Ind AS 7

Statement of Cash Flows

EIRC, Kolkata

Mohit Jain
16 February 2018

For discussion purposes only

Overview of Ind AS 7

 Requires presentation of a statement of cash flows as an integral part of financial statements,

mandatorily for all entities

 Cash flows are defined as inflows and outflows of cash and cash equivalents and classified into:
 Operating activities
 Investing activities
 Financing activities

 Accounting policy choices available for presentation of interest/dividends paid and received
under IAS 7 not available under Ind AS 7.

 Cash flows from operating activities are reported using either direct or indirect method

 Cash flows from investing and financing activities are reported on gross basis with some exceptions

 Requires disclosure of components of cash and cash equivalents and a reconciliation of the amounts
in statement of cash flows with the equivalent items reported in the balance sheet
Key Concepts

Cash comprises cash on hand and demand deposits

Cash equivalents are

• Short-term (<3 months from date of acquisition)
• Highly liquid investments (readily convertible into known amounts of cash)
• Insignificant risk of changes in value
• Held for purpose of meeting short-term cash commitments rather than investment or other purposes
Key Concepts

Question #1:
An entity purchases a two-year bond in the market when the bond only has three months remaining before
its redemption date. Does the bond qualify as a cash equivalent under Ind AS 7?
Key Concepts

Suggested Solution #1:

Yes, provided that it is held for the purpose of meeting short-term cash commitments rather than for
investment or other purposes, as required by paragraph 7 of Ind AS 7.
Key Concepts

Question #2:
An entity purchases a two-year bond in the market when the bond only has four months remaining before
its redemption date. Does the bond qualify as a cash equivalent under Ind AS 7?
Key Concepts

Suggested Solution #2:

No. Paragraph 7 of Ind AS 7 clarifies that an investment normally qualifies as a cash equivalent when it
has a maturity of three months or less from the date of acquisition.

Note: The classification is established at the date of acquisition and is not changed subsequently (e.g.,
when the bond has less than three months remaining to maturity).
Key Concepts

Question #3:
An entity purchases a two-year bond in the market when the bond only has two months remaining before
its redemption date. The purchase is made for investment purposes. Does the bond qualify as a cash
equivalent under Ind AS 7?
Key Concepts

Suggested Solution #3:

No. Paragraph 7 of Ind AS 7 specifies that, in order to qualify as a cash equivalent, the bond must be held
for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
Because the bond has been acquired for investment purposes, the acquisition should be recorded as an
investing cash outflow.
Key Concepts

Question #4:
One of the entities in Group A, (e.g. Subsidiary B) operates in a country where exchange controls or other
legal restrictions apply and the cash and cash equivalents in the subsidiary B are not available for use by
other members of the group? How should such cash and cash equivalent balances be presented in the
consolidated statement of cash flows presented by Group A?
Key Concepts

Suggested Solution #4:

Restrictions on the use of cash or cash equivalents do not alter the classification of the restricted amounts
in the balance sheet or statement of cash flows. For example, when there are restrictions on the transfer of
amounts from foreign subsidiary B, the amounts are treated as part of Group A’s cash and cash
equivalents in the consolidated statement of cash flows presented by Group A if they meet the definition of
cash and cash equivalents in the foreign subsidiary; disclosure is made in accordance with Ind AS 7.48.
Key Concepts - Classification

According to Ind AS 7, the cash flows should be classified in the

following standard headings:

Operating Investing Financing

activities activities activities
Key Concepts – Operating Activities

Principal revenue-producing activity

of entity

Operating Users can judge whether the purpose

activities of entity’s existence is fulfilled

Cash receipts or payments for all

items in the SOPL will be included

Examples

 Cash flows from operating activities

 Cash receipts from the sale of goods and the rendering of services
 Cash receipts from royalties, fees, commission and other revenue
Key Concepts - Investing and Financing Activities

Acquisition and disposal of long-term

assets and other investments
Investing activities
Bring future profits

Examples of cash flows from investing activities

 Property, plant and equipment, intangibles and other long-term assets e.g. acquisition or
disposal of equipment
 If money is invested in new machinery, it will help the entity to produce and sell more goods,
which in turn will generate more income in the future.

Changes in the size and composition

of the contributed equity
Financing activities

Borrowings of the entity

Examples of cash flows from financing activities

 Issue or redemption of shares
 Borrowing and repayment of debentures, loans, notes, bonds, mortgages and other short or
long-term borrowings
Classification of certain cash flow items
Interest/dividends paid (for non-financial entities)
• classified as financing activity

Interest/dividends received (for non-financial entities)

• classified as investing activity

Bank overdraft
• Financing activity, except when it forms an integral part of entity’s cash management
‒ In such a case, it may be classified as cash and cash equivalent
Example: bank overdrafts
Question
Should bank overdrafts always be classified as cash equivalents?

Answer
No.
The definition of cash equivalents makes no reference to the inclusion of bank borrowings. IAS 7.8
acknowledges, however, that bank overdrafts repayable on demand may form an integral part of an
entity's cash management, in which case they should be included as a component of cash equivalents. A
characteristic of such banking arrangements is that the bank balance often fluctuates from being
positive to overdrawn.

Ind AS 7 does not therefore mandate the inclusion of bank overdrafts in cash equivalents in all
circumstances. But it does require their inclusion when the bank overdraft forms an integral part of the
entity's cash management.

Ind AS 7.8 also emphasizes that bank borrowings are generally considered to be financing
activities. Therefore, the Standard does not allow for other short-term loans (e.g. short-term bank loans,
advances from factors or similar credit arrangements, credit import loans, trust receipt loans) to be
classified as cash equivalents because they are financing in nature.
Reporting cash flows on a net basis
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

Examples of cash receipts and payments referred to in paragraph (a) above 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.

b. cash receipts and payments for items in which the turnover is quick, the amounts are large, and the
maturities are short.

Examples of cash receipts and payments referred to in paragraph (b) above are advances made for,
and the repayment of:
a. principal amounts relating to credit card customers;
b. the purchase and sale of investments; and
General
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.

Non-cash transactions
Investing and financing transactions that do not require the use of cash or cash equivalents shall be
excluded from a statement of cash flows.

Taxes on Income
Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash
flows from operating activities unless they can be specifically identified with financing and investing
activities.
General
Investments in subsidiaries, associates and joint ventures
 When accounting for an investment in an associate or a subsidiary accounted for by use of the equity
or cost method, an investor restricts its reporting in the statement of cash flows to the cash flows
between itself and the investee, for example, to dividends and advances.

 An entity which reports its interest in a jointly controlled entity (see IAS 31 Interests in Joint Ventures)
using proportionate consolidation, includes in its consolidated statement of cash flows its proportionate
share of the jointly controlled entity's cash flows.

Changes in ownership interests in subsidiaries and other businesses

• The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business
units shall be presented separately and classified as investing activities.
General
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.

Other disclosures
 Restricted cash
 Additional disclosures may be relevant to users, disclosure of following together with a commentary by
management, is encouraged and may include:
a) the amount of undrawn borrowing facilities that may be available for future operating activities and
to settle capital commitments, indicating any restrictions on the use of these facilities;
b) the aggregate amounts of the cash flows from each of operating, investing and financing activities
related to interests in joint ventures reported using proportionate consolidation;
c) the aggregate amount of cash flows that represent increases in operating capacity separately from
those cash flows that are required to maintain operating capacity; and
d) the amount of the cash flows arising from the operating, investing and financing activities of each
reportable segment (see Ind AS 108).
Overview of key differences
Area of Indian GAAP IFRS Ind AS
Difference
Primary AS 3 – Cash Flow Statements IAS 7 – Statement of Cash Flows Ind AS 7 – Statement
literature of Cash Flows
Bank Bank overdrafts are considered as financing Included as cash and cash Similar to IFRS.
overdrafts activities. equivalents if they form an
integral part of an entity’s cash
management.
Cash flows Cash flows from items disclosed as As presentation of items as Similar to IFRS.
from extraordinary are classified as arising from extraordinary is not permitted,
extraordinary operating, investing or financing activities as the cash flow statement does not
items appropriate, and separately disclosed. reflect any items of cash flow as
extraordinary.

Interest and For Financial enterprises: May be classified as operating, Similar to Indian GAAP.
dividend Interest paid and interest and dividend investing or financing activities in
received are to be classified as operating a manner consistent from period
activities. Dividend paid is to be classified as to period.
financing activity.

For other enterprises:

Interest and dividends received are required
to be classified as investing activities. Interest
and dividends paid are required to be
classified as financing activities.
Overview of key differences
Area of Indian GAAP IFRS Ind AS
Difference
Acquisition and No specific guidance. Entities might routinely sell items Similar to IFRS.
disposal of of property, plant and equipment
properties held that they have previously held for
for rental to rental to others. Cash payments/
others receipts in respect of acquisition/
disposal of such assets are
classified as operating activities.
Changes in No specific guidance. Changes in ownership interest in Similar to IFRS.
ownership a subsidiary without loss of
interest control are treated as financing
activities.
Questions