IAS 7 STATEMENT OF CASH FLOWS

HISTORY OF IAS 7

June 1976 Exposure Draft E7 Statement of Source and Application of Funds

October 1977 IAS 7 Statement of Changes in Financial Position

July 1991 Exposure Draft E36 Cash Flow Statements

December
IAS 7 (1992) Cash Flow Statements
1992

1 January
Effective date of IAS 7 (1992)
1994

6 September Retitled from Cash Flow Statements to Statement of Cash Flows as a

2007 consequential amendment resulting from revisions to IAS 1

16 April IAS 7 amended by Annual Improvements to IFRSs 2009 with respect

2009 to expenditures that do not result in a recognised asset.

Effective date for amendments from IAS 27(2008) relating to changes

1 July 2009
in ownership of a subsidiary

1 January
Effective date of the April 2009 revisions to IAS 7
2010

RELATED INTERPRETATIONS

• Issues Relating to This Standard that IFRIC Did Not Add to Its Agenda

SUMMARY OF IAS 7

Objective of IAS 7

The objective of IAS 7 is to require the presentation 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 according to operating,
investing, and financing activities.

Fundamental Principle in IAS 7

All entities that prepare financial statements in conformity with IFRSs are required
to present a statement of cash flows. [IAS 7.1]

The statement of cash flows analyses changes in cash and cash equivalents during a
period. Cash and cash equivalents comprise cash on hand and demand deposits,
together with short-term, highly liquid investments that are readily convertible to a
known amount of cash, and that are subject to an insignificant risk of changes in
value. Guidance notes indicate that an investment normally meets the definition of a
cash equivalent when it has a maturity of three months or less from the date of
acquisition. Equity investments are normally excluded, unless they are in substance
a cash equivalent (e.g. preferred shares acquired within three months of their
specified redemption date). Bank overdrafts which are repayable on demand and
which form an integral part of an entity's cash management are also included as a
component of cash and cash equivalents. [IAS 7.7-8]

Presentation of the Statement of Cash Flows

Cash flows must be analysed between operating, investing and financing activities.
[IAS 7.10]

Key principles specified by IAS 7 for the preparation of a statement of cash flows
are as follows:

• operating activities are the main revenue-producing activities of the entity

that are not investing or financing activities, so operating cash flows include
cash received from customers and cash paid to suppliers and employees [IAS
7.14]
• investing activities are the acquisition and disposal of long-term assets and
other investments that are not considered to be cash equivalents [IAS 7.6]
• financing activities are activities that alter the equity capital and borrowing
structure of the entity [IAS 7.6]
• interest and dividends received and paid may be classified as operating,
investing, or financing cash flows, provided that they are classified
consistently from period to period [IAS 7.31]
• cash flows arising from taxes on income are normally classified as operating,
unless they can be specifically identified with financing or investing
activities [IAS 7.35]
• for operating cash flows, the direct method of presentation is encouraged, but
the indirect method is acceptable [IAS 7.18]

The direct method shows each major class of gross cash receipts and gross
cash payments. The operating cash flows section of the statement of cash
flows under the direct method would appear something like this:

Cash receipts from customers xx,xxx

Cash paid to suppliers xx,xxx
Cash paid to employees xx,xxx
Cash paid for other operating
xx,xxx
expenses
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
The indirect method adjusts accrual basis net profit or loss for the effects of
non-cash transactions. The operating cash flows section of the statement of
cash flows under the indirect method would appear something like this:

Profit before interest and income xx,xxx

 taxes
Add back depreciation xx,xxx
Add back amortisation of goodwill xx,xxx
Increase in receivables xx,xxx
Decrease in inventories xx,xxx
Increase in trade payables xx,xxx
xx,xx
Interest expense
x
xx,xx
Less Interest accrued but not yet paid
x
Interest paid xx,xxx
Income taxes paid xx,xxx
Net cash from operating activities xx,xxx
• the exchange rate used for translation of transactions denominated in a
foreign currency should be the rate in effect at the date of the cash flows
[IAS 7.25]
• cash flows of foreign subsidiaries should be translated at the exchange rates
prevailing when the cash flows took place [IAS 7.26]
• as regards the cash flows of associates and joint ventures, where the equity
method is used, the statementof cash flows should report only cash flows
between the investor and the investee; where proportionate consolidation is
used, the cash flow statement should include the venturer's share of the cash
flows of the investee [IAS 7.37-38]
• aggregate cash flows relating to acquisitions and disposals of subsidiaries
and other business units should be presented separately and classified as
investing activities, with specified additional disclosures. [IAS 7.39] The
aggregate cash paid or received as consideration should be reported net of
cash and cash equivalents acquired or disposed of [IAS 7.42]
• cash flows from investing and financing activities should be reported gross
by major class of cash receipts and major class of cash payments except for
the following cases, which may be reported on a net basis: [IAS 7.22-24]
• cash receipts and payments on behalf of customers (for example,
receipt and repayment of demand deposits by banks, and receipts
collected on behalf of and paid over to the owner of a property)
• cash receipts and payments for items in which the turnover is quick,
the amounts are large, and the maturities are short, generally less than
three months (for example, charges and collections from credit card
customers, and purchase and sale of investments)
• cash receipts and payments relating to deposits by financial
institutions
• cash advances and loans made to customers and repayments thereof
• investing and financing transactions which do not require the use of cash
should be excluded from the statementof cash flows, but they should be
separately disclosed elsewhere in the financial statements [IAS 7.43]
• the components of cash and cash equivalents should be disclosed, and a
reconciliation presented to amounts reported in the statement of financial
position [IAS 7.45]
• the amount of cash and cash equivalents held by the entity that is not
available for use by the group should be disclosed, together with a
commentary by management [IAS 7.48]
Test Problem:
The following information relates to the draft financial statements of Deltoid. Summarised
statements of financial position as at:
31 March 2010 31 March 2009
$’000 $’000 $’000 $’000
Assets
Non-current assets
Property, plant and equipment (note (i)) 19,000 25,500
Current assets
Inventory 12,500 4,600
Trade receivables 4,500 2,000
Tax refund due 500 nil
Bank nil 1,500
––––––– –––––––
Total assets 36,500 33,600
––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each (note (ii)) 10,000 8,000
Share premium (note (ii)) 3,200 4,000
Retained earnings 4,500 7,700 6,300 10,300
–––––– –––––– –––––– –––––––
17,700 18,300
Non-current liabilities
10% loan note (note (iii)) nil 5,000
Finance lease obligations 4,800 2,000
Deferred tax 1,200 6,000 800 7,800
–––––– ––––––
Current liabilities
10% loan note (note (iii)) 5,000 nil
Tax nil 2,500
Bank overdraft 1,400 nil
Finance lease obligations 1,700 800
Trade payables 4,700 12,800 4,200 7,500
–––––– ––––––– –––––– –––––––
Total equity and liabilities 36,500 33,600
––––––– –––––––
Summarised income statements for the years ended:
31 March 2010 31 March 2009
$’000 $’000
Revenue 55,000 40,000
Cost of sales (43,800) (25,000)
––––––– –––––––
Gross profit 11,200 15,000
Operating expenses (12,000) (6,000)
Finance costs (note (iv)) (1,000) (600)
––––––– –––––––
Profit (loss) before tax (1,800) 8,400
Income tax relief (expense) 700 (2,800)
––––––– –––––––
Profit (loss) for the year (1,100) 5,600
––––––– –––––––
 6
The following additional information is available:
(i) Property, plant and equipment is made up of:
As at: 31 March 2010 31 March 2009
$’000 $’000
Leasehold property nil 8,800
Owned plant 12,500 14,200
Leased plant 6,500 2,500
––––––– –––––––
19,000 25,500
––––––– –––––––
During the year Deltoid sold its leasehold property for $8·5 million and entered into an
arrangement to rent it back from the purchaser. There were no additions to or disposals of owned
plant during the year. The depreciation charges (to cost of sales) for the year ended 31 March 2010
were:
$’000
Leasehold property 200
Owned plant 1,700
Leased plant 1,800
–––––––
3,700
–––––––
(ii) On 1 July 2009 there was a bonus issue of shares from share premium of one new share for
every 10 held.
On 1 October 2009 there was a fully subscribed cash issue of shares at par.
(iii) The 10% loan note is due for repayment on 30 June 2010. Deltoid is in negotiations with the
loan provider
to refinance the same amount for another five years.
(iv) The finance costs are made up of:
For year ended:
31 March 2010 31 March 2009
$’000 $’000
Finance lease charges 300 100
Overdraft interest 200 nil
Loan note interest 500 500
–––––– ––––
1,000 600
–––––– ––––
Required:
(i) Prepare a statement of cash flows for Deltoid for the year ended 31 March 2010 in accordance
with IAS 7 Statement of cash flows, using the indirect method;
(ii) Based on the information available, advise the loan provider on the matters you would take into
consideration when deciding whether to grant Deltoid a renewal of its maturing loan note.