Statement of Cash Flows

2

Statement of cash flows

Mandatory for most of the entities

Direct and Indirect method

Generally starts with PAT (Profit

after tax)

General Principles

Overview of AS 3

Requires presentation of a statement of cash flows as an integral part of financial statements

Cash flows are defined as inflows and outflows of cash and cash equivalents and classified

into:

• Operating activities

• Investing activities

• Financing activities

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

• 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 AS 3?

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.

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 AS 3?

7

Key Concepts

Suggested Solution #2:

No. AS 3 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

Operating activities

• Principal revenue producing activities and other activities that are not investing or

financing activities

Investing activities

• Acquisition and disposal of long-term assets and other assets not included in

cash equivalents

Financing activities

• Activities that result in changes in the size and composition of equity and

borrowings

9

Reporting Cash Flows

Cash flows from operating activities

• Use direct or indirect method

Cash flows from investing and financing activities

• Presented on gross basis except

• Items in which turnover is quick, the amounts are large and the maturities

are short

• Cash receipts and payments on behalf of customers when the cash flows

reflect the activities of the customer rather than those of the entity

Foreign currency cash flows

• Effect of exchange rate changes on cash and cash equivalents presented

separately

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Reporting Cash Flows

Reporting Cash Flows from Operating Activities

Net cash flow from operating activities can be reported either as direct method or as

indirect method.

Direct method

In this method, we take the gross receipts from sales, trade receivables and other

operating inflows and subtract gross payments for purchases, creditors and other

expenses ignoring all non-cash items like depreciation, provisions.

Indirect method

In this method we start from the net profit or loss, eliminate the effect of any non-cash

items, investing items and financing items from such profit/ loss i.e. all such expenses

like depreciation, provisions, interest paid, loss on sale of assets etc. are added and

interest received etc. are deducted. Adjustment for changes in working capital items

are also made ignoring cash and cash equivalent to reach to the figure of net cash

flows.

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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

Income taxes paid/refunded

• Operating activity unless they can be specifically identified with financing and

investing activities.

12

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 AS 3?

13

Key Concepts

Suggested Solution #3:

No. AS 3 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.

14

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?

15

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 AS 3.

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Other Presentation Matters

Facts:

Company P sold its international business to Company J for Rs.1,200 crores. As a

result of the sale, Company P will be required to pay taxes related to the gain on

the sale of approximately Rs.300 crores. Company P has appropriately determined

to report the sale of the international business as a discontinued operation in its

statement of profit and loss. In its statement of cash flows, Company P has

proposed including the taxes on the gain as a component of cash flows from

investing activities, below the net proceeds from the sale of the international

business.

Question:

Is the proposed presentation in the cash flow statement appropriate?

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Other Presentation Matters

Suggested Solution:

Yes. AS 3 states that taxes shall be classified as operating activities "…unless they

can be specifically identified with financing and investing activities".

The disposal of non-current assets would be considered investing activities, and

therefore, allocation of the tax effect of the sale to investing activities would be

appropriate.

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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

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 (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.

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

c. other short-term borrowings, for example, those which have a maturity period of three

months or less.

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General

Foreign currency cash flows

Cash flows arising from transactions in a foreign currency shall be recorded in an

entity's local 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 flows.

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.

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General

Investments in subsidiaries, associates and joint ventures

When accounting for an investment in an associate or a subsidiary or a joint

venture, an investor restricts its reporting in the statement of cash flows to the cash

flows between itself and the investee, for example, cash flows relating to dividends

and advances.

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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

An entity should disclose, together with a commentary by the management, the

amount of significant cash and cash equivalent balances held by the enterprise that

are not available for use by it.

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 amount of cash flows that represent increases in operating

capacity separately from those cash flows that are required to maintain operating

capacity.

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Example

Classify the following activities as per AS 3 Cash Flow Statement:

1. Interest paid by financial enterprise

2. Tax deducted at source on interest received from subsidiary company

3. Deposit with Bank for a term of two years

4. Insurance claim received towards loss of machinery by fire

5. Bad debts written off.

Solution

1. Cash flows from operating activities

2. Cash flows from investing activities

3. Cash flows from investing activities

4. Extraordinary item to be shown as a separate heading under ‘Cash flow from

investing activities’.

5. It is a non-cash item which is adjusted from net profit/loss under indirect method, to

arrive at net cash flow from operating activity.

3.44

Reporting Cash Flows from Operating Activities

Net cash flow from operating activities can be reported either as direct method or

as indirect method.

Direct method

In this method, we take the gross receipts from sales, trade receivables and other

operating inflows and subtract gross payments for purchases, creditors and other

expenses ignoring all non-cash items like depreciation, provisions.

Indirect method

In this method we start from the net profit or loss, eliminate the effect of any non-

cash items, investing items and financing items from such profit/ loss i.e. all such

expenses like depreciation, provisions, interest paid, loss on sale of assets etc.

are added and interest received etc. are deducted. Adjustment for changes in

working capital items are also made ignoring cash and cash equivalent to reach

to the figure of net cash flows.

Thank you