International Accounting Standard 7
Statement of Cash Flows
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 7 Cash Flow Statements, which had originally been issued by the International Accounting Standards Committee in December 1992. IAS 7 Cash Flow Statements replaced IAS 7 Statement of Changes in Financial Position (issued in October 1977).
As a result of the changes in terminology used throughout IFRSs arising from requirements
in IAS 1 Presentation of Financial Statements (issued in 2007), the title of IAS 7 was changed to Statement of Cash Flows.
Other IFRSs have made minor consequential amendments to IAS 7. They include
Improvement to IFRSs (issued April 2009), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011) and Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012).
INTERNATIONAL ACCOUNTING STANDARD 7
STATEMENT OF CASH FLOWS
BENEFITS OF CASH FLOW INFORMATION
Cash and cash equivalents
PRESENTATION OF A STATEMENT OF CASH FLOWS
Operating activities Investing activities Financing activities
REPORTING CASH FLOWS FROM OPERATING ACTIVITIES
REPORTING CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
REPORTING CASH FLOWS ON A NET BASIS
FOREIGN CURRENCY CASH FLOWS
INTEREST AND DIVIDENDS
TAXES ON INCOME
INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JOINT VENTURES
CHANGES IN OWNERSHIP INTERESTS IN SUBSIDIARIES AND OTHER
COMPONENTS OF CASH AND CASH EQUIVALENTS
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
BASIS FOR CONCLUSIONS
A Statement of cash flows for an entity other than a financial institution
B Statement of cash flows for a financial institution
International Accounting Standard 7 Statement of Cash Flows (IAS 7) is set out in paragraphs 1-58. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 7 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
International Accounting Standard 7
Statement of Cash Flows1
Information about the cash flows of an entity is useful in providing users of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an entity to generate cash and cash equivalents and the timing and certainty of their generation.
The objective of this Standard is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.
An entity shall prepare a statement of cash flows in accordance with the
requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.
This Standard supersedes IAS 7 Statement of Changes in Financial Position, approved
in July 1977.
Users of an entity's financial statements are interested in how the entity
generates and uses cash and cash equivalents. This is the case regardless of the nature of the entity's activities and irrespective of whether cash can be viewed as the product of the entity, as may be the case with a financial institution. Entities need cash for essentially the same reasons however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their investors. Accordingly, this Standard requires all entities to present a statement of cash flows.
Benefits of cash flow information
A statement of cash flows, when used in conjunction with the rest of the
financial statements, provides information that enables users to evaluate the changes in net assets of an entity, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different entities. It also enhances the
1 In September 2007 the IASB amended the title of IAS 7 from Cash Flow Statements to Statement of Cash
Flows as a consequence of the revision of IAS 1 Presentation of Financial Statements in 2007.
comparability of the reporting of operating performance by different entities because it eliminates the effects of using different accounting treatments for the same transactions and events.
Historical cash flow information is often used as an indicator of the amount,
timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of changing prices.
The following terms are used in this Standard with the meanings
Cash comprises cash on hand and demand deposits.
Cash equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the
entity and other activities that are not investing or financing activities.
Investing activities are the acquisition and disposal of long-term assets
and other investments not included in cash equivalents.
Financing activities are activities that result in changes in the size and
composition of the contributed equity and borrowings of the entity.
Cash and cash equivalents
Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents, for example in the case of preferred shares acquired within a short period of their maturity and with a specified redemption date.
Bank borrowings are generally considered to be financing activities. However, in
some countries, bank overdrafts which are repayable on demand form an integral part of an entity's cash management. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
Cash flows exclude movements between items that constitute cash or cash
equivalents because these components are part of the cash management of an entity rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.
Presentation of a statement of cash flows
The statement of cash flows shall report cash flows during the period classified by operating, investing and financing activities.
An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and
cash equivalents. This information may also be used to evaluate the
relationships among those activities.
A single transaction may include cash flows that are classified differently. For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.
The amount of cash flows arising from operating activities is a key indicator of
the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of financing. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.
Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or
loss. Examples of cash flows from operating activities are:
cash receipts from the sale of goods and the rendering of services;
cash receipts from royalties, fees, commissions and other revenue;
cash payments to suppliers for goods and services;
cash payments to and on behalf of employees;
cash receipts and cash payments of an insurance entity for premiums
and claims, annuities and other policy benefits;
cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities; and
cash receipts and payments from contracts held for dealing or trading
Some transactions, such as the sale of an item of plant, may give rise to a gain or loss that is included in recognised profit or loss. The cash flows relating to such transactions are cash flows from investing activities. However, cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale as described in paragraph 68A of IAS 16 Property, Plant and Equipment are
cash flows from operating activities. The cash receipts from rents and
subsequent sales of such assets are also cash flows from operating activities.
An entity may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial institutions are usually classified as operating activities since they relate to the main revenue-producing activity of that entity.
The separate disclosure of cash flows arising from investing activities is
important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities. Examples
of cash flows arising from investing activities are:
cash payments to acquire property, plant and equipment, intangibles
and other long-term assets. These payments include those relating to capitalised development costs and self-constructed property, plant and
cash receipts from sales of property, plant and equipment, intangibles
and other long-term assets;
cash payments to acquire equity or debt instruments of other entities
and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing
or trading purposes);
cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading
cash advances and loans made to other parties (other than advances and
loans made by a financial institution);
cash receipts from the repayment of advances and loans made to other
parties (other than advances and loans of a financial institution);
cash payments for futures contracts, forward contracts, option contracts
and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities;
cash receipts from futures contracts, forward contracts, option contracts
and swap contracts except when the contracts are held for dealing or
trading purposes, or the receipts are classified as financing activities.
When a contract is accounted for as a hedge of an identifiable position the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged.
The separate disclosure of cash flows arising from financing activities is
important because it is useful in predicting claims on future cash flows by providers of capital to the entity. Examples of cash flows arising from financing
cash proceeds from issuing shares or other equity instruments;
cash payments to owners to acquire or redeem the entity's shares;
cash proceeds from issuing debentures, loans, notes, bonds, mortgages
and other short-term or long-term borrowings;
cash repayments of amounts borrowed; and
cash payments by a lessee for the reduction of the outstanding liability
relating to a finance lease.
Reporting cash flows from operating activities
An entity shall report cash flows from operating activities using either:
the direct method, whereby major classes of gross cash receipts
and gross cash payments are disclosed; or
the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.
Entities are encouraged to report cash flows from operating activities using the direct method. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method. Under the direct method, information about major classes of gross
cash receipts and gross cash payments may be obtained either:
(a) from the accounting records of the entity; or
(b) by adjusting sales, cost of sales (interest and similar income and interest
expense and similar charges for a financial institution) and other items
in the statement of comprehensive income for:
changes during the period in inventories and operating
receivables and payables;
other non-cash items; and
other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is
determined by adjusting profit or loss for the effects of:
(changes during the period in inventories and operating receivables and
non-cash items such as depreciation, provisions, deferred taxes, unrealised foreign currency gains and losses, and undistributed profits
of associates; and
all other items for which the cash effects are investing or financing cash
Alternatively, the net cash flow from operating activities may be presented
under the indirect method by showing the revenues and expenses disclosed in the statement of comprehensive income and the changes during the period in inventories and operating receivables and payables.
Reporting cash flows from investing and financing activities
An entity shall report separately major classes of gross cash receipts and
gross cash payments arising from investing and financing activities, except to the extent that cash flows described in paragraphs 22 and 24 are reported on a net basis.
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:
cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the
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 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 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.
Cash flows arising from each of the following activities of a financial
institution may be reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of
deposits with a fixed maturity date;
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