No exemption has been provided in Ind AS 7 with regard to its applicability as provided in AS 3. So, companies which will be required to prepare financial statements as per Ind AS will be required to prepare statement of cash flows as per Ind AS 7.

Cash and cash equivalents:

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).

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.

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.)

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; or

(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:

  • Record cash flows (those cash flows which arise from transactions in foreign currency) in functional currency.
  • Cash flows of a foreign subsidiary shall be translated at the exchange rates between functional currency and foreign 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 flow effects of losing control are not deducted from those of obtaining control.
  • Cash paid / received as consideration is reported net of cash and cash equivalents acquired / disposed on account of such transaction.
  • 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

Such transactions shall be disclosed in the financial statements indicating investing / financing activity.

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; and
    • other changes.
  • It also applies to changes in financial assets (for example, assets that hedge liabilities arising from financing activities) if cash flows from those financial assets included in cash flows from financing activities.
  • Disclosure requirement can be fulfilled by: Reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities.
  • If an entity discloses the same with disclosures of changes in other assets and liabilities, it shall disclose financing activities separately.

Disclosures:

  • Components of cash and cash equivalents and reconciliation with amount appearing in balance sheet
  • Policy adopted in determining composition of cash and cash equivalents
  • Significant cash and cash equivalent that are not available for use by the entity (with commentary by management).

Examples: balance in unpaid dividend account, bank balance subject to legal restrictions, earmarked balances, bank balance for share application money / pending allotment of shares.

  • Additional information (optional but standard encouraged the following disclosure):
    • amount of undrawn borrowing facilities (indicating any restrictions on use)
    • cash flows representing increases in operating capacity separately from cash flows required to maintain operating capacity;
    • cash flows from operating, investing and financing activities of each reportable segment (same is required by Ind AS 108).

Key points:

1. A single transaction may include cash flows that are classified differently.

Example: An item of Property, Plant and Equipment is acquired on deferred payment basis and the instalment amount for the same includes interest, that interest element is classified under financing activities and the loan element is classified under investing activities.

2. Cash flows arising from interest paid should be classified as financing activity while interest and dividends received should be classified as cash flows from investing activities.

In the case of a financial institution, Cash flows arising from interest paid and interest & dividends received should be classified as cash flows from operating activities.

Dividends paid shall always be classified as cash flows from financing activities.

Interest paid is disclosed in the statement of cash flows whether it has been recognised as an expense in profit or loss or capitalised as per Ind AS 23.

Particulars Banks / Financial Institutions Other Entities
Interest and dividend received on investments in subsidiaries, associates and in other entities Investing activity Investing activity
Dividend paid on preference and equity shares Financing activity Financing activity
Finance charges paid by lessee under finance lease Financing activity Financing activity
Interest paid to vendor for acquiring fixed asset under deferred payment basis Financing activity Financing activity
Principal sum payment under deferred payment basis for acquisition of fixed assets Investing activity Investing activity
Penal interest received from customers or paid to suppliers for late payments Operating activity Operating activity
Interest received on tax refunds Operating activity Operating activity

3. Cash flows arising from taxes shall be separately disclosed and classified as operating activities unless specifically identified with financing and investing activities.

4. AS 3 requires separate disclosure of cash flows from operating, investing and financing activities for extraordinary items. Ind AS 7 does not require the same.

5. Cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale are cash flows from operating activities. Cash receipts from rents and subsequent sales of such assets are also cash flows from operating activities (no such specific guidance under AS 3).

ITFG Clarification Bulletin 16, Issue 4

Investments in units of money-market mutual funds (i.e., those investing in money-market instruments such as treasury bills, certificates of deposit and commercial paper) that are traded in an active market or are puttable by the holder at NAV at any time can be classified as cash equivalents as per Ind AS?

Response:

Ind AS 7 prescribes:

  • The investment must be for meeting short-term cash commitments.
  • It must be highly liquid, i.e. readily convertible to cash.
  • The amount that would be realised from the investment must be known, with no more than an insignificant risk of change in value of the investment.

It is well-known that even though the money market instruments have short life, their value keeps changing primarily due to changes in interest rates. Accordingly, it cannot be classified as cash and cash equivalents. However, there may be cases wherein this condition is met e.g. units acquired only for a very brief period and the maturity amount of the investments are pre-determined – in such a case, it might be possible to argue that the redemption amount of the units is known and subject to an insignificant change in value.

For any query on any Ind AS, I can be reached at swati18ca@gmail.com

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