[ecis2016.org] The objective of the Ind-AS 7, is to help users to access information about the historical changes in cash and cash equivalents of companies from their operating, investing and financing activities
The Indian accounting standard 7 or Ind AS 7, deals with statements of cash flows. The standard prescribes rules and suggestions on preparation and presentation of cash flows of companies from its operating, financing and investment activities, for a specific reporting period. The standard’s objective, is to help users to access information about the historical changes in cash and cash equivalents of companies from their operating, investing and financing activities.
You are reading: All about Indian accounting standard 7 or Ind-AS 7
[ecis2016.org] All about Indian accounting standards (Ind AS)
What are cash flows?
Cash flows of a company include the inflows and outflows of cash, its equivalents such as demand deposits, short-term investments and bank overdrafts. Cash equivalents are basically short-term investments that are easily convertible to cash, without causing any risk of changes in its value.
This information helps investors to understand a company’s financial status, by providing an accurate account of its various inward and outward cash flows. This also helps users to understand the fiscal health of an entity by providing data on how the entity is using the cash available to it and whether or not there is consistent flows.
Ind AS 7 scope and applicability
While providing a statement on its cash flows at the beginning and end of a reporting period, the company has to report cash and cash equivalents in various classifications – i.e., operating, investing and financing activities. In some cases, cash flows are offset and reported on a net basis too.
Barring small and medium enterprises (SMEs), all companies have to provide cash-flow statements. As part of their financial statements for each period, companies have to provide statements of their cash flows, in accordance with this standard. Note that cash flows arising from the operating, investing and financing activities could be reported on a net basis.
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In its balance sheet, a company has to disclose the components of cash and cash equivalents and provide the final calculations in its statement of cash flows. The company should also disclose the amount of significant cash and cash equivalents it has set aside for any specific purpose, elaborating the same.
Also note that investments and financial transactions that do not require the use of cash or cash equivalents, are to be excluded from cash flow statements.
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What are operating activities?
Operating activities include the main revenue-producing activities of a company. It also includes activities that are not related to investing or financing activities.
Examples of operating activities:
- Cash receipts through the sale of goods or services.
- Cash receipts from royalties, fees, or commissions.
- Payments of cash to the suppliers of goods and services.
- Cash flows from the purchase and sale of dealing or trading securities.
- Payment of cash to manufacture or acquire assets that are rented to others and subsequently held for sale.
What are investing activities?
These refer to the acquisition and disposal of long-term assets and other investments that are not included under cash or cash equivalents.
Examples of investing activities:
- Cash payments to acquire property, plant and equipment and other long-term assets
- Cash received through the sale of property, plant and equipment, or other intangibles.
- Payment of cash to acquire equity or debt instruments.
- Cash advances and loans given to other parties.
- Payment of cash for forward contracts, future contracts and option contracts.
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What are financing activities?
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Financing activities are acts that influence the changes in the size and the composition of a company’s equity and borrowings.
Examples of financing activities:
- Cash proceeds arising through the issue of shares or other equity instruments.
- Cash payments to owners, to redeem or acquire the equity’s shares.
- Cash proceeds through the issue of loans, mortgages, bonds, debentures, or notes.
- Cash repayments of borrowed amounts.
- Cash repayments by a lessee, towards reduction of any outstanding liability.
The company must also disclose the following changes in liabilities arising from financing activities:
- Changes from financing cash flows.
- Changes arising from acquiring or losing control of subsidiaries or other businesses.
- Effects of changes in foreign exchange rates.
- Changes in fair values.
What are foreign currency cash flows?
The cash flows that arise from transactions in a foreign currency, are recorded in a company’s cash flow data after making adjustments according to the exchange rate. However, unrealised gains and losses arising from any changes in foreign currency exchange rates do not fall in the cash category. The same is true of cash flows of a foreign arm of such a company.
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Reporting of interest and dividend
- Companies have to report cash flows from interest and dividends separately, categorising them in the receivables and payments. These include:
- Interest payments as part of financing activities.
- Interest and dividend receivables as part of investing activities.
- Dividend payment as financing activities.
Cash flows arising from taxes on income should be disclosed separately and be classified as part of operating activities, unless it can be separately identified under investing/financing activities.
Note: Banks and such institutions classify interest and dividend, as cash flow arising from operating activities.
Examples of interest and dividend:
- Acquisition of assets by assuming directly liabilities or by a finance lease.
- Acquisition of a company by equity issue.
- Conversion of debt into equity.
FAQ
What is included in cash and cash equivalent as per accounting standards?
While cash includes the inflow and outflow of cash, cash equivalents refer to short-term investments that can easily be converted to cash.
What does cash flow mean?
Cash flow refers to the net amount of cash and cash-equivalents that are transferred into and out of a company.
What is the objective of IAS 7?
Ind AS 7 prescribes standards for the presentation of information about the cash flows of an entity during a specific period according to operating, investing and financing activities.
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