Ind AS 7 Statement of Cash Flows. EIRC, Kolkata. Mohit Jain 16 February For discussion purposes only

Transcription

1 Ind AS 7 Statement of Cash Flows EIRC, Kolkata Mohit Jain 16 February 2018 For discussion purposes only

2 Overview of Ind AS 7 Requires presentation of a statement of cash flows as an integral part of financial statements, mandatorily for all entities Cash flows are defined as inflows and outflows of cash and cash equivalents and classified into: Operating activities Investing activities Financing activities Accounting policy choices available for presentation of interest/dividends paid and received under IAS 7 not available under Ind AS 7. Cash flows from operating activities are reported using either direct or indirect method Cash flows from investing and financing activities are reported on gross basis with some exceptions Requires disclosure of components of cash and cash equivalents and a reconciliation of the amounts in statement of cash flows with the equivalent items reported in the balance sheet

3 Key Concepts Cash comprises cash on hand and demand deposits Cash equivalents are Short-term (<3 months from date of acquisition) Highly liquid investments (readily convertible into known amounts of cash) Insignificant risk of changes in value Held for purpose of meeting short-term cash commitments rather than investment or other purposes

4 Key Concepts Question #1: An entity purchases a two-year bond in the market when the bond only has three months remaining before its redemption date. Does the bond qualify as a cash equivalent under Ind AS 7?

5 Key Concepts Suggested Solution #1: Yes, provided that it is held for the purpose of meeting short-term cash commitments rather than for investment or other purposes, as required by paragraph 7 of Ind AS 7.

6 Key Concepts Question #2: An entity purchases a two-year bond in the market when the bond only has four months remaining before its redemption date. Does the bond qualify as a cash equivalent under Ind AS 7?

7 Key Concepts Suggested Solution #2: No. Paragraph 7 of Ind AS 7 clarifies that an investment normally qualifies as a cash equivalent when it has a maturity of three months or less from the date of acquisition. Note: The classification is established at the date of acquisition and is not changed subsequently (e.g., when the bond has less than three months remaining to maturity).

8 Key Concepts Question #3: An entity purchases a two-year bond in the market when the bond only has two months remaining before its redemption date. The purchase is made for investment purposes. Does the bond qualify as a cash equivalent under Ind AS 7?

9 Key Concepts Suggested Solution #3: No. Paragraph 7 of Ind AS 7 specifies that, in order to qualify as a cash equivalent, the bond must be held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Because the bond has been acquired for investment purposes, the acquisition should be recorded as an investing cash outflow.

10 Key Concepts Question #4: One of the entities in Group A, (e.g. Subsidiary B) operates in a country where exchange controls or other legal restrictions apply and the cash and cash equivalents in the subsidiary B are not available for use by other members of the group? How should such cash and cash equivalent balances be presented in the consolidated statement of cash flows presented by Group A?

11 Key Concepts Suggested Solution #4: Restrictions on the use of cash or cash equivalents do not alter the classification of the restricted amounts in the balance sheet or statement of cash flows. For example, when there are restrictions on the transfer of amounts from foreign subsidiary B, the amounts are treated as part of Group A s cash and cash equivalents in the consolidated statement of cash flows presented by Group A if they meet the definition of cash and cash equivalents in the foreign subsidiary; disclosure is made in accordance with Ind AS 7.48.

12 Key Concepts - Classification According to Ind AS 7, the cash flows should be classified in the following standard headings: Operating activities Investing activities Financing activities

13 Key Concepts Operating Activities Principal revenue-producing activity of entity Operating activities Users can judge whether the purpose of entity s existence is fulfilled Cash receipts or payments for all items in the SOPL will be included Examples Cash flows from operating activities Cash receipts from the sale of goods and the rendering of services Cash receipts from royalties, fees, commission and other revenue

14 Key Concepts - Investing and Financing Activities Investing activities Acquisition and disposal of long-term assets and other investments Bring future profits Examples of cash flows from investing activities Property, plant and equipment, intangibles and other long-term assets e.g. acquisition or disposal of equipment If money is invested in new machinery, it will help the entity to produce and sell more goods, which in turn will generate more income in the future. Financing activities Changes in the size and composition of the contributed equity Borrowings of the entity Examples of cash flows from financing activities Issue or redemption of shares Borrowing and repayment of debentures, loans, notes, bonds, mortgages and other short or long-term borrowings

15 Classification of certain cash flow items Interest/dividends paid (for non-financial entities) classified as financing activity Interest/dividends received (for non-financial entities) classified as investing activity Bank overdraft Financing activity, except when it forms an integral part of entity s cash management In such a case, it may be classified as cash and cash equivalent

16 Example: bank overdrafts Question Should bank overdrafts always be classified as cash equivalents? Answer No. The definition of cash equivalents makes no reference to the inclusion of bank borrowings. IAS 7.8 acknowledges, however, that bank overdrafts repayable on demand may form an integral part of an entity's cash management, in which case they should be included as a component of cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn. Ind AS 7 does not therefore mandate the inclusion of bank overdrafts in cash equivalents in all circumstances. But it does require their inclusion when the bank overdraft forms an integral part of the entity's cash management. Ind AS 7.8 also emphasizes that bank borrowings are generally considered to be financing activities. Therefore, the Standard does not allow for other short-term loans (e.g. short-term bank loans, advances from factors or similar credit arrangements, credit import loans, trust receipt loans) to be classified as cash equivalents because they are financing in nature.

17 Reporting cash flows on a net basis Cash flows arising from the following operating, investing or financing activities may be reported on a 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; and Examples of cash receipts and payments referred to in paragraph (a) above are: a. the acceptance and repayment of demand deposits of a bank; b. funds held for customers by an investment entity; and c. 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 of cash receipts and payments referred to in paragraph (b) above are advances made for, and the repayment of: a. principal amounts relating to credit card customers; b. the purchase and sale of investments; and

18 General Foreign currency cash flows Cash flows arising from transactions in a foreign currency shall be recorded in an entity's functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow. Non-cash transactions Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Taxes on Income Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

19 General Investments in subsidiaries, associates and joint ventures When accounting for an investment in an associate or a subsidiary accounted for by use of the equity or cost method, an investor restricts its reporting in the statement of cash flows to the cash flows between itself and the investee, for example, to dividends and advances. An entity which reports its interest in a jointly controlled entity (see IAS 31 Interests in Joint Ventures) using proportionate consolidation, includes in its consolidated statement of cash flows its proportionate share of the jointly controlled entity's cash flows. Changes in ownership interests in subsidiaries and other businesses The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities.

20 General Components of cash and 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 the Balance Sheet. Other disclosures Restricted cash Additional disclosures may be relevant to users, disclosure of following together with a commentary by management, is encouraged and may include: a) the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities; b) the aggregate amounts of the cash flows from each of operating, investing and financing activities related to interests in joint ventures reported using proportionate consolidation; c) the aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity; and d) the amount of the cash flows arising from the operating, investing and financing activities of each reportable segment (see Ind AS 108).

21 Overview of key differences Area of Difference Primary literature Bank overdrafts Cash flows from extraordinary items Indian GAAP IFRS Ind AS AS 3 Cash Flow Statements IAS 7 Statement of Cash Flows Ind AS 7 Statement of Cash Flows Bank overdrafts are considered as financing activities. Cash flows from items disclosed as extraordinary are classified as arising from operating, investing or financing activities as appropriate, and separately disclosed. Included as cash and cash equivalents if they form an integral part of an entity s cash management. As presentation of items as extraordinary is not permitted, the cash flow statement does not reflect any items of cash flow as extraordinary. Similar to IFRS. Similar to IFRS. Interest and dividend For Financial enterprises: Interest paid and interest and dividend received are to be classified as operating activities. Dividend paid is to be classified as financing activity. May be classified as operating, investing or financing activities in a manner consistent from period to period. Similar to Indian GAAP. For other enterprises: Interest and dividends received are required to be classified as investing activities. Interest and dividends paid are required to be classified as financing activities.

22 Overview of key differences Area of Difference Indian GAAP IFRS Ind AS Acquisition and disposal of properties held for rental to others No specific guidance. Entities might routinely sell items of property, plant and equipment that they have previously held for rental to others. Cash payments/ receipts in respect of acquisition/ disposal of such assets are classified as operating activities. Similar to IFRS. Changes in ownership interest No specific guidance. Changes in ownership interest in a subsidiary without loss of control are treated as financing activities. Similar to IFRS.

23 Questions