Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.
The Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.
Scope
1. An enterprise should prepare a cash flow
statement and should present it for each period for which financial statements
are presented.
2. Users of an enterprise's financial
statements are interested in how the enterprise generates and uses cash and
cash equivalents. This is the case regardless of the nature of the enterprise's
activities and irrespective of whether cash can be viewed as the product of the
enterprise, as may be the case with a financial enterprise. Enterprises 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.
Benefits of Cash Flow Information
3. A cash flow statement, when used in
conjunction with the other financial statements, provides information that
enables users to evaluate the changes in net assets of an enterprise, 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 enterprise 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 enterprises. It also enhances the comparability of the
reporting of operating performance by different enterprises because it
eliminates the effects of using different accounting treatments for the same
transactions and events.
4. 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.
Definitions
5. The following terms are used in this Statement
with the meanings specified:
Cash comprises
cash on hand and demand deposits with banks.
Cash
equivalents are short term, highly liquid
investments that are readily convertible into 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 enterprise 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 owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise.
Cash and Cash Equivalents
6. 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. Investments in shares are excluded from cash
equivalents unless they are, in substance, cash equivalents; for example,
preference shares of a company acquired shortly before their specified
redemption date (provided there is only an insignificant risk of failure of the
company to repay the amount at maturity).
7. Cash flows exclude movements between items
that constitute cash or cash equivalents because these components are part of
the cash management of an enterprise rather than part of its operating,
investing and financing activities. Cash management includes the investment of
excess cash in cash equivalents.
Presentation of a Cash Flow Statement
8. The cash flow statement should report cash
flows during the period classified by operating, investing and financing
activities.
9. An enterprise 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 enterprise and the amount of its cash and cash equivalents.
This information may also be used to evaluate the relationships among those
activities.
10. A single transaction may include cash flows
that are classified differently. For example, when the instalment paid in
respect of a fixed asset acquired on deferred payment basis includes both
interest and loan, the interest element is classified under financing activities
and the loan element is classified under investing activities.
Operating Activities
11.
The amount of cash flows arising from
operating activities is a key indicator of the extent to which the operations
of the enterprise have generated sufficient cash flows to maintain the
operating capability of the enterprise, pay dividends, repay loans 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.
12. Cash flows from operating activities are
primarily derived from the principal revenue-producing activities of the
enterprise. Therefore, they generally result from the transactions and other
events that enter into the determination of net profit or loss. Examples of
cash flows from operating activities are:
(a)
cash
receipts from the sale of goods and the rendering of services;
(b)
cash
receipts from royalties, fees, commissions and other revenue;
(c) cash
payments to suppliers for goods and services;
(d)
cash payments to and on behalf of
employees;
(e)
cash receipts and cash payments of an
insurance enterprise for premiums and claims, annuities and other policy
benefits;
(f)
cash payments or refunds of income
taxes unless they can be specifically identified with financing and investing
activities; and
(g)
cash receipts and payments relating to
futures contracts, forward contracts, option contracts and swap contracts when
the contracts are held for dealing or trading purposes.
13. Some transactions, such as the sale of an item
of plant, may give rise to a gain or loss which is included in the
determination of net profit or loss. However, the cash flows relating to such
transactions are cash flows from investing activities.
14. An enterprise 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 enterprises
are usually classified as operating activities since they relate to the main
revenue-producing activity of that enterprise.
Investing Activities
15. 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. Examples of cash flows arising from investing
activities are:
(a)
cash payments to acquire fixed assets
(including intangibles). These payments include those relating to capitalised
research and development costs and self-constructed fixed assets;
(b)
cash receipts from disposal of fixed
assets (including intangibles);
(c)
cash payments to acquire shares,
warrants or debt instruments of other enterprises and interests in joint
ventures (other than payments for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
(d)
cash receipts from disposal of shares,
warrants or debt instruments of other enterprises and interests in joint
ventures (other than receipts from those instruments considered to be cash
equivalents and those held for dealing or trading purposes);
(e)
cash advances and loans made to third
parties (other than advances and loans made by a financial enterprise);
cash receipts from the repayment of advances and
loans made to third parties (other than advances and loans of a financial enterprise);
(a)
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; and
(b)
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.
16. 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.
Financing Activities
17. 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 funds (both capital and borrowings)
to the enterprise. Examples of cash flows arising from financing activities
are:
(a)
cash proceeds from issuing shares or
other similar instruments;
(b)
cash proceeds from issuing debentures,
loans, notes, bonds, and other short or long-term borrowings; and
(c)
cash repayments of amounts borrowed.
Reporting Cash Flows from Operating Activities
18. An enterprise should report cash flows from
operating activities using either:
(a)
the
direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
(b)
the
indirect method, whereby net 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.
19. The direct method provides information which
may be useful in estimating future cash flows and which is not available under the
indirect method and is, therefore, considered more appropriate than 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 enterprise; or
(b)
by
adjusting sales, cost of sales (interest and similar income and interest
expense and similar charges for a financial enterprise) and other items in the
statement of profit and loss for:
i)
changes during the period in
inventories and operating receivables and payables;
ii)
other non-cash items; and
iii)
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 net profit or loss for the
effects of:
(a)
changes during the period in
inventories and operating receivables and payables;
(b)
non-cash items such as depreciation,
provisions, deferred taxes, and unrealised foreign exchange gains and losses;
and
(c)
all other items for which the cash
effects are investing or financing cash flows.
Alternatively, the net cash flow from
operating activities may be presented under the indirect method by showing the
operating revenues and expenses excluding non-cash items disclosed in the
statement of profit and loss and the changes during the period in inventories
and operating receivables and payables.
Reporting Cash Flows from Investing and Financing
Activities
21. An enterprise should 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
22. 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 enterprise; and
(b) cash receipts and payments for items in which
the turnover is quick, the amounts are large, and the maturities are short.
23. Examples of cash receipts and payments
referred to in paragraph 22(a) are:
(a)
the acceptance and repayment of demand
deposits by a bank;
(b)
funds held for customers by an
investment enterprise; 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 22(b) are advances made for, and the repayments 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.
24. Cash flows arising from each of the following
activities of a financial enterprise may be reported on a net basis:
(a)
cash
receipts and payments for the acceptance and repayment of deposits with a fixed
maturity date;
(b) the
placement of deposits with and withdrawal of deposits from other financial
enterprises; and
(c)
cash
advances and loans made to customers and the repayment of those advances and
loans.
Foreign Currency Cash Flows
25. Cash flows arising from transactions in a
foreign currency should be recorded in an enterprise's reporting currency by
applying to the foreign currency amount the exchange rate between the reporting
currency and the foreign currency at the date of the cash flow. A rate that
approximates the actual rate may be used if the result is substantially the
same as would arise if the rates at the dates of the cash flows were used. The
effect of changes in exchange rates on cash and cash equivalents held in a
foreign currency should be reported as a separate part of the reconciliation of
the changes in cash and cash equivalents during the period.
26. Cash flows denominated in foreign currency are
reported in a manner consistent with Accounting Standard (AS) 11, Accounting
for the Effects of Changes in Foreign Exchange Rates. This permits the use of
an exchange rate that approximates the actual rate. For example, a weighted
average exchange rate for a period may be used for recording foreign currency
transactions.
27. Unrealised gains and losses arising from
changes in foreign exchange rates are not cash flows. However, the effect of
exchange rate changes on cash and cash equivalents held or due in a foreign
currency is reported in the cash flow statement in order to reconcile cash and
cash equivalents at the beginning and the end of the period. This amount is
presented separately from cash flows from operating, investing and financing
activities and includes the differences, if any, had those cash flows been
reported at the end-of-period exchange rates.
Extraordinary Items
28. The cash flows associated with extraordinary
items should be classified as arising from operating, investing or financing activities
as appropriate and separately disclosed.
29. The cash flows associated with extraordinary
items are disclosed separately as arising from operating, investing or
financing activities in the cash flow statement, to enable users to understand
their nature and effect on the present and future cash flows of the enterprise.
These disclosures are in addition to the separate disclosures of the nature and
amount of extraordinary items required by Accounting Standard (AS) 5, Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies.
Interest and Dividends
30.
Cash flows from interest and dividends
received and paid should each be disclosed separately. Cash flows arising from
interest paid and interest and dividends received in the case of a financial
enterprise should be classified as cash flows arising from operating
activities. In the case of other enterprises, cash flows arising from interest
paid should be classified as cash flows from financing activities while
interest and dividends received should be classified as cash flows from
investing activities. Dividends paid should be classified as cash flows from
financing activities.
31.
The total amount of interest paid
during the period is disclosed in the cash flow statement whether it has been
recognised as an expense in the statement of profit and loss or capitalised in
accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets.
Interest paid and interest and dividends
received are usually classified as operating cash flows for a financial
enterprise. However, there is no consensus on the classification of these cash
flows for other enterprises. Some argue that interest paid and interest and
dividends received may be classified as operating cash flows because they enter
into the determination of net profit or loss. However, it is more appropriate
that interest paid and interest and dividends received are classified as
financing cash flows and investing cash flows respectively, because they are
cost of obtaining financial resources or returns on investments.
30.
Some argue that dividends paid may be
classified as a component of cash flows from operating activities in order to
assist users to determine the ability of an enterprise to pay dividends out of
operating cash flows. However, it is considered more appropriate that dividends
paid should be classified as cash flows from financing activities because they
are cost of obtaining financial resources.
Taxes on Income
31.
Cash flows arising from taxes on
income should be separately disclosed and should be classified as cash flows
from operating activities unless they can be specifically identified with
financing and investing activities.
32.
Taxes on income arise on transactions
that give rise to cash flows that are classified as operating, investing or
financing activities in a cash flow statement. While tax expense may be readily
identifiable with investing or financing activities, the related tax cash flows
are often impracticable to identify and may arise in a different period from the
cash flows of the underlying transactions. Therefore, taxes paid are usually
classified as cash flows from operating activities. However, when it is
practicable to identify the tax cash flow with an individual transaction that
gives rise to cash flows that are classified as investing or financing
activities, the tax cash flow is classified as an investing or financing
activity as appropriate. When tax cash flow are allocated over more than one
class of activity, the total amount of taxes paid is disclosed.
Investments in
Subsidiaries, Associates and Joint Ventures
36. When accounting for an investment in an
associate or a subsidiary or a joint venture, an investor restricts its
reporting in the cash flow statement to the cash flows between itself and the investee/joint
venture, for example, cash flows relating to dividends and advances.
Acquisitions and Disposals of
Subsidiaries and Other Business Units
37. The aggregate cash flows arising from
acquisitions and from disposals of subsidiaries or other business units should
be presented separately and classified as investing activities.
38. An enterprise should disclose, in aggregate,
in respect of both acquisition and disposal of subsidiaries or other business
units during the period each of the following:
(a)
the
total purchase or disposal consideration; and
(b)
the
portion of the purchase or disposal consideration discharged by means of cash
and cash equivalents.
39. The separate presentation of the cash flow
effects of acquisitions and disposals of subsidiaries and other business units
as single line items helps to distinguish those cash flows from other cash
flows. The cash flow effects of disposals are not deducted from those of
acquisitions.
Non-cash Transactions
40.
Investing and financing transactions
that do not require the use of cash or cash equivalents should be excluded from
a cash flow statement. Such transactions should be disclosed elsewhere in the
financial statements in a way that provides all the relevant information about
these investing and financing activities.
41.
Many investing and financing
activities do not have a direct impact on current cash flows although they do
affect the capital and asset structure of an enterprise. The exclusion of
non-cash transactions from the cash flow statement is consistent with the
objective of a cash flow statement as these items do not involve cash flows in
the current period. Examples of non-cash transactions are:
(a)
the acquisition of assets by assuming
directly related liabilities;
(b)
the acquisition of an enterprise by means
of issue of shares; and
(c)
the conversion of debt to equity.
Components of Cash and Cash
Equivalents
42. An enterprise should disclose the components
of cash and cash equivalents and should present a reconciliation of the amounts
in its cash flow statement with the equivalent items reported in the balance
sheet.
43. In view of the variety of cash management
practices, an enterprise discloses the policy which it adopts in determining
the composition of cash and cash equivalents.
44.
The effect of any change in the policy
for determining components of cash and cash equivalents is reported in
accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies.
Other Disclosures
45.
An enterprise should disclose, together
with a commentary by management, the amount of significant cash and cash
equivalent balances held by the enterprise that are not available for use by
it.
46.
There are various circumstances in which
cash and cash equivalent balances held by an enterprise are not available for
use by it. Examples include cash and cash equivalent balances held by a branch
of the enterprise that operates in a country where exchange controls or other
legal restrictions apply as a result of which the balances are not available
for use by the enterprise.
47.
Additional information may be relevant to
users in understanding the financial position and liquidity of an enterprise.
Disclosure of this information, 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; and
(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.
48. The separate disclosure of cash flows that
represent increases in operating capacity and cash flows that are required to
maintain operating capacity is useful in enabling the user to determine whether
the enterprise is investing adequately in the maintenance of its operating
capacity. An enterprise that does not invest adequately in the maintenance of
its operating capacity may be prejudicing future profitability for the sake of
current liquidity and distributions to owners.
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