IAS-7

STATEMENT OF CASH FLOWS

PRESENTED BY:

CA DHEERAJ AGRAWAL Contact no. 9958895675

 Indian scenario: at present

In India, the provision of IAS-7 Statement of Cash Flows are covered by AS-3 Cash Flow Statement issued by ICAI*.
As per clause 32 of Listing agreement the company shall provide a cash flow statement along with Balance Sheet and Profit and Loss a/c. The cash flow will be prepared in accordance with the Accounting Standard on Cash Flows (AS-3) issued by the Institute of Chartered Accountants of India, and the Cash Flows shall be presented only under indirect method as given in AS-3. It is mandatory on all Level-I companies on or after 01.04.2001.

*Exposure draft of AS-3 (Revised) has been issued by ICAI which is in line with IAS-7 and will be effective from 1.4.2011.

IAS-7
Applicability
All enterprises that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. In India, the corresponding revised AS-3 will be in force from 1.4.2011.

IAS-7
Objectives 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 enterprises by means of a statement of cash flows, which classifies cash flows during the period according to Operating, Investing and Financing activities.

IAS-7
Cash and cash equivalents: it comprise Cash on hand Demand deposits: from banks & other financial institutions Short term highly liquidated investment that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value. (guidance note indicates that an investment normally meets the definition of a cash equivalents when it has a maturity of 3 months or less from the date of acquisition) Equity investment are normally excluded, unless they are, in substance , cash equivalents. Bank Overdrafts: which are repayable on demand and which form an integral part of an enterprises cash management are also included as a component of cash and cash equivalents.
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IAS-7
Cash Flows from operating activities:

Operating activities are the main revenue producing activities of the enterprises that are not investing or financial activities. Some example of operating activities: i) Cash received from customers from sale of goods or service provided ii) Cash paid to suppliers towards purchase of goods or services iii) Cash paid to employees towards salary wages and for others claims iv) Interest/Dividend paid (in case non-financial institututions IAS-7 provide an option to consider the same as operating or financing, but it should be consistently followed during the entire period) v) Taxes paid (unless they can be specifically identified with Financing or investing activities)

IAS-7
Cash Flows from investing activities:

Investing activities are the acquisition and disposal of long term assets and other investments that are not considered to be cash & cash equivalents. Some example of investing activities:i) Sale /Purchase of fixed assets ii) Investing in long term investments iii) Investment /acquisition/disposal of subsidiaries/JVs/ Associates iv) Interest /dividends received on deposits/investments. (IAS-7 provide an option to consider the same under operating activities also.)

IAS-7
Cash Flows from financing activities:

Financing activities are the activities that alter the equity capital and borrowing structure of the enterprise. Some example of Financing activities:i) Issue of shares/debentures ii) Buy back of equity shares iii) Redemption of preference shares/debenture iv) Long term loans which are not Cash & cash Equivalent and payment thereof v) Interest/dividends paid on Loans/ to shareholders.

IAS-7
Accounting Framework: Presentation of cash flows

IAS-7
Cash flows from operating Activities can be calculated by using two mentods:i) Direct method ii) Indirect method (acceptable but preferred)
The direct method shows each major class of gross receipts & cash payments. The operating cash flows section of the statements of cash flows under the direct method would appear something like this :Cash receipts from customers Cash paid to suppliers Cash paid to employees Cash paid for others operating expenses Interest paid Income tax paid
NET CASH FLOWS FROM OPERATING ACTIVITIES

xxx xxx xxx xxx xxx xxx

XXXX

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IAS-7
Indirect method (most common in practice)
The Indirect method adjust accrual basis net profits or loss for the effects of non cash transactions. Cash flows section of the statement of cash flows under indirect method would appear something like this :Profit before Interest and Income Taxes
Add back Deprciation Add back amortisation of Goodwill Increase in receivables Decrease in Inventories Increase in Trade Payables Interest expense Less: Interest accrued but not yet paid Interest paid Income tax paid

xxx xxx

xxx
xxx xxx xxx xxx xxx

xxx xxx

Net cash flows from Operating Activities

xxxx

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Guidance notes on IAS-7

The exchange rates used for translation of transactions denominated in a foreign currency and cash flows of a foreign subsidiary should be the rate in effect at the date of cash flows (i.e. Transaction date rate). As regards the cash flows of associates and JVs, where the equity method is used, the statements of cash flows should report cash flows only between the investor and investee ( e.g. Advance taken or given, dividend paid or received). But where proportionate consolidation is used, the cash flow statement should include the venturers share of cash flows of investee. Aggregate cash flows relating to acquisitions and disposal of subsidiaries and other business units should be presented separately and classified as investing activities with specified additional disclosures.

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Guidance notes on IAS-7

Cash flows from investing and financing activities should be recorded gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis:
1. Cash receipts & payments on behalf of customers (e.g. receipts and repayments of demand deposits by banks) 2. Cash receipts and payments of the items in which the turnover is quick, the amounts are large and maturities are short (e.g. charges and collection from credit card customers) 3. Cash receipts and payments relating to fixed maturity deposits.

Investing and financing transaction which do not require the use of cash should be excluded from the statements of cash flows, but they should be separately disclosed elsewhere in the financial statements (e.g. acquisition of an enterprise by means of issue of equity shares, conversion of debts to equity.) The amount of cash and cash equivalents held by enterprise that is not available for use by the group should be disclosed, together with a commentary by management on same.
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COMPARISION OF IFRS/IAS-7 WITH AS-3

IFRS/IAS-7 Cash Flow statement
Applicability

INDIAN GAAP/AS-3

No exemption.

Cash flow is not mandatory for SMEs.

Cash and Cash Equivalents

Cash comprises not only cash on hand but alsoCash comprises cash on hand and demand deposits demand deposits with banks or other financialwith banks. There is no stipulation in AS 3 for institutions. Cash equivalents are short-term, highlyclassification of bank overdrafts. Changes in balance liquid investments that are readily convertible toof cash flows are classified as short term, highly known amounts of cash and that are subject to anliquid investments that are readily convertible into insignificant risk of changes in value. An investmentknown amounts of cash and which are subject to an normally qualifies as a cash equivalent only when itinsignificant risk of changes in value. has a maturity of three months or less from its acquisition date. Bank borrowings are normally part of financing activities. Nonetheless, bank overdrafts that are repayable on demand and that form an integral part of an entitys cash management are included in cash equivalents.
Format and content of cash flow

The cash flow statement may be prepared usingSimilar to IFRS. However, in case of listed either the direct method (cash flows derived fromcompanies SEBI permits only indirect method. aggregating cash receipts and payments associated with operating activities) or the indirect method (cash flows derived from adjusting net income for transactions of a non-cash nature such as depreciation). The latter is more common in practice. The cash flow should be classified into 14 operating, investing and financing cash flow.

Comparison
IFRS/IAS-7 INDIAN GAAP/AS-3
Cash flow associated with extraordinary items

Separate disclosure is prohibited. The concept ofThe cash flows associated with extraordinary items extra-ordinary items has been made redundantshould be classified as arising from operating, under IFRS. investing or financing activities as appropriate and separately disclosed.
Disclosure of Interest paid

Operating in case of financing enterprise. For other enterprises, it should be disclosed as operating or financing Operating or financing

Operating in case of financing enterprise. For other enterprises, it should be disclosed as financing.

Disclosure of dividend paid

Financing
Disclosure of dividend/interest received

Operating in case of financing enterprise. OperatingOperating in case of financing enterprise. Investing or investing in case of other enterprises in case of other enterprises
Disclosure of taxes paid

Operating unless specific identification with financing or investing

Similar to IFRS

Foreign currency transaction

Cash flows denominated in a foreign currency andSimilar to IFRS cash flows of a foreign subsidiary should be translated into the parents reporting currency using the exchange rate at the date of the cash flow or an appropriate weighted average rate, i.e. that used for income statement purposes. Unrealised gains and losses for the period on cash and cash equivalents balances denominated in a foreign currency, should be reported as a reconciling item in the cash flow statement, separate from operating, investing and financing activities.

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Comparison
IFRS/IAS-7
Additional disclosures in CFS

INDIAN GAAP/AS-3

IAS 7 deals with issues relating to disclosure in cashNo such requirement under AS 3 flow statement in CFS like undistributed profits of associate and minority interests, foreign exchange cash flows of foreign subsidiary.
Acquisition of subsidiaries

IAS 7 requires further disclosure on cash and cashNo such requirement under AS 3 equivalents of acquired subsidiary and all other assets acquired. Reconciliation Requires a reconciliation of net profit or loss to netSimilar to IFRS cash flows from operating activities under only the indirect method. Enterprises must reconcile the components of cash and cash equivalents to the amounts presented on the balance sheet. That requirement implies that the total of cash and cash equivalents presented in the cash flow statement need not agree to a single line item, cash and cash equivalents, in the balance sheet.
Cash restriction

Requires that an enterprise disclose together with aSimilar to IFRS commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by the group.

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Comparison
IFRS/IAS-7
Other disclosures

INDIAN GAAP/AS-3

IAS7 also encourages disclosure of the followingAS 3 modeled on IAS 7 also requires the above items: disclosure, except that set out in the last two bullet points. 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 the facilities. The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity.

The aggregate amounts of the cash flows from operating, investing, and financing activities related to interests in joint ventures reported using proportionate consolidation.

The amount of the cash flows arising fromencouraged under AS 17. the operating, investing, and financing activities of each reported industry and geographical segment.

Segment cash flow disclosure are however

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KEY DIFFERENCES: IAS-7 & AS-3 (existing):FACTORS

APPLICABILITY No exemption
CASH & CASH EQUIVALENT

IAS-7
Bank overdrafts that are repayable onAS 3 is silent demand and that form an integral part of an entitys cash management are to be treated as a component of cash/cash equivalents under IAS 7.

AS-3
Exemption for SMEs

INTEREST/ In case of entities whose principal activities isIn case DIVIDENDS not financing, IAS 7 allows interest andactivities PAID/RECEIVED

of entities whose principal are not financing, AS 3 dividend received to be classified either undermandates disclosure of interest and Operating Activities or Investing Activities. IASdividend received under Investing 7 allows interest paid to be classified eitherActivities only. AS 3 mandates disclosure under Operating Activities or Financingof interest paid under Financing Activities Activities. only.

EXTRA ORDINARY IAS 7 prohibits separate disclosure of items asAS 3 requires disclosure of extraordinary ITEMS extraordinary items in Cash Flow Statements. items. CONSOLIDATED IAS 7 deals with cash flows of consolidatedAS 3 does not deal with cash flows FINACIAL financial statements. relating to consolidated financial STATEMENTS

statements.

CASH & CASH IAS 7 requires further disclosure on cash andNo such requirement under AS 3. EQUIVALENT OF cash equivalents of acquired subsidiary and SUBSIDIARY

all other assets acquired.

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Differences between IAS-7 & Exposure Draft on AS-3 Statement of cash flows (revised) issued by ICAI :-

ICAI is in the process of Revision of its Existing AS-3 in Line with IAS-7 to compliance with IFRS and has issued the exposure draft on AS-3 statement of cash flows(revised) which is nothing but IAS-7 only. But, still in some cases ICAI has taken different views:ITEMS INTEREST PAID IFRS/IAS-7
FINANCIAL ENTERPRISE:OPERATING

INDIAN GAAP/AS-3
FINANCIAL ENTERPRISE:OPERATING

OTHERS:

OPERATING OR FINANCING

OTHERS:

FINANCING

INTEREST RECEIVED

FINANCIAL ENTERPRISE:-

OPERATING

FINANCIAL ENTERPRISE:-

OPERATING

OTHERS:

OPERATING OR INVESTING

OTHERS: FINANCING

INVESTING

DIVIDENDS PAID DIVIDENDS RECEIVED

OPERATING OR FINANCING FINANCIAL ENTERPRISE:OPERATING

FINANCIAL ENTERPRISE:-

OPERATING

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OTHERS: OPERATING OR INVESTING OTHERS: INVESTING

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