Ind AS 7: Presentation of Statement of Cash Flows and Special Items

Understand Presentation of Statement of Cash Flows and Special Items

Key rules to remember

Primary classification (para 10)

Net change in cash = Operating + Investing + Financing cash flows (+ effect of exchange rate changes on cash)

Opening cash and cash equivalents plus this total gives closing cash and cash equivalents.

Default presentation of investing and financing flows (para 21)

Major classes of gross receipts and gross payments shown separately

Net is the exception, allowed only for the para 22 cases below (and the extra items for financial institutions).

Net basis case (a) (para 22(a))

Receipts and payments on behalf of customers, where the flow reflects the customer's activity

Example: rent collected for owners and passed on, an operating flow. Only the entity's own fee or commission is its own cash flow.

Net basis case (b) (para 22(b))

Quick turnover + large amounts + short maturities

Examples: credit card customer balances, purchase and sale of investments, other short-term borrowings with maturity of three months or less.

Foreign currency cash flow

Functional currency amount = Foreign currency amount × exchange rate on the date of the cash flow

A weighted average rate may be used if it approximates the actual rates.

Effect of exchange rate on cash held

Effect = Closing foreign currency balance × closing rate − (Opening foreign currency balance × opening rate + net foreign currency cash flows translated at the dates of flow or average rates)

This is the difference between translating the foreign currency cash flows at the dates of flow (or average rates) and translating the closing balance at the closing rate. If there were no flows during the period, it reduces to balance × (closing rate − opening rate). Shown separately from operating, investing and financing. Not an operating item.

Non-cash transactions

Investing or financing transactions with no cash movement are excluded and disclosed elsewhere

Examples: asset acquired under a lease, debt converted to equity, entity acquired by issuing shares.

Cash equivalent test

Short-term + highly liquid + known amount of cash + insignificant risk of value change

Normally three months or less from the date of acquisition. Repayable-on-demand overdrafts that are part of cash management are included.

Required disclosures on cash

Components of cash and cash equivalents + reconciliation to balance sheet + policy on composition

Also disclose significant balances that the group cannot use, with management's commentary.

How to solve Presentation of Statement of Cash Flows and Special Items questions

1. 1Read each item in the question and ask: did cash actually move? If not, it is a non-cash transaction. Exclude it from the statement and note that it is disclosed elsewhere.
2. 2For items with cash movement, classify them as operating, investing or financing as per the activity, and say so in one line.
3. 3Test whether gross or net applies. Apply the default of gross. Use net only if the item is on behalf of customers, or has quick turnover, large amounts and short maturities (such as borrowings of three months or less).
4. 4For foreign currency items, find the functional currency. Convert each cash flow at the rate on the date of the flow, or at an approximating average rate. Ignore unrealised gains and losses as cash flows.
5. 5Compute the effect of exchange rate changes on foreign currency cash balances and show it as a separate reconciling line.
6. 6Decide what counts as cash and cash equivalents: check the three-month maturity from acquisition, and check whether any overdraft is repayable on demand and part of cash management.
7. 7State the disclosures: components of cash and cash equivalents, reconciliation to the balance sheet, non-cash transactions, and unavailable balances if any.
8. 8Close with a one-line conclusion that gives the amount and its place in the statement.

Quickest way: Four-question screen

Common mistakes in Presentation of Statement of Cash Flows and Special Items

• Netting a loan raised against a loan repaid in the financing section.

  Students think a net figure is neater and tie it to the closing balance of the loan.

  Fix: Show both gross lines unless the loan is a short-term borrowing with maturity of three months or less, or another net-basis case applies.

• Including shares issued for an asset, or debt converted into equity, as a cash inflow and outflow.

  The balance sheet changed, so students assume the cash flow statement must show it.

  Fix: Exclude the transaction because no cash moved, and disclose it elsewhere in the financial statements with all relevant information.

• Treating unrealised exchange gains on foreign currency balances as an operating cash flow.

  The gain appears in profit and loss, so students leave it in operating profit as cash.

  Fix: Unrealised exchange differences are not cash flows. Reverse them in the indirect method and show only the effect of exchange rates on cash held as a separate reconciling item.

• Presenting an item as 'extraordinary' in the cash flow statement.

  Students remember older practice or the old AS 3.

  Fix: Ind AS prohibits extraordinary items. Put the cash flow in its operating, investing or financing category and disclose its nature separately if it is material.

• Treating every fixed deposit as a cash equivalent.

  Students see 'deposit with bank' and assume it is cash-like.

  Fix: Check the original maturity from the date of acquisition. Normally only three months or less qualifies. A deposit of one year is an investing item.

• Excluding all bank overdrafts from cash and cash equivalents and showing them as financing.

  Bank borrowings are generally financing, so students apply that rule without exception.

  Fix: Include overdrafts that are repayable on demand and form an integral part of cash management in cash and cash equivalents. Other bank borrowings remain financing.

Worked examples