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).
Cash flows from operating activities -> indicator -> sufficient cash flows to repay loans, pay dividends and make new investments without external sources of financing.
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.)
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:
Foreign currency cash flows:
Change in ownership (no such concept under AS 3):
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:
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):
Examples: balance in unpaid dividend account, bank balance subject to legal restrictions, earmarked balances, bank balance for share application money / pending allotment of shares.
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?
Ind AS 7 prescribes:
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 firstname.lastname@example.org