from operating or investing or financing activity, as the case may be, depending on the nature of such extraordinary item. | IND AS 1 prohibits presentation of any item of income or expense as extraordinary item and hence Ind AS 7 does not deal with the presentation of cash flows from extra ordinary items. |
A parent may decrease its ownership interest in a subsidiary by:
(1) selling a portion of the subsidiary’s shares it holds or
(2) causing the subsidiary to issue shares.
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