Introduction to IND AS 7
IND AS 7, or the Indian Accounting Standard 7, is a financial reporting standard that outlines the requirements for preparing and presenting cash flow statements. It is applicable to all entities that are required to comply with IND AS and provides guidance on the presentation of information about an entity’s cash receipts and payments during a given period.
Purpose of Cash Flow Statements
As per IND AS 7, the purpose of cash flow statements is to provide information about an entity’s cash inflows and outflows during a given period. This information is useful for investors, creditors, and other stakeholders in making decisions about the entity’s financial health and future prospects.
The cash flow statement helps users to understand the differences between net income and cash flow from operating activities, as well as to identify the cash flows from investing and financing activities. It also provides insights into an entity’s liquidity, solvency, and ability to generate cash flows.
Furthermore, cash flow statements can help users to identify potential risks and opportunities for the entity, such as the need for additional financing, the ability to pay dividends, or the ability to fund future growth. Overall, the primary purpose of cash flow statements as per IND AS 7 is to provide relevant and reliable information about an entity’s cash flows to assist users in their decision-making process.
Key Features of IND AS 7
IND AS 7, or the “Statement of Cash Flows” standard, has several key features that distinguish it from other accounting standards. Some of these features include:
- Classification of cash flows: The standard requires entities to classify their cash flows into three categories: operating, investing, and financing activities. This helps users to better understand the sources and uses of cash, as well as the timing and magnitude of these activities.
- Direct or indirect method: IND AS 7 allows for the use of either the direct or indirect method of presenting cash flows from operating activities. The direct method shows the actual cash inflows and outflows, while the indirect method reconciles net income to cash flows from operating activities.
- Consistency and comparability: IND AS 7 emphasizes the importance of consistency and comparability in presenting cash flow information. Entities are encouraged to use the same methods and classifications from period to period, which helps users to better understand changes in the entity’s cash flows over time.
- Usefulness for decision-making: The ultimate goal of IND AS 7 is to provide relevant and reliable information about an entity’s cash flows to assist users in their decision-making process. The standard emphasizes the importance of providing information that is understandable, transparent, and free from bias.
Preparation of Cash Flow Statements
The preparation of cash flow statements under IND AS 7 involves several steps. These steps are:
- Identify the cash inflows and outflows: The first step in preparing a cash flow statement is to identify all the cash inflows and outflows that occurred during the period. This includes cash receipts from customers, cash paid to suppliers, interest and dividend payments, and cash spent on investments and financing activities.
- Classify cash flows: The next step is to classify these cash flows into the three categories: operating, investing, and financing activities. Operating activities involve cash flows related to the entity’s core business operations, investing activities relate to cash flows related to the acquisition and disposal of long-term assets, and financing activities relate to cash flows related to the entity’s financing activities.
- Choose the direct or indirect method: The third step is to choose between the direct and indirect method of presenting cash flows from operating activities. The direct method shows the actual cash inflows and outflows, while the indirect method reconciles net income to cash flows from operating activities.
- Prepare the statement: The fourth step is to prepare the cash flow statement itself. The statement should show the beginning and ending cash and cash equivalents balances, as well as the cash flows from operating, investing, and financing activities. The statement should also include any significant non-cash transactions, such as the acquisition of long-term assets through a capital lease.
- Disclose supplementary information: Finally, the entity should disclose any additional information required by IND AS 7. This includes information about the entity’s use of cash and cash equivalents, such as restrictions on their use or any significant changes in their balances. The entity should also provide information about the effects of exchange rate changes on cash flows, and any significant non-cash transactions that occurred during the period.
Few example:
> Cash and cash equivalents
- Cash in hand
- Money in a checking account
- Petty cash fund
- Treasury bills
- Money market funds
> Operating activities
- Payment of salaries and wages to employees
- Payment of rent and utilities
- Payment for raw materials or inventory
- Collection of accounts receivable
- Payment of income tax
> Investing activities
- Purchase of property, plant, and equipment
- Purchase of long-term investments
- Sale of property, plant, and equipment
- Purchase of patents or other intangible assets
- Purchase of marketable securities
> Financing activities
- Issuance of Share Capital
- Payment of dividends to shareholders
- Repayment of long-term debt
- Payment of interest on outstanding debt
- Purchase of treasury stock
> Significant events or transactions.
- Merger or acquisition of another company
- Sale or closure of a major business segment
- Lawsuit settlement or judgment
- Major changes in accounting policies or estimates
- Issuance of a significant amount of debt or equity securities.
Non cash item that should be considered in cash flow statement as per IND as 7
Under IND AS 7, the following non-cash items should be considered in the cash flow statement:
- Depreciation and amortization: These represent the use of economic resources over time, even though no cash outflows occurred during the period.
- Impairment losses: These are non-cash charges that reduce the value of assets and can occur due to a decline in the asset’s fair value or impairment of the asset’s future economic benefits.
- Write-offs of intangible assets: These are non-cash charges that represent the loss of value of an intangible asset due to factors such as obsolescence or expiration of legal rights.
- Gain or loss on disposal of assets: These represent the difference between the proceeds received from the sale of an asset and the carrying amount of the asset at the time of sale.
- Deferred taxes: These represent the temporary differences between the carrying amount of an asset or liability and its tax base, which can result in future tax benefits or obligations.
- Changes in fair value of financial instruments: These represent the changes in the fair value of financial instruments, such as derivatives, that are not settled during the period.
- Accruals and provisions: These represent non-cash charges that are recognized in the financial statements to account for expected future payments or obligations, such as accruals for employee benefits or provisions for warranty costs.
It is important to note that these non-cash items should be separately disclosed in the cash flow statement to provide users with a clear understanding of the entity’s cash flows.
Disclosure requirements
IND AS 7, the standard for cash flow statements, requires entities to provide disclosures that supplement the information presented in the cash flow statement. The disclosure requirements are as follows:
- Cash and cash equivalents: The entity should disclose the policy used in determining what constitutes cash and cash equivalents, as well as any restrictions on their use.
- Operating activities: If the indirect method is used to present cash flows from operating activities, the entity should disclose the reconciliations between net income and cash flows from operating activities. This includes the adjustments made for non-cash items, such as depreciation and amortization, as well as any changes in working capital.
- Investing activities: The entity should disclose the nature of its investing activities, including the acquisition and disposal of long-term assets, such as property, plant, and equipment, and any proceeds from the sale of investments.
- Financing activities: The entity should disclose the nature of its financing activities, including any proceeds from the issuance of debt or equity securities, as well as any payments made to reduce debt.
- Non-cash transactions: The entity should disclose any significant non-cash transactions that occurred during the period, such as the acquisition of long-term assets through a capital lease.
- Changes in exchange rates: The entity should disclose the effects of changes in exchange rates on cash and cash equivalents.
- Significant events or transactions: The entity should disclose any significant events or transactions that occurred during the period that had a material effect on the cash flows of the entity.
- Dividends: The entity should disclose any dividends paid during the period, including the amount and the date of payment.
Conclusion
In conclusion, IND AS 7 provides guidance on the preparation and presentation of cash flow statements, which are an important tool for investors, creditors, and other stakeholders in evaluating an entity’s financial performance and prospects. The standard requires the disclosure of significant non-cash items and provides guidance on the preparation of cash flow statements under two methods: the direct method and the indirect method. It is important for entities to comply with IND AS 7 to ensure accurate and transparent reporting of their cash flows.
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Disclaimer: This article provides general information existing at the time of preparation and author takes no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and author neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.
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