IAS 7 | Statement of cash flows

1

Scope

An entity shall prepare a statement of cash flows in accordance with this standard and present it as an integral part of its financial statements for each period presented.

2

Supersession

This standard supersedes the previous version, IAS 7 Statement of Changes in Financial Position, approved in July 1977.

3

Applicability

Users are interested in how an entity generates and uses cash regardless of the nature of the entity's activities, including financial institutions. All entities need cash to conduct operations, pay obligations, and provide returns to investors; therefore, all entities must present a statement of cash flows.

4

Benefits

The statement enables users to evaluate changes in net assets, financial structure (liquidity/solvency), and the ability to adapt to changing circumstances. It enhances comparability between entities by eliminating the effects of different accounting treatments for the same transactions.

5

Predictive Value

Historical cash flow information is used as an indicator of the amount, timing, and certainty of future cash flows and helps check the accuracy of past assessments.

6

Definitions

Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk of changes in value. Cash flows are inflows and outflows of cash and cash equivalents.

7

Cash Equivalents

These are held for meeting short-term commitments rather than investment purposes. To qualify, an investment must have a short maturity, typically three months or less from the acquisition date. Equity investments are excluded unless they are substantively cash equivalents.

8

Bank Overdrafts

Bank borrowings are generally financing activities, but repayable-on-demand bank overdrafts that form an integral part of cash management are included as a component of cash and cash equivalents.

9

Cash Management

Cash flows exclude movements between items that constitute cash or cash equivalents, as these are part of cash management rather than operating, investing, or financing activities.

10

Presentation

The statement shall report cash flows classified by operating, investing, and financing activities. This classification allows users to assess the impact of activities on the financial position and their relationships.

11

Presentation Appropriateness

An entity presents these classifications in a manner most appropriate to its business.

12

Single Transaction Split

A single transaction may include cash flows that are classified differently; for example, a loan repayment may include both interest (operating or financing) and capital (financing) components.

13

Operating Activities

These cash flows are a key indicator of the extent to which operations generate sufficient cash to repay loans, pay dividends, and invest without external financing.

14

Operating Examples

Examples include receipts from sales of goods/services, royalties, and commissions; payments to suppliers and employees; and payments/refunds of income taxes unless identified with investing or financing activities.

15

Dealing/Trading

Cash flows from purchasing and selling securities held for dealing or trading purposes are classified as operating activities, similar to inventory acquired for resale.

16

Investing Activities

These cash flows represent expenditures for resources intended to generate future income and cash flows. Only expenditures resulting in a recognised asset are eligible for this classification. Examples include payments/receipts for property, plant, equipment, intangibles, and equity or debt instruments of other entities.

17

Financing Activities

These cash flows are useful in predicting claims on future cash flows by providers of capital. Examples include proceeds from issuing shares or borrowings, payments to acquire/redeem shares, repayments of borrowings, and lease liability payments.

18

Reporting Operating Flows

An entity reports operating cash flows using either the direct method (disclosing major classes of gross receipts/payments) or the indirect method (adjusting profit or loss for non-cash items and deferrals/accruals).

19

Direct Method Encouraged

Entities are encouraged to use the direct method as it provides information useful for estimating future cash flows that is not available under the indirect method.

20

Indirect Method Mechanics

Under the indirect method, net operating cash flow is determined by adjusting operating profit or loss for changes in inventories/receivables/payables, non-cash items like depreciation, and items linked to investing/financing cash flows.

21

Reporting Investing/Financing

Major classes of gross cash receipts and payments arising from investing and financing activities must be reported separately, except for specific net basis cases.

22

Net Reporting Criteria

Cash flows may be reported on a net basis for items where the cash flows reflect the activities of the customer rather than the entity (e.g., demand deposits, funds held for customers) or for items with quick turnover, large amounts, and short maturities.

23

Net Reporting Examples

Examples include principal amounts for credit card customers, purchase/sale of investments, and short-term borrowings (three months or less).

24

Financial Institutions

Financial institutions may report cash flows on a net basis for the acceptance/repayment of fixed maturity deposits, placement/withdrawal of deposits with other institutions, and advances/loans to customers.

25

Foreign Currency

Cash flows from foreign currency transactions are recorded in the functional currency by applying the exchange rate at the date of the cash flow.

26

Foreign Subsidiaries

Cash flows of a foreign subsidiary are translated at the exchange rates between the functional and foreign currency at the dates of the cash flows.

27

Average Rates

A weighted average exchange rate may be used for recording transactions or translating subsidiary cash flows if it approximates the actual rate, but the period-end rate cannot be used for translation.

28

Unrealised FX Gains/Losses

Unrealised gains and losses from exchange rate changes are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents is reported in the statement to reconcile opening and closing balances, presented separately from operating, investing, and financing activities.

31

Interest and Dividends

Cash flows from interest and dividends received and paid must be presented separately.

32

Classification Consistency

Each interest and dividend item must be classified in a consistent manner from period to period.

33

Total Interest Paid

The total amount of interest paid during a period is included in the statement of cash flows whether it is expensed in profit or loss or capitalised under IAS 23.

33A

Dividends Paid Classification

An entity shall classify dividends paid as cash flows from financing activities.

34A

Other Classifications

An entity (other than those in Para 34B) shall classify interest paid as financing activities and interest/dividends received as investing activities.

34B

Financial Institutions Classification

Entities with investing or customer financing as a main business activity must classify dividends/interest received and interest paid by referring to how they classify the related income/expense in the statement of profit or loss (applying IFRS 18).

34C

Single Category Alignment

If income/expenses are classified in a single category in profit or loss (e.g., financing), the related cash flows are classified in the associated activity (e.g., financing activities).

34D

Multiple Category Policy

If income/expenses are classified in more than one category in profit or loss, the entity makes an accounting policy choice to classify the related cash flows in one of the associated activities.

35

Taxes on Income

Cash flows from taxes on income are separately presented and classified as operating activities unless specifically identified with financing or investing activities.

36

Tax Allocation

While tax expense may relate to investing/financing, related cash flows are often impracticable to identify; thus, taxes paid are usually operating. If practicable to identify, tax cash flows are classified as investing or financing as appropriate.

37

Investments in Associates/Subs

When using the equity or cost method, an investor restricts reporting to the cash flows between itself and the investee, such as dividends and advances.

38

Equity Method Reporting

An entity reporting an interest in an associate or joint venture using the equity method includes cash flows regarding investments, distributions, and other payments/receipts between it and the investee.

39

Obtaining/Losing Control

Aggregate cash flows from obtaining or losing control of subsidiaries or other businesses are presented separately and classified as investing activities.

40

Control Disclosures

An entity discloses total consideration paid/received, the portion consisting of cash/cash equivalents, the amount of cash/cash equivalents in the subsidiary, and the amount of other assets/liabilities in the subsidiary.

40A

Investment Entity Exemption

Investment entities (defined in IFRS 10) need not apply certain disclosures for subsidiaries measured at fair value through profit or loss.

41

Single Line Item

Presenting these effects as single line items helps distinguish them from other operating, investing, and financing activities. The effects of losing control are not deducted from those of obtaining control.

42

Net Consideration

Cash paid/received for control changes is reported net of cash and cash equivalents acquired or disposed of in the transaction.

42A

Changes Without Loss of Control

Cash flows from changes in ownership interests in a subsidiary that do not result in a loss of control are classified as financing activities.

42B

Equity Transaction Logic

Such changes are accounted for as equity transactions, so the resulting cash flows are classified similarly to other transactions with owners.

43

Non-Cash Transactions

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

44

Non-Cash Disclosure

Such transactions must be disclosed elsewhere in the financial statements to provide all relevant information (e.g., acquiring assets via lease or equity issue).

44A

Liabilities Reconciliation

An entity must provide disclosures enabling users to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes.

44B

Reconciliation Items

Disclosures should cover changes from financing cash flows, obtaining/losing control of businesses, exchange rates, fair values, and other changes.

44C

Scope of Reconciliation

This applies to liabilities where cash flows are classified as financing, and also to relevant financial assets (e.g., assets hedging financing liabilities).

44D

Reconciliation Format

One way to fulfil this is by reconciling opening and closing balances in the statement of financial position for liabilities arising from financing activities.

44E

Separate Disclosure

If combined with other disclosures, changes in financing liabilities must be disclosed separately from changes in other assets and liabilities.

44F

Supplier Finance Objective

An entity shall disclose information about supplier finance arrangements to enable users to assess their effects on liabilities, cash flows, and liquidity risk.

44G

Supplier Finance Definition

These arrangements involve finance providers paying suppliers, with the entity agreeing to pay the provider later. They provide extended payment terms to the entity or early payment to suppliers.

44H

Supplier Finance Disclosures

Entities must disclose terms and conditions, carrying amounts of relevant financial liabilities at the start and end of the period, the range of payment due dates (compared to trade payables), and non-cash changes.

45

Components Disclosure

An entity shall disclose the components of cash and cash equivalents and reconcile the amounts in the cash flow statement with the statement of financial position.

46

Policy Disclosure

Due to varying practices, an entity discloses the policy adopted in determining the composition of cash and cash equivalents.

47

Policy Change

The effect of any change in policy for determining cash components is reported in accordance with IAS 8.

48

Restricted Cash

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

50

Additional Information

Disclosure of additional information is encouraged, such as undrawn borrowing facilities, cash flows representing increases in operating capacity versus maintenance, and segmental cash flows.

51

Capacity Maintenance

Separating cash flows for capacity increase vs maintenance helps users determine if the entity is investing adequately to maintain profitability.

52

Segmental Cash Flows

Segmental disclosure helps users understand the relationship between business-wide cash flows and component parts.