IAS 7 Statement of Cash Flows - Summary

IAS 7 Statement of Cash Flows

IFRS Summaries by Imad Uddin, FRM

Objective

Requires entities to present a statement of cash flows as an integral part of their primary financial statements.

Provides users with information to evaluate the entity's ability to generate cash and cash equivalents.

Helps assess the needs of the entity to utilise those cash flows, including the timing and certainty of their generation.

Cash flow information is crucial for assessing liquidity, solvency, and financial flexibility.

Scope

Applies to all entities preparing financial statements in accordance with IFRS.

Requires presentation of historical changes in cash and cash equivalents via a statement classifying flows into operating, investing, and financing activities.

Components of Cash Flows

Definition of Cash and Cash Equivalents

Term	Definition & Key Features
Cash	Comprises cash on hand and demand deposits (current accounts).
Cash Equivalents	Short-term, highly liquid investments that are: Readily convertible to known amounts of cash. Subject to an insignificant risk of changes in value. Held to meet short-term cash commitments rather than for investment or other purposes. Typically have short maturities (e.g., 3 months or less from date of acquisition). Examples: treasury bills, commercial paper, money market funds. Bank overdrafts repayable on demand are often included as part of cash & cash equivalents (negative component).

Term

Definition & Key Features

Cash

Comprises cash on hand and demand deposits (current accounts).

Cash Equivalents

Short-term, highly liquid investments that are:
Readily convertible to known amounts of cash.
Subject to an insignificant risk of changes in value.
Held to meet short-term cash commitments rather than for investment or other purposes.
Typically have short maturities (e.g., 3 months or less from date of acquisition). Examples: treasury bills, commercial paper, money market funds. Bank overdrafts repayable on demand are often included as part of cash & cash equivalents (negative component).

Three Main Categories of Cash Flows

Category	Description	Examples
Operating Activities	Cash flows from the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Generally result from transactions entering into determination of profit or loss.	Cash receipts from sale of goods/services. Cash receipts from royalties, fees, commissions. Cash payments to suppliers for goods/services. Cash payments to/for employees. Cash receipts/payments of insurance entity for premiums/claims. Income taxes paid (unless specifically identified with financing/investing). Interest received / Interest paid (see Special Considerations). Dividends received (see Special Considerations).
Investing Activities	Cash flows derived from the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Represent expenditures made for resources intended to generate future income and cash flows.	Payments to acquire PPE, intangibles, other long-term assets. Receipts from sale of PPE, intangibles, other long-term assets. Payments to acquire equity/debt instruments of other entities (investments). Receipts from sale of equity/debt instruments of other entities. Cash advances and loans made to other parties. Receipts from repayment of advances/loans made to others. Payments/receipts for futures, forwards, options (unless held for trading - Operating).
Financing Activities	Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Useful for predicting claims on future cash flows by providers of capital.	Proceeds from issuing shares or other equity instruments. Payments to owners to acquire/redeem entity's shares. Proceeds from issuing debentures, loans, notes, bonds, mortgages. Repayments of borrowed amounts. Payments by lessee for reduction of outstanding lease liability (IFRS 16). Dividends paid (see Special Considerations).

Presentation and Format

Methods for Reporting Operating Activities

Method	Description	Key Feature / Comment
Direct Method	Discloses major classes of gross cash receipts (e.g., from customers) and gross cash payments (e.g., to suppliers, employees). Information obtained from accounting records or by adjusting revenue/cost of sales.	Encouraged by IASB as it provides more useful information for estimating future cash flows. However, often more complex to prepare.
Indirect Method	Starts with profit or loss before tax and adjusts it for: Effects of non-cash transactions (e.g., depreciation, provisions, deferred taxes). Deferrals or accruals of past/future operating cash receipts/payments. Items of income/expense associated with investing/financing cash flows (e.g., gain on sale of PPE). Changes in working capital (inventories, receivables, payables).	Most commonly used in practice, often due to ease of obtaining data from accounting systems.

If using indirect method, separate disclosure of interest paid/received and income taxes paid is still required.

Required Disclosures (Statement or Notes)

A reconciliation of the amounts in the statement of cash flows with the equivalent items reported in the statement of financial position (opening and closing cash & cash equivalents).

The components of cash and cash equivalents and the policy adopted for determining the composition.

The amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group, along with management commentary (e.g., due to exchange controls).

Disclosure providing a reconciliation between opening and closing balances in the statement of financial position for liabilities arising from financing activities (required by amendments effective 2017).

Non-Cash Transactions (Excluded from Statement of Cash Flows)

Investing and financing transactions that do not require the use of cash or cash equivalents must be excluded from the statement of cash flows.

Such transactions must be disclosed elsewhere in the financial statements (typically the notes) where they provide relevant information about these activities. Examples:

Acquisition of assets by assuming liabilities directly or via a finance lease.

Acquisition of an entity by means of an equity issue.

Conversion of debt to equity.

Special Considerations

Interest and Dividends Classification

Cash flows from interest and dividends received/paid must be separately disclosed and classified consistently from period to period as operating, investing, or financing.

Type	Operating (Default/Option)	Investing (Option)	Financing (Option)
Interest Paid	(Default)		(Alternative*)
Interest Received	(Default)	(Alternative*)
Dividends Received	(Default)	(Alternative*)
Dividends Paid	(Default)		(Alternative*)

*Alternative classifications are often argued based on the nature of the entity (e.g., financial institutions might classify interest paid/received as Operating) or the nature of the transaction (e.g., dividends paid relate to financing). The chosen policy must be applied consistently.

Foreign Currency Cash Flows

Record cash flows from foreign currency transactions in the entity's functional currency using the exchange rate at the date of the cash flow (or an average rate if it approximates actual).

Cash flows of a foreign subsidiary are translated at rates ruling when the cash flows occurred.

Unrealised gains and losses from exchange rate changes are not cash flows.

The effect of exchange rate changes on cash and cash equivalents held in foreign currency is reported separately as part of the reconciliation of opening and closing cash balances.

Acquisitions and Disposals of Subsidiaries/Other Businesses

Aggregate cash flows arising from obtaining or losing control are presented separately and classified as investing activities.

Disclose in aggregate for acquisitions and disposals in the period:

Total purchase or disposal consideration.

Portion of consideration discharged by means of cash and cash equivalents.

Amount of cash and cash equivalents acquired or disposed of.

Amount of other assets and liabilities acquired or disposed of, summarized by major category.

Netting Off (Offsetting)

Generally, cash inflows and outflows should be reported gross.

Net reporting is permitted for:

Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity (e.g., rent collected for property owners).

Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short (e.g., purchase/sale of investments, credit card customer collections/payments).

Key Disclosure Checklist

Mandatory Disclosures:

Presentation of cash flows classified by Operating, Investing, and Financing activities.

Reconciliation of opening and closing cash and cash equivalents.

Accounting policy for classifying interest and dividends paid/received.

Components of cash and cash equivalents.

Significant non-cash investing and financing transactions.

Effect of foreign exchange rate changes on cash balances.

Amount and nature of restricted cash balances.

Reconciliation of liabilities arising from financing activities.

Details regarding acquisition/disposal of subsidiaries.

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