Ind AS 7 and existing AS 3
The objective of IND AS 7 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. The objective of IND AS 7 i.e. “Statement of Cash flows” is similar to that of existing AS 3 i.e. “Cash Flow Statements”.
IND AS 7 differs existing AS 3 in certain aspects. The following are the differences between IND AS 7 i.e. “Statement of Cash flows” and existing AS 3 i.e. “Cash Flow Statements”:-
Existing AS 3 is not mandatory Small and Medium Sized Companies, as defined in the Notification. However, it encourages such entities to comply with the standard. However, no such exclusion has been included in IND AS 7.
Ind AS 7 specifically includes bank overdrafts which are repayable on demand as a part of cash and cash equivalents. Para 8 of IND AS 7 states that, Bank borrowings are generally considered to be financing activities. However, where bank overdrafts which are repayable on demand form an integral part of an entity’s cash management, 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. However, existing AS-3 is silent in this aspect
Para 14 of Ind AS 7 requires the treatment of cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale in the ordinary course of business as cash flows from operating activities. Further, treatment of cash receipts from rent and subsequent sale of such assets as cash flow from operating activity is also provided is also provided. However, the existing AS 3 (Para 13) does not contain any such requirements.
IND AS 7 includes the following new examples of cash flows arising from financing activities:-
- Cash payments to owners to acquire or redeem the entity’s shares
- Cash proceeds from mortgages
- Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.
– Paragraph 17 of Ind AS 7
Para 25 of existing AS 3 requires the Cash flows arising from transactions in a foreign currency to 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.
However, Ind AS 7 uses the term ‘functional currency’ instead of reporting currency (as used in the existing AS 3). Further Para 25 of IND AS 7 also states that the cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows. This requirement has however not been dealt with in existing AS 3
The existing AS 3 requires cash flows associated with extraordinary activities to be separately classified as arising from operating, investing and financing activities, whereas Ind AS 7 does not contain this requirement as Ind AS 1 prohibits presentation of an item as extraordinary item in the statement of profit and loss or in the notes.
Ind AS 7 mentions the use of Equity or Cost method while accounting for an investment in an associate or a subsidiary (refer paragraph 37 of Ind AS 7). It also specifically deals with the reporting of interest in a jointly controlled entity using proportionate consolidation and using equity method (paragraph 38 of Ind AS 7). The existing AS 3 does not contain such requirements.
As compared to the existing AS 3, Ind AS 7 requires disclosing the amount of cash and cash equivalents and other assets and liabilities in the subsidiaries or other businesses over which control is obtained or lost. Para 40 of IND AS 7 requires additional disclosures to be made which were not required by Para 38 of existing AS 3. The following additional disclosures are required:-
a. the amount of cash and cash equivalents in the subsidiaries or other businesses over which control is obtained or lost; and
b. the amount of the assets and liabilities other than cash or cash equivalents in the subsidiaries or other businesses over which control is obtained or lost, summarised by each major category.
Ind AS 7 also requires to report the aggregate amount of the cash paid or received as consideration for obtaining or losing control of subsidiaries or other businesses in the statement of cash flows, net of cash and cash equivalents acquired or disposed of as a part of such transactions, events or changes in circumstances. The existing AS 3 does not contain such requirements.
Ind AS 7 requires to classify cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control as cash flows from financing activities (paragraphs 42A and 42B of Ind AS 7). The existing AS 3 does not contain any such requirements.
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