Decoding Indian Accounting Standard (Ind AS) - 7

Firstly, I have not covered the basic classification of cash flows between the Operating, Investing and Financing Activities in this blog as we all know the basic thing. So, what is covered in this blog? The things that you don’t know or the things that are different from what you have learn from Indian GAAP or you know but can be confusing while applying them practically.

In case you are here just to know the key paras and changes you can skip the introductory part and can jump directly to “What are the basic points that has to be kept in mind while implementing this Ind AS”

What are the objectives of implementing this Ind AS?

Ind AS 7 is concerned with preparation of statement of cash flow statements. A statement of cash flow provides useful information about an entity’s ability to generate cash and the needs of the entity to utilise those cash flows.

The objective of this standard is to presenting the historical changes in cash flow statements and also helps the stakeholder in assessing the ability of entity to generate cash and cash equivalents.

Relevance of Ind AS – 7

Users of an entity’s financial statements are interested in entity’s ability to manage cash and cash equivalents. Cash flow statement gives a fair idea about the efficiency and ability of the entity to generate cash and also enable the users to discount future cash flows through it.

What role it plays in accounting framework?

The balance sheet and profit and loss account of the company are based on accrual basis of accounting, which equips the user to understand the financial performance and obligations of the entity. But it doesn’t convey whether entity is able to generate enough cash for the operational necessity of the entity or to pay off their short term obligations, here the cash flow statement plays the major role.

What are the basic points that has to be kept in mind while implementing this IndAS?

1. The most important point for implementing this Ind AS is to understand the classification of cash flows under operating, investing and financing activities that can differ on the basis of the nature of the entity.

For Example: -

Cash flow from interest and dividends are classified as: -

• For Financial intuitions – cash flow from operating activities
• For Other Entities – cash flow from investing activities.

2. Bank overdrafts which are repayable on demand form an integral part of an entity's cash management, bank overdrafts are included as a component of cash and cash equivalents. This is one of the differences between Ind AS-7 and AS-3.

3. There is one important thing in classifying an instrument as cash equivalents held for the short term i.e., maturity within 3 months, but the same posses a common mistake done by most of the people. The maturity shall be counted at the initial stage i.e., the stage when asset is acquired and if that doesn’t meet the definition of short term at the initial stage it can’t be reclassified as cash equivalents later.

4. A single transaction may include cash flows that are classified differently. For example, when the instalment paid in respect of an item of Property, Plant and Equipment acquired on deferred payment basis includes interest, the interest element is classified under financing activities and the loan element is classified under investing activities.

Key Paragraphs & their interpretations.

1. Components of cash and cash Equivalents

• Cash on hand, and
• Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

2. Classification of change in cash flows due to change in ownership pattern in subsidiary

3. The aggregate amount of the cash paid or received as consideration for obtaining or losing control of subsidiaries or other businesses is reported in the statement of cash flows net of cash and cash equivalents acquired or disposed of as part of such transactions, events or changes in circumstances. [Para 42]

4. Classification of cash flows in case of payment of Borrowings

Cas Although Para 31 specifies that interest paid is classified as Financing activity, Para 16(a) permits expenditure that results in recognising the asset is to be classified as investing activities. Therefore, following shall be the interpretation of the above contradiction as per my views:

• The amount of cash that has been capitalised while recording the asset is to be shown under investing activities, and
• The amount of cash not being capitalised is to be shown under financing activities.

5. 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 held or due in a foreign currency 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 and includes the differences, if any, had those cash flows been reported at end of period exchange rates.

Compliance Oriented Paragraphs

1. Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

2. Cash flows arising from the following operating, investing or financing activities may be reported on a net basis:

• cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity; and
• cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.

3. An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.

What are the carve outs between Ind AS & IAS?

1. In case of other than financial entities, IAS 7 gives an option to classify the interest paid and interest and dividends received as item of operating cash flows. Ind AS 7 does not provide such an option and requires these items to be classified as item of financing activity and investing activity, respectively.

2. IAS 7 gives an option to classify the dividend paid as an item of operating activity. However, Ind AS 7 requires it to be classified as a part of financing activity only.

  Report