Advanced Accounting · AS 3 Cash Flow Statement

AS 3 Cash Flow Statement: Foreign Currency, Unusual Items and Taxes

Updated 4 October 2026 · Fact-checked

These are special items in a cash flow statement under AS 3. Foreign currency flows are recorded at the exchange rate on the date of the flow. Unusual items are classified by their nature as operating, investing or financing. Income tax is operating unless specifically identified with investing or financing. Non-cash transactions are disclosed, not included.

Understand Special Items: Foreign Currency, Extraordinary Items, Taxes

A cash flow statement splits cash movements into operating, investing and financing activities. Most items fit easily. A few items need special rules, and examiners like to test them because the wrong class loses marks.

Foreign currency. Report a foreign currency cash flow in the reporting currency. Apply the exchange rate between the reporting currency and the foreign currency on the date of the cash flow. An average rate for a period may be used if it approximates the actual rates. Cash flows of a foreign subsidiary are translated at the rates on the dates of those flows. Unrealised gains and losses from exchange rate changes are not cash flows. But the effect of exchange rate changes on cash and cash equivalents held in a foreign currency is reported in the statement as a separate item, so the opening and closing cash reconcile.

Unusual items. AS 3 requires cash flows associated with extraordinary items to be classified as operating, investing or financing according to their nature. These cash flows are also disclosed separately. AS 3 does not ask for a separate line under each class.

The points below are the usual applications of the classify-by-nature principle. They are not explicit AS 3 rules. Insurance proceeds are usually classified by what they compensate. Proceeds for the loss of a fixed asset, such as a destroyed plant, are usually investing. Proceeds for the loss of stock or of business income are usually operating. Compensation received in a lawsuit relating to normal business operations (for example, damages for breach of a sale contract) is usually operating too. So decide by the nature of the claim.

Income taxes. Cash flows from income taxes are shown separately. They are classified as operating unless they can be specifically identified with financing or investing activities. For example, tax paid on the profit from sale of a fixed asset may be shown under investing, but only if you can specifically identify it with that sale. Tax is usually spread over many transactions, so it is normally operating.

Subsidiaries and non-cash items. The aggregate cash flows from acquiring or disposing of subsidiaries or other business units are shown separately as investing activities. Show the total purchase or disposal consideration, and the part of it settled in cash and cash equivalents. Report the amount of cash held by the entity acquired or disposed of net of that. Investing and financing transactions that do not use cash, such as issuing shares to buy an asset or converting debentures into shares, are left out of the statement. Disclose them elsewhere in the financial statements.

Key rules to remember

Foreign currency cash flow: Reporting currency amount = Foreign currency amount × exchange rate on the date of the cash flow; An average rate may be used for a period if it approximates the actual rates.
Effect of exchange rate on cash held: Closing cash − Opening cash − Net cash from the three activities = Effect of exchange rate changes; Shown as a separate reconciling item. It is not part of operating, investing or financing.
Unusual items rule: Classify by nature into operating, investing or financing; AS 3 requires cash flows associated with extraordinary items to be classified as operating, investing or financing according to their nature and disclosed separately.
Income tax rule: Operating, unless specifically identified with investing or financing; Tax cash flows are disclosed separately.
Subsidiary acquisition or disposal: Net cash flow = Consideration settled in cash − Cash and cash equivalents of the entity acquired or disposed of; Shown as one separate line in investing. Only the cash part of consideration counts.
Non-cash transactions: Excluded from the statement, disclosed elsewhere; Examples: shares issued for a building, conversion of debentures into shares.

How to solve Special Items: Foreign Currency, Extraordinary Items, Taxes questions

Use this order for any question on special items. Sort each item before you calculate anything.

1List every special item in the question: forex, unusual items, tax, subsidiary, non-cash.
2Ask if cash actually moved. If not, it is a non-cash transaction. Leave it out and note it as a disclosure.
3For foreign currency items, convert at the rate on the date of the flow. Treat unrealised forex gains or losses as non-cash adjustments. Show the effect on foreign currency cash separately.
4Classify unusual items by nature into operating, investing or financing. For insurance proceeds, look at what is compensated: a fixed asset is usually investing, stock or business income is usually operating. Disclose cash flows from extraordinary items separately.
5Put income tax paid under operating unless it can be specifically identified with an investing or financing item.
6For subsidiary deals, take only the cash part of consideration, deduct the cash balance of the subsidiary, and show the net figure under investing.
7Total each activity, add the exchange effect, and reconcile to the opening and closing cash and cash equivalents.
8Write a short note for non-cash items at the end.

Quickest way: Four-question sort for special items

When to use it: Use it in MCQs and in the first minute of a written question, before you start working.

Did cash move? If no, the answer is excluded and disclosed.
Is it tax? The answer is operating, unless it can be specifically identified with an investing or financing activity.
Is it a subsidiary or business? The answer is investing, and it is net of cash acquired or disposed of.
Is it an unusual one-off item? Classify it by its nature as operating, investing or financing. If it is extraordinary, also disclose it separately. For insurance proceeds, ask what was lost.
In a written answer, give each item its own labelled line. Step marks are given for the correct classification, so state the reason in a few words.

Common mistakes in Special Items: Foreign Currency, Extraordinary Items, Taxes

Showing shares issued for a machine as an investing outflow and a financing inflow.
Students treat any asset purchase as investing.
Fix: No cash moved. Exclude it from the statement and disclose it as a non-cash transaction.
Treating every unusual or one-off item as operating.
Students think a one-off item is a profit and loss item, so it must be operating.
Fix: Classify by nature. Insurance proceeds usually follow what they compensate: a destroyed fixed asset is investing, lost stock or business income is operating. Cash flows from extraordinary items are classified by nature and disclosed separately.
Including the full purchase price of a subsidiary in investing outflows.
Students ignore the cash held by the subsidiary and any part paid in shares.
Fix: Take only the cash consideration and deduct the subsidiary's cash and cash equivalents. Show the net amount.
Treating unrealised exchange gains on cash as a cash inflow.
The gain increases the closing cash balance, so it looks like a flow.
Fix: Show the effect of exchange rate changes on cash as a separate reconciling item. It is not an activity cash flow.
Putting income tax paid under financing or leaving it out of the statement.
Students think of tax as an appropriation of profit.
Fix: Show tax paid as a separate line in operating activities, unless it is specifically identified with another activity.

Worked examples

Example 1

X Ltd issued 10,000 shares of ₹10 each at par to buy land worth ₹1,00,000. It also paid ₹3,00,000 cash for machinery and received ₹50,000 insurance claim on a machine destroyed by fire. Show how these are treated in the cash flow statement.

Show the solution

Land for shares: no cash moved. It is a non-cash transaction and is excluded from the statement.
Machinery: ₹3,00,000 cash paid is an investing outflow.
Insurance claim of ₹50,000: it compensates for the loss of a machine, which is a fixed asset, so it is an investing inflow. Show it as a separate line.
Net investing cash flow = −₹3,00,000 + ₹50,000 = −₹2,50,000.
Disclose the land purchase for shares of ₹1,00,000 in a note.

Answer: Net cash used in investing activities is ₹2,50,000, and the land transaction of ₹1,00,000 is disclosed as non-cash.

Example 2

Y Ltd acquired 100% of Z Ltd for ₹20,00,000, paying ₹15,00,000 in cash and the rest by issuing shares. Z Ltd held cash and cash equivalents of ₹2,00,000 at the date of acquisition. Y Ltd paid income tax of ₹4,00,000 during the year, none of it linked to investing or financing. Show the cash flow effect of each item.

Show the solution

Cash part of consideration = ₹15,00,000. The ₹5,00,000 paid in shares is non-cash and is disclosed.
Net cash outflow on acquisition = ₹15,00,000 − ₹2,00,000 = ₹13,00,000.
Show ₹13,00,000 as one separate line in investing activities.
Income tax paid of ₹4,00,000 is not identified with any investing or financing item, so show it as a separate line in operating activities.

Answer: Investing outflow on the acquisition is ₹13,00,000 (net of cash acquired). Tax paid of ₹4,00,000 is an operating outflow. The ₹5,00,000 share consideration is disclosed as non-cash.

Exam tips

In MCQs, the word non-cash or issued shares for assets usually means the answer is excluded from the statement.
For subsidiary acquisition problems, always subtract the cash balance of the subsidiary from the cash consideration.
Write the classification reason beside each line in a written answer. It earns step marks.
Remember that tax is operating by default. Only move it if the question specifically identifies it with an investing or financing activity.
Keep the exchange effect on cash as a separate line when you reconcile opening and closing cash.

Practice questions from AS 3 Cash Flow Statement

Special Items: Foreign Currency, Extraordinary Items, Taxes: frequently asked questions

Where do unusual or one-off items go in an AS 3 cash flow statement?

They go under operating, investing or financing, whichever fits their nature. AS 3 requires cash flows from extraordinary items to be classified by nature and disclosed separately. They are not placed in a separate fourth section.

Is income tax paid always an operating activity?

Usually yes. AS 3 says to show tax cash flows separately and classify them as operating unless they can be specifically identified with financing or investing activities. Only if the tax can be specifically identified with, say, the sale of an asset may you classify it as investing. Otherwise it stays operating.

How do I treat a subsidiary acquisition in a cash flow statement?

Show one separate line under investing activities. It equals the cash part of the consideration less the cash and cash equivalents of the subsidiary. Disclose the total consideration and any part paid in shares or other non-cash form.

Do non-cash transactions appear in the cash flow statement?

No. Transactions like issuing shares for assets or converting debentures into shares do not involve cash, so you leave them out. You disclose them elsewhere in the financial statements.