Ind AS-7: Cash Flow Statements

Cash on hand, demand deposits, investment only when it has a short maturity of, say, three months or less from the date of acquisition.

Bank borrowings are generally considered to be financing activities. However, where bank overdrafts which are repayable on demand are included in cash and cash equivalents. (Under AS – 3, the same is not treated as part of cash and cash equivalents).

Investing activities:

Cash flows from investing activities represent 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 investing activities. (AS 3 does not prescribe any such requirement.)

Operating activities:

Cash flows from operating activities -> indicator -> sufficient cash flows to repay loans, pay dividends and make new investments without external sources of financing.

Financing activities:

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.

Reporting cash flows from operating activities:

An entity shall report cash flows from operating activities using either:

(a) the direct method: Major classes of gross cash receipts and gross cash payments are disclosed.

(b) the indirect method: Profit or loss from statement of profit of loss is adjusted for the effects:

• Transactions of a non-cash nature (e.g., undistributed profit of associates in consolidated financial statements)
• Any deferrals or accruals of past or future operating cash receipts or payments
• Items of income or expense associated with investing or financing cash flows.

Foreign currency cash flows:

• Cash flows of a foreign subsidiary shall be translated at the exchange rates between functional currency and foreign currency.
• Record cash flows (those cash flows which arise from transactions in foreign currency) in functional currency.
• Exchange rate at the date of cash flows shall be applied. Ind AS 21 permits the use of exchange rate that approximates the actual rate.
• 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 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.

Change in ownership (no such concept under AS 3):

Cash flows from obtaining / losing control in businesses (including subsidiary) shall be presented separately and classified as Investing activity and disclose the following:

• Total amount of consideration
• Portion of consideration consisting of cash and cash equivalents
• Amount of cash and cash equivalent over which control is obtained / lost
• Assets and liabilities (other than cash and cash equivalent) over which control is obtained / lost summarised in each major category.
• Cash paid / received as consideration is reported net of cash and cash equivalents acquired / disposed on account of such transaction.
• Cash flow effects of losing control are not deducted from those of obtaining control.
• Cash flows arising from changes in ownership in subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities, unless subsidiary is held by investment entity.

Non-cash Transactions:

Many investing and financing activities do not impact cash flows although they do affect the capital and asset structure of an entity. These shall be excluded from the statement of cash flows. Examples:

• Acquisition of assets by means of a finance lease;
• Conversion of debt to equity.
• Issue of bonus shares
• Conversion of term loan into equity shares.

Changes in liabilities arising from financing activities (It was an amendment in Ind AS 7 and this provision was not there in AS 3):

An entity shall provide the following disclosures to evaluate changes in liabilities arising from financing activities including both changes arising from cash flows and non-cash changes:

• 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.
• Other changes.