Objective
Ind AS 7, has specified the following objectives of Statement of Cash
Flows:
To provide information about historical changes in cash and cash
equivalents: Cash flow statement aims at providing the information
about how the cash has been generated during the year and for what
purposes has it been utilised. The information will be provided for
current year and immediate previous year.
To assess the ability to generate cash and cash equivalents:Cash flow
statement is intended to provide the stakeholders about the efficiency
of the company in generating cash and cash equivalents. Some
companies may look profitable as per profit and loss account but
whether they have enough cash for payment of their debts and
creditors has to be assessed by using cash flow statement.
To understand the timing and certainty of their generation: The
historical analysis of statement of cash flow can set a trend regarding
the years in which company could generate fair amount of cash flows
and the probability of generating it.
Scope
An entity shall prepare a statement of cash flows in accordance with
the requirements of this Standard and shall present it as an integral
part of its financial statements for each period for which financial
statements are presented.
Definitions
The following terms are used in this Standard with the meanings
specified:
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 flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the
entity and other activities that are not investing or financing activities.
Investing activities are the acquisition and disposal of long term assets
and other investments not included in cash equivalents.
Financing activities are activities that result in changes in the size and
composition of the contributed equity and borrowings of the entity.
Cash and cash equivalents
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 cash 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.
Presentation of a statement of cash flows
The statement of cash flows shall report cash flows during the period classified
by operating, investing and financing activities.
An entity presents its cash flows from operating, investing and financing
activities in a manner which is most appropriate to its business.
Classification by activity provides information that allows users to assess the
impact of those activities on the financial position of the entity and
the amount of its cash and cash equivalents. This information may also
be used to evaluate the relationships among those activities.
12 A single transaction may include cash flows that are classified
differently. For example, when the instalment paid in respect of a fixed
asset acquired on deferred payment basis includes both interest and
loan, the interest element is classified under financing activities and
the loan element is classified under investing activities.
Operating activities
13 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. Information about the specific
components of historical operating cash flows is useful, in conjunction
with other information, in forecasting future operating cash flows.
14 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. Examples of cash flows from operating
activities are:
(a) cash receipts from the sale of goods and the rendering of
services;
7
Statement of Cash Flows
(b) cash receipts from royalties, fees, commissions and other
revenue;
(c) cash payments to suppliers for goods and services;
(d) cash payments to and on behalf of employees;
(e) cash receipts and cash payments of an insurance entity for
premiums and claims, annuities and other policy benefits;
(f) cash payments or refunds of income taxes unless they can
be specifically identified with financing and investing
activities; and
(g) cash receipts and payments from contracts held for dealing
or trading purposes.
Some transactions, such as the sale of an item of plant, may give rise
to a gain or loss that is included in recognised profit or loss. The cash
flows relating to such transactions are cash flows from investing
activities. However, cash payments to manufacture or acquire assets
held for rental to others and subsequently held for rental to others and
subsequently held for sale as described in paragraph 68A of Ind AS 16
Property, Plant and Equipment are cash flows from operating activities.
The cash receipts from rents and subsequent sales of such assets are
also cash flows from operating activities.
15 An entity may hold securities and loans for dealing or trading
purposes, in which case they are similar to inventory acquired specifically
for resale. Therefore, cash flows arising from the purchase and sale of
dealing or trading securities are classified as operating activities.
Similarly, cash advances and loans made by financial institutions are
usually classified as operating activities since they relate to the main
revenue-producing activity of that entity.
Investing activities
16 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. Only expenditures that result in a
recognized asset in the balance sheet are eligible for classification as
Indian Accounting Standards
8
investing activities. Examples of cash flows arising from investing
activities are:
(a) cash payments to acquire property, plant and equipment,
intangibles and other long-term assets. These payments
include those relating to capitalised development costs and
self-constructed property, plant and equipment;
(b) cash receipts from sales of property, plant and equipment,
intangibles and other long-term assets;
(c) cash payments to acquire equity or debt instruments of other
entities and interests in joint ventures (other than payments
for those instruments considered to be cash equivalents or
those held for dealing or trading purposes);
(d) cash receipts from sales of equity or debt instruments of
other entities and interests in joint ventures (other than
receipts for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
(e) cash advances and loans made to other parties (other than
advances and loans made by a financial institution);
(f) cash receipts from the repayment of advances and loans
made to other parties (other than advances and loans of a
financial institution);
(g) cash payments for futures contracts, forward contracts,
option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
(h) cash receipts from futures contracts, forward contracts,
option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable
position the cash flows of the contract are classified in the same
manner as the cash flows of the position being hedged.
9
Statement of Cash Flows
Financing activities
17 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. Examples of cash flows
arising from financing activities are:
(a) cash proceeds from issuing shares or other equity
instruments;
(b) cash payments to owners to acquire or redeem the entity’s
shares;
(c) cash proceeds from issuing debentures, loans, notes, bonds,
mortgages and other short-term or long-term borrowings;
(d) cash repayments of amounts borrowed; and
(e) cash payments by a lessee for the reduction of the
outstanding liability relating to a finance lease.
Reporting cash flows from operating activities
An entity shall report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and
gross cash payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the
effects of transactions of a non-cash nature, any deferrals or accruals of
past or future operating cash receipts or payments, and items of
income or expense associated with investing or financing cash flows.
Reporting cash flows from investing and
financing activities
An entity shall report separately major classes of gross cash receipts
and gross cash payments arising from investing and financing activities.
Statement of Cash Flows
Reporting cash flows on a net basis
22 Cash flows arising from the following operating, investing or
financing activities may be reported on a net basis:
(a) cash receipts and payments on behalf of customers when
the cash flows reflect the activities of the customer
rather than those of the entity; and
(b) cash receipts and payments for items in which the
turnover is quick, the amounts are large, and the
maturities are short.
23 Examples of cash receipts and payments referred to in paragraph
22(a) are:
(a) the acceptance and repayment of demand deposits of a
bank;
(b) funds held for customers by an investment entity; and
(c) rents collected on behalf of, and paid over to, the owners of
properties.
23A Examples of cash receipts and payments referred to in paragraph
22(b) are advances made for, and the repayment of:
(a) principal amounts relating to credit card customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, for example, those which have
a maturity period of three months or less.
24 Cash flows arising from each of the following activities of a
financial institution may be reported on a net basis:
(a) cash receipts and payments for the acceptance and
repayment of deposits with a fixed maturity date;
(b) the placement of deposits with and withdrawal of
deposits from other financial institutions; and
Indian Accounting Standards
12
(c) cash advances and loans made to customers and the
repayment of those advances and loans.
Foreign currency cash flows
25 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.
26 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.
27 Cash flows denominated in a foreign currency are reported in a
manner consistent with Ind AS 21. The Effects of Changes in Foreign
Exchange Rates. This permits the use of an exchange rate that
approximates the actual rate. For example, a weighted average exchange
rate for a period may be used for recording foreign currency transactions
or the translation of the cash flows of a foreign subsidiary. However,
Ind AS 21 does not permit use of the exchange rate at the end of the
reporting period when translating the cash flows of a foreign subsidiary.
28 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. This amount is presented separately from cash flows from
operating, investing and financing activities and includes the differences,
if any, had those cash flows been reported at end of period exchange
rates.