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Readily Convertible Into Known Amount of Cash

The document defines key terms related to cash flow statements under Ind AS 7 such as cash and cash equivalents, operating activities, investing activities, and financing activities. It provides guidance on preparing and presenting cash flow statements, including the treatment of foreign currency cash flows, interest and dividends, taxes, and non-cash transactions.

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Niranjan Jain
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26 views3 pages

Readily Convertible Into Known Amount of Cash

The document defines key terms related to cash flow statements under Ind AS 7 such as cash and cash equivalents, operating activities, investing activities, and financing activities. It provides guidance on preparing and presenting cash flow statements, including the treatment of foreign currency cash flows, interest and dividends, taxes, and non-cash transactions.

Uploaded by

Niranjan Jain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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IND AS 7 – CASH FLOW STATEMENTS

DEFINITIONS:
1. Cash & Cash Equivalents:
Cash Comprises Cash in Hand & Demand Deposits (Savings A/c, Current A/c, Money Market
Instruments)
Cash Equivalents: Short Term, Highly Liquid Investments that are readily convertible into known
amount of cash and risk of changes in value are insignificant. Cash Equivalents are held for
meeting SHORT TERM COMMITMENTS rather than Investments. It has SHORT MATURITY
(say 3 months or less from date of acquisition).
Example: 90 Days maturity treasury bills, temporary bank overdraft payable on demand etc.

2. Operating Activities: Principal revenue producing activities.


(Example: Cash receipts/payment from the sale/purchase of goods and the rendering of
services, Cash payments to employees, Cash receipts from royalties, fee, Cash payments/
refunds of income taxes, Cash receipts and payments from contracts held for dealing or trading
purposes.)

3. Investing Activities: Acquisition and Disposal of long-term assets and other investment not
included in Cash Equivalents.
(Example: Cash receipts/payments from sales/purchase of PPE, intangibles, Equity or Debt
Instruments, Cash advances and loans given including repayments, Cash receipts/payments from
futures contracts, forward contracts, option contracts and swap contracts except when the
contracts are held for dealing or trading purposes)

4. Financing Activities: Activities result in changes in size and composition of contributed equity
and borrowing of the entity.
(Example: Cash proceeds from issuing shares or other equity instruments, Cash payments to
owners to acquire or redeem the entity’s shares, Cash proceeds from issuing debentures, Cash
repayments of amounts borrowed; and, loans, notes, bonds, mortgages and other, Short- term or
long-term borrowings; Cash payments by a lessee for the reduction of the outstanding liability
relating to a lease.)
FACTORING ARRANGEMENT:

RECOURSE ARRANGEMENT NON-RECOURSE ARRANGEMENT

Financing Cash Inflows Operating Cash Inflows

Risks & Rewards not transferred • Risks and Rewards transferred


• Entity de-recognises factoring
Journal Entry: receivables
Cash A/c Dr • Entity received cash in exchange for
To Payables to Factoring Entity receivables that arose from
operating activities.

REPORTING CASH FLOWS FROM OPERATING ACTIVITIES:

Direct method starts with cash revenue / income / receipts of the company, whereas, Indirect
method starts with the accounting profit after tax as given in Profit and Loss Accounts
IND AS 7 – CASH FLOW STATEMENTS

REPORTING CASH FLOWS FROM INVESTING & FINANCING ACTIVITIES.


Only Direct Method

REPORTING CASH FLOWS ON A NET BASIS:


As per Ind AS 7, the cash flows will be presented on Gross Basis. Gross basis means the receipts
would be shown separately and the payments will be shown separately.
Exceptions: (Net Basis)
a) Cash receipts and payments on behalf of customers when the cash flows reflect the activities
of the customer rather than those of the entity;
Examples are:
i. the acceptance and repayment of demand deposits of a bank;
ii. funds held for customers by an investment entity; and
iii. rents collected on behalf of, and paid over to, the owners of properties

b) Cash receipts and payments for items in which the turnover is quick, the amounts are large, and
the maturities are short.
Examples are:
i. Advances made for, and, Repayment of principal amounts relating to credit card customers;
ii. other short-term borrowings, having a maturity period of three months or less.
iii. the purchase and sale of investments

c) Cash flows arising from each of the following activities of a financial institution may be reported
on a net basis:
i. cash receipts and payments for acceptance and repayment of deposits with a fixed maturity
date;
ii. the placement of deposits with and withdrawal of deposits from other financial institutions;
iii. cash advances and loans made to customers and repayment of those advances and loans.

FOREIGN CURRENCY CASH FLOWS


Cash flows from foreign currency ($) recorded in an entity’s functional currency (₹) at exchange rate
at the date of the cash flow.
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/due in a foreign
currency is reported in the statement of cash flows 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.

INTEREST & DIVIDENDS ADJUSTMENT

Particulars Financing Company Other Company

Interest Paid Operating Financing


Interest/Dividend Received Operating Investing
Dividends Paid Financing Financing
IND AS 7 – CASH FLOW STATEMENTS
TAXES ON INCOME
Cash flows arising from taxes on income shall be separately disclosed and classified as OPERATING
UNLESS SPECIFICALLY identified as FINANCING & INVESTING ACTIVITIES.
• If PRACTICABLE : Disclosed separately as Operating, Financing & Investing Activities
• If IMPRACTICABLE : Disclosed as Operating Activities

CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES & OTHER BUSINESS:


The aggregate of Cash Flows from:
1. Obtaining Control of subsidiaries 2. Losing Control of subsidiaries 3. Other Business

Shall be presented SEPARATELY and classified as INVESTING Activities.

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.

CLASSIFICATION OF CASH FLOWS AS FINANCING ACTIVITY


Cash flows arising from changes in ownership interests in a subsidiary that do not result in a LOSS
OF CONTROL shall be classified as cash flows from FINANCING ACTIVITIES, unless it is held by
an investment entity and measured at FVTPL.

NON-CASH TRANSACTIONS
Non-Cash Items will not form part of the Cash Flow Statement.

Examples of Non-Cash Items:


1. the acquisition of assets either by assuming directly related liabilities or by means of a-lease;
2. the acquisition of an entity by means of an equity issue; and
3. the conversion of debt to equity (Convertible Debentures)

COMPONENTS OF CASH & CASH EQUIVALENTS


An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation
of the amounts in its statement of cash flows with the equivalent items reported in balance sheet.
Eg - Unrealized Gain on Foreign Currency held in a Foreign Bank which forms part of Cash & Cash
Equivalents. (Check Illustration-10)

As per Ind AS 7 “where 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. Although Ind AS 7 permits bank overdrafts to be included as cash and cash equivalent,
for the purpose of presentation in the balance sheet, it would not be appropriate to include bank
overdraft in the line item cash and cash equivalents unless the netting off conditions as given in
paragraph 42 of Ind AS 32, Financial Instruments: Presentation are complied with.
Bank overdraft, in the balance sheet, will be included within financial liabilities. Just because the
bank overdraft is included in cash and cash equivalents for the purpose of Ind AS 7, does not mean
that the same should be netted off against the cash and cash equivalent balance in the balance
sheet.

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