Educational Material on

Indian Accounting Standard (Ind AS) 7

Statement of Cash Flows
(Revised 2016)

ISBN : 978-81-8441-673-2

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
www.icai.org New Delhi
April/2016/P1944(Revised)
 Educationnal Mateerial on
n
Indian Acccountin
ng Standdard (In
nd AS) 7
Statement of Cassh Flowws
(Revvised 20166)

The Institu
ute of Charrtered Accountants of o India
Set up by an Act of Paarliament)
(S
New Delhi
© The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form, or by any means, electronic
mechanical, photocopying, recording, or otherwise, without prior permission,
in writing, from the publisher.

This Educational Material has been formulated in accordance with the Ind AS
notified by the Ministry of Corporate Affairs (MCA) as Companies (Indian
Accounting Standards) Rules, 2015 vide Notification dated February 16,
2015 and other amendments finalised subsequent to the notification.

First Edition : February, 2014

Second Edition : February, 2016

Committee/Department : Ind AS (IFRS) Implementation Committee

Email : indas@icai.in

Website : www.icai.org

ISBN : 978-81-8441-673-2

Price : ` 50/ -

Published by : The Publication Department on behalf of the

Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100, Indraprastha
Marg, New Delhi - 110 002.

Printed by : Sahitya Bhawan Publications, Hospital Road,

Agra 282 003
February/2016/1,000
 Foreword
Considering the global developments and expected benefits of convergence
with International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB), which are widely
recognised as global financial reporting standards, India decided to converge
with IFRS. The notification of IFRS-converged Indian Accounting Standards
(Ind AS) and roadmap for implementation of Ind AS by MCA as Companies
(Indian Accounting Standards) Rules, 2015, is a significant milestone
towards bringing Indian financial reporting at par with global financial
reporting. Further, The MCA has also issued a Press Release on January 18,
2016, announcing the Ind AS roadmap for Scheduled Commercial Banks
(excluding RRBs), Insurers/Insurance companies and Non-banking Financial
Companies (NBFCs) from the financial year 2018-19.
With the objective of educating the members and other stakeholders about
Ind AS, the Ind AS (IFRS) Implementation Committee had been constituted
by the ICAI. The Committee is making every possible effort to enhance
knowledge-base of members and stakeholders at large about Ind AS. For
this purpose, the Committee is engaged in formulation of Educational
Materials on Ind AS. The Committee has already issued Educational
Materials on various Ind AS.
The Committee has now revised its Educational Material on Ind AS 7,
Statement of Cash Flows. I am confident that this publication will provide
significant guidance in preparing Statement of Cash Flows in accordance
with the provisions of this Standard by explaining the principles enunciated in
the Standard through Frequently Asked Questions (FAQs).
I would like to place on record my sincere thanks to CA. S. B. Zaware,
Chairman, CA. Vijay Kumar Gupta, Vice Chairman and other members of the
Ind AS (IFRS) Implementation Committee including co-opted members and
special invitees for formulating this Educational Material.
I am sure that this Educational Material will be very useful to the members in
discharging their professional duties. It will also be useful to others
concerned in the application and implementation of Ind AS.
New Delhi CA. Manoj Fadnis
February 9, 2016 President, ICAI
 Preface
In the impending era of IFRS environment, in line with move of various global
jurisdictions towards International Financial Reporting Standards (IFRS),
where India has also decided to converge with IFRS. With notification of
IFRS-converged Indian Accounting Standards (Ind AS) by Ministry of
Corporate Affairs (MCA), a great need has been felt to educate the members
and other stakeholders about these Standards. The Ind AS (IFRS)
Implementation Committee of the ICAI is working relentlessly to provide
guidance to the members and other stakeholders on these notified Ind ASs.
For this purpose, Educational Materials on Ind ASs covering various issues
are being formulated by the Committee. The Committee is also conducting
IFRS Certificate Course, various workshops, seminars, awareness
programmes, webcasts etc., to impart knowledge about Ind ASs/IFRSs.
During the Council Year 2015-16, the Committee decided to revise certain
Educational Materials already issued since there are substantial changes in
certain Ind AS notified in 2015 compared to the Ind AS notified in 2011.
Working in this direction, the Committee has brought this revised Educational
Material on Ind AS 7, Statement of Cash Flows.
Ind AS 7 prescribes principles and guidance on preparation and presentation
of cash flows of an entity from operating activities, investing activities and
financing activities for a reporting period. Information on cash flows is useful
in assessing the ability of an entity to generate cash and cash equivalents
and the needs of the entity to utilise those cash flows.
This revised Educational Material contains summary of Ind AS 7 discussing
the key requirements of the Standard in brief and the Frequently Asked
Questions (FAQs) covering the issues, which are expected to be
encountered frequently while implementing this Standard.
I may mention that the views expressed in this publication are the views of
the Ind AS (IFRS) Implementation Committee and are not necessarily the
views of the Council of the Institute. The purpose of this publication is to
provide guidance for implementing this Ind AS effectively by explaining the
principles enunciated in the Standard with the help of examples. However,
while applying Ind ASs in a practical situation, reference should be made to
the text of the Standards.
I would like to convey my sincere gratitude to our Honourable President CA.
Manoj Fadnis and Vice-President CA. M. Devaraja Reddy for providing me
this opportunity of bringing out implementation guidance on Ind ASs in the
form of Educational Materials. I wish to place on record my sincere
appreciation of CA. Vijay Kumar Gupta, Vice-Chairman, CA. Sanjeev
Singhal, CA. R. Sankaraiah, CA. Akshat Kedia and other members of the
Study Group, for preparing the revised draft of this Educational Material. I
would also like to thank all members, co-opted members, special invitees of
the Ind AS (IFRS) Implementation Committee for their invaluable suggestions
and contributions for finalising this publication.
I am sure that this revised Educational Material will be of immense use in
understanding the provisions of Ind AS 7 and in implementation of the same.

New Delhi CA. S. B. Zaware

February 9, 2016 Chairman
Ind AS (IFRS) Implementation Committee
 Foreword to the First Edition
The Institute of Chartered Accountants of India (ICAI) being the premier
accounting body in the country has always played a proactive role in
establishing a sound financial reporting system in India. As a step in this
direction, it was decided to converge national Accounting Standards with
International Financial Reporting Standards (IFRS). For smooth transitioning
to IFRS-converged Indian Accounting Standards (Ind AS), Ind AS (IFRS)
Implementation Committee had been constituted by the ICAI. The primary
objective of the Committee is to educate the members and other
stakeholders about Ind AS/IFRS so that these Standards may be
implemented from a future date, as may be announced by the Ministry of
Corporate Affairs (MCA), in the same spirit in which these have been
formulated.
The Committee is making every possible effort to enhance the knowledge of
members and stakeholders at large about Ind ASs and IFRS. For this
purpose, the Committee is engaged in formulation of Educational Materials
on Ind ASs. The purpose of an Educational Material is to provide guidance
on various issues, which are expected to arise while implementing an
Accounting Standard. The Committee has already issued Educational
Materials on various Ind ASs. The Committee has now come out with an
Educational Material on Ind AS 7, Statement of Cash Flows.
I am confident that this publication will provide significant guidance in
preparing statement of cash flows in accordance with the provisions of this
Standard by explaining the principles enunciated in the Standard through
Frequently Asked Questions (FAQs).
I congratulate CA. Shiwaji Bhikaji Zaware, Chairman, Ind AS (IFRS)
Implementation Committee for formulating this Educational Material on Ind
AS 7, Statement of Cash Flows. I would also like to place on record deep
appreciation of efforts put in by the Committee in formulation and finalisation
of this publication.
I sincerely believe that this Educational Material will be of immense use to
the members and others concerned in proper understanding and
implementing the Standard. I am confident that all these efforts will be very
useful for smooth transitioning to Ind ASs in India.
New Delhi CA. Subodh Kumar Agrawal
February 5, 2014 President
 Preface to the First Edition
The Ind AS (IFRS) Implementation Committee of the Institute of Chartered
Accountants of India (ICAI) is making every possible effort to educate the
members and other concerned stakeholders to ensure that whenever IFRS-
converged Indian Accounting Standards (Ind AS) become effective, the same
are implemented in the same spirit in which these have been formulated.
One of the initiatives undertaken by the Committee in this regard is issuance
of Educational Materials on Ind ASs. An Educational Material on an Ind AS
generally contains summary of the respective Standard, Frequently Asked
Questions (FAQs), the text of the Standard and comparison with
corresponding existing Accounting Standard.
Moving forward in this direction, the Committee has brought out Educational
Material on Ind AS 7, Statement of Cash Flows. This Standard prescribes
requirements for preparation of statement of cash flows which shall be
presented as an integral part of the financial statements. This Standard
prescribes principles and guidance on preparation and presentation of cash
flows of an entity from operating activities, investing activities and financing
activities for a reporting period. Information on cash flows is useful in
assessing the ability of an entity to generate cash and cash equivalents and
the needs of the entity to utilise those cash flows.
This Educational Material contains summary of Ind AS 7 discussing the key
requirements of the Standard in brief, Frequently Asked Questions (FAQs)
covering the issues, which are expected to be encountered frequently while
preparing statement of cash flows and case studies illustrating the
application of the Standard. The text of Ind AS 7 and significant differences
between Ind AS 7 and existing AS 3 has also been included as Appendices
to make this publication comprehensive.
I may mention that the views expressed in this publication are the views of
the Ind AS (IFRS) Implementation Committee and are not necessarily the
views of the Council of the Institute. The purpose of this publication is to
provide guidance for implementing this Ind AS effectively by explaining the
principles enunciated in the Standard with the help of FAQs. However, while
applying Ind ASs in a practical situation, reference should be made to the
text of the Standards.
I would also like to place on record my special thanks to our Honourable
President CA. Subodh Kumar Agrawal and Vice-President CA. K. Raghu for
providing me this opportunity of bringing out implementation guidance on Ind
ASs in the form of Educational Materials. I gratefully acknowledge the
sincere efforts put in by the Pune-based Study Group comprising
CA. Chandrashekhar Balasubramaniam, CA. Prasad Paranjape,
CA. C.V.Chitale, CA. Parag Pansare, CA. Nachiket Deo, CA. Ashish
Khandelwal and CA. Akshay Oke for developing the draft of this Educational
Material. I would like to thank my Council colleagues, co-opted members and
special invitees on the Ind AS (IFRS) Implementation Committee for their
valuable inputs.
I would like to thank Dr. Avinash Chander, Technical Director, CA. Parminder
Kaur, Secretary, Ind AS (IFRS) Implementation Committee, CA. Bibhuti
Bhusan Nayak, Executive Officer and other officers of the Secretariat for
their efforts and support in bringing out this publication.
I hope this Educational Material will be of immense use in understanding and
implementing the provisions of Ind AS 7.

New Delhi CA. Shiwaji Bhikaji Zaware

February 5, 2014 Chairman
Ind AS (IFRS) Implementation Committee
 Contents

I Ind AS 1 - Summary 1
II Frequently Asked Questions (FAQs) 4
III Case Studies 21
Educational Material on
Indian Accounting Standard (Ind AS) 7
Statement of Cash Flows
I Ind AS 7 – Summary
Introduction
The balance sheet is a snapshot of entity’s financial resources and
obligations at a particular point of time and the statement of profit and loss
reflects the financial performance for the period. These two components of
financial statements are based on accrual basis of accounting. The
statement of cash flows includes only inflows and outflows of cash and cash
equivalents; it excludes transactions that do not affect cash receipts and
payments.
The information on cash flows is useful in assessing sources of generating
and deploying cash and cash equivalents during the reporting period. The
statement of cash flows can be used for comparison with earlier reporting
periods of the same entity as well as comparison with other entities for the
same reporting period.
Ind AS 7, Statement of Cash Flows, prescribes principles and guidance on
preparation and presentation of cash flows of an entity from operating
activities, investing activities and financing activities for a reporting period.

Objective
The 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 objective of this Standard is to provide information about the historical
changes in cash and cash equivalents of an entity during the reporting period
from its operating, investing and financing activities.

Scope
An entity is required to prepare a statement of cash flows in accordance with
Educational Material on Ind AS 7

the requirements of this Standard and shall present it as an integral part of

its financial statements for each reporting period for which financial
statements are prepared.
The users of an entity’s financial statements are interested in how the entity
generates and uses its cash and cash equivalents. All 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 return to their investors. Accordingly, this
Standard requires entities to present a statement of cash flows.

Key Requirements of Ind AS 7

The statement of cash flows is required to report cash flows classified by
operating, investing and financing activities along with the components of
cash and cash equivalents at the beginning and end of the reporting period.
Cash and cash equivalents include demand deposits, certain short-term
investments and in some cases, bank overdrafts.
An entity shall report cash flows from operating activities using either the
‘direct method’ or the ‘indirect method’. Under direct method, major classes
of gross cash receipts and payments are presented. However, under indirect
method, profit or loss is adjusted for the effects of transactions of a non-cash
nature; deferrals or accruals of past or future operating cash receipts or
payments; and items of income or expenses associated with investing or
financing cash flows.
Ind AS 7 prescribes that 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 profit and loss and the
changes during the period in inventories and operating receivables and
payables.
Generally, an entity shall report separately major classes of gross cash
receipts and gross cash payments arising from , investing and financing
activities, except in limited circumstances where cash flows are offset and
reported on net basis.
Cash flows arising from taxes on income shall be separately disclosed and
classified as cash flow from operating activities unless they can be
specifically identified with financing or investing activities.
Cash flows denominated in a foreign currency are reported in a manner

2
 Educational Material on Ind AS 7

consistent with Ind AS 21, The Effects of Changes in Foreign Exchange

Rates. Foreign currency cash flows are translated at the exchange rates at
the dates of the cash flows or using average exchange rate when it is
appropriate to do so.
Cash flows from interest and dividends received and paid shall each be
disclosed separately. Interest paid and interest and dividend received are
classified as operating cash flows for a financial institution. In the case of
other entities, interest paid is 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 for both financial institutions and other entities.
When accounting for an investment in an associate, a joint venture or a
subsidiary accounted for by use of the equity or cost method, an investor
restricts its reporting in the statement of cash flows to the cash flows
between itself and the investee, for example, to dividends and advances.
An entity that reports its interest in an associate or a joint venture using the
equity method includes in its statement of cash flows the cash flows in
respect of its investments in the associate or joint venture, and distributions
and other payments or receipts between it and the associate or joint venture.
Cash flows arising from obtaining or losing control of businesses shall be
presented separately and classified as investing activities.
Investing and financing transactions that do not require the use of cash or
cash equivalents shall be excluded from the statement of cash flows. Such
transactions shall be disclosed elsewhere in the financial statements in a way
that provides all the relevant information about these investing and financing
activities.

Disclosures
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 equivalent items reported in the balance sheet.
An entity shall disclose, together with a commentary by management, the
amount of significant cash and cash equivalents held by the entity that are
restricted for specific purposes.

3
Educational Material on Ind AS 7

II Frequently Asked Questions

Question 1
Does Ind AS 7 provide any exemption with regard to its applicability like AS
3, which provides that AS 3 is not mandatory for Small and Medium Sized
Companies and non-corporate entities falling in Level II and Level III?
Response
No exemption has been provided in Ind AS 7 with regard to its applicability
as provided in AS 3. Like other Indian Accounting Standards (Ind ASs), this
Standard will be applicable to specified class of companies as per the
roadmap for implementation of Ind AS issued under Companies (Indian
Accounting Standards) Rules, 2015, notified by the Ministry of Corporate
Affairs (MCA) in this regard. Moreover, Ind AS 7 provides that statement of
cash flows forms an integral part of financial statements for each period for
which financial statements are presented. Accordingly, the class of
companies which will be required to prepare financial statements as per Ind
AS will be required to prepare statement of cash flows as per Ind AS 7.
Question 2
Whether statement of cash flows should be prepared only for annual
reporting period?
Response
According to paragraph 1 of Ind AS 7, statement of cash flows forms an
integral part of financial statements for each period for which financial
statements are presented. According to Ind AS 1, Presentation of Financial
Statements, complete set of financial statements include among other
statements, a statement of cash flows for the period.
From the above, it is clear that statement of cash flows is an integral part of
financial statements and the same should be prepared for each period for
which financial statements are presented i.e., annual period as well as
interim reporting period.
In this regard, it may be noted that Ind AS 34, Interim Financial Reporting,
states that interim financial report shall comply with all of the requirements of
Indian Accounting Standards. Ind AS 34 provides that interim financial report
means a financial report containing either a complete set of financial
statements or a set of condensed financial statements for an interim period.
Accordingly, statement of cash flows can be presented in complete or
condensed form.

4
 Educational Material on Ind AS 7

Question 3
When an item qualifies to be a cash equivalent?
Response
According to paragraph 6 of Ind AS 7, 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 change in value.
Cash equivalents are held for the purpose of meeting short-term cash
requirements rather than for investment or other purposes. An investment
normally qualifies to be a cash equivalent only when it has a short maturity
(say not more than three months) from the date of acquisition, readily
convertible to a known amount of cash and is subject to an insignificant risk
of changes in value. Accordingly, readily convertible investments for which
the amount of cash that will be received is known at the time of initial
investment will be treated as cash equivalents for the purpose of statement
of cash flows.
Examples of cash equivalents:
 Balances with bank in short-term deposits say not more than three
months.
 Short-term money market instruments, such as, 91 days’ treasury bills,
certificate of deposit, etc.
An overriding test is that cash equivalents are held to meet short-term cash
requirements of the entity rather than for investment or other purposes. For
example, a three month loan or deposit given to a party to help in managing
party’s short-term liquidity position is not a cash equivalent because it is
given for a purpose other than to manage its own short-term cash
requirements.
In view of variety of cash management practices and banking arrangements,
an entity is required to disclose the policy which it adopts in determining the
composition of cash and cash equivalents.
Question 4
Cash is defined as cash on hand and demand deposits. What is the meaning
of the term ‘demand deposit’? State the treatment of demand deposits?
Response
Ind AS 7 does not define the term ‘demand deposit’.

5
Educational Material on Ind AS 7

In commercial parlance, demand deposit refers to a deposit in an account

held at a bank/financial institution where the amount deposited can be
withdrawn at any time by the depositor without any penalty. Examples of
such deposit accounts are, current accounts, savings accounts etc. The
purpose of making a demand deposit is to meet the short-term fund
requirements. Such deposits have same level of liquidity as cash.
Accordingly, demand deposits are included in cash.
Question 5
What is meant by ‘term deposit’? State the treatment of term deposits?
Response
Term deposit is a deposit held at a bank/financial institution at an agreed rate
of interest for fixed period of time. The money so deposited along with the
interest at agreed rate can be withdrawn at the end of such period, or amount
deposited can be withdrawn earlier along with interest at lower rate for the
period for which the deposit was held.
Term deposit can be for short-term or long-term. For the purpose of
presentation of term deposits in the statement of cash flows, short-term
deposits (say, not more than three months) are those deposits which are
held with an intention to meet the short-term fund requirements. Since short-
term deposits are highly liquid investments that are readily convertible into
known amounts of cash and are subject to insignificant risk of changes in
value, the same qualify to be a cash equivalent.
The three months maturity period is to be determined from the date of
deposit and not from the end of the reporting period, i.e., for a term deposit
to qualify to be a cash equivalent, it should have original maturity of period
less than three months.
However, term deposits placed for a specified long period (say, more than
three months) with an intention to meet the long-term fund requirements will
not satisfy the definition of cash equivalents. Further, there could be
restrictions on withdrawal or early redemption. Accordingly, cash flows from
these deposits are classified under investing activities.
Question 6
What do you mean by ‘cash flows’? Is it necessary that there should be
actual cash inflow/outflow from entity’s cash/bank balances?

6
 Educational Material on Ind AS 7

Response
The dictionary meaning of the word ‘flow’ means movement. There are two
types of cash flows viz., cash inflow and cash outflow. A cash flow
transaction must increase or decrease cash and cash equivalents. Examples:
receipt from debtors, sale of fixed assets for cash, repayment of term loan
etc.
Any transaction which does not have any effect on cash and cash
equivalents is outside the purview of statement of cash flows. Examples:
conversion of term loan or debt into equity, redemption of preference shares
by conversion into equity, purchase of goods on credit etc.
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 operating, investing or financing activities.
Examples: cheques/demand drafts deposited in bank, withdrawal or deposit
of cash from/in bank, cash invested in short-term deposit classified as cash
equivalent etc.
Question 7
What is the difference between ‘bank overdraft’ and ‘cash credit’?
Response
An overdraft is a loan arrangement between the borrower and the bank
whereby the bank extends the credit to a maximum amount up to which the
customer can write cheques or make withdrawals. It refers to the amount of
money borrowed that exceeds the deposits. Bank overdraft facility is granted
by bank usually for a short period to accommodate short-term fund
requirement. It may be secured by tangible assets or may be a clean
overdraft. Overdraft facilities are linked with the operations in current
account.
Cash credit is a fund based facility granted by a bank to its customer to
finance working capital requirements on a continuing basis. Cash credit is
usually secured by hypothecation of inventory and debtors or pledge of
goods. It may also be secured by a charge on fixed assets.
With regard to presentation of these items in the statement of cash flows,
paragraph 8 of Ind AS 7, provides that bank borrowings are usually
considered to be part of 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

7
Educational Material on Ind AS 7

equivalents. A characteristic of such banking arrangements is that the bank

balance often fluctuates from positive to being overdrawn.
In accordance with the above, cash credit from bank, a facility on a
continuing basis (though contractually payable on demand on violation of
terms and conditions of sanction) is considered as a part of financing
activities and bank overdraft forming the part of cash management is
considered as cash equivalent while preparing the statement of cash flows.
Question 8
What are the examples of cash flows arising from taxes on income to be
separately disclosed under cash flows from investing or financing activities?
Response
Cash flows arising from taxes on income shall be separately disclosed and
classified as cash flow from operating activities, unless they can be
specifically identified with financing and investing activities. Taxes on income
arise on transactions that give rise to cash flows that are classified as
operating, investing or financing activities in the statement of cash flows.
While tax expense may be identified 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 underlying transaction. Therefore,
taxes paid are usually classified as cash flows from operating activities.
Example: If we strictly go by classification of taxes in accordance with the
nature of the related transaction, tax impact of short-term capital gain should
be classified as investing activity. Suppose, the entity is incurring business
losses, the same gets adjusted against short-term capital gain for tax
purposes. Accordingly, showing tax impact of short-term capital gain and
business losses separately is impracticable. Therefore, tax paid is usually
classified as cash flows from operating activity.
However, where it is practicable to identify the tax cash flow with an
individual transaction that gives rise to cash flows, tax cash flows are
classified as investing or financing activities. Examples: tax payment by way
of long-term capital gain on sale of land which was used as property, plant
and equipment (PPE), tax payment on dividend received from a foreign
company shall be classified as investing activity.
Similarly, dividend distribution tax under section 115-O of Income Tax Act,
1961 viz., preference and equity dividend distribution tax is considered as an
integral part of financing activities.

8
 Educational Material on Ind AS 7

Question 9
What are the examples of cash flows which can be reported on a net basis?
Response
Generally, all cash flows are reported gross. Cash flows are offset and
reported net only in limited circumstances. Cash flows arising from the
following operating, investing and financing activities may be reported on a
net basis:
 cash receipts and payments on behalf of customers when the cash
flow reflect the activities of the customer rather than those of the
entity; and
 cash receipts and payments for items in which the turnover is quick,
the amounts are large, and the maturities are short.
Examples:
(a) receipt of insurance premium from policy holders and refund of
premium on cancellation of general insurance policy to policy holders
(under direct method of presenting cash flows from operating
activities);
(b) investment and sale of securities by wealth management companies
on behalf of customers (under direct method of presenting cash flows
from operating activities);
(c) receipts and payments by an agent on behalf of a principal;
(d) acceptance and repayment of deposits with short maturities;
(e) withdrawal and deposits from/in cash credit account with bank.
Cash flows arising from the following activities of a financial institution may
be reported on a net basis:
 cash receipts and payments for the acceptance and repayment of
deposits with fixed maturity date;
 the placement of deposits with and withdrawal of deposits from other
financial institutions;
 cash advances and loans made to customers and repayment of those
advances and loans.
Question 10
What is the preferred method to report cash flows from operating activities?

9
Educational Material on Ind AS 7

Response
An entity shall report cash flows from operating activities using either the
‘direct method’ or the ‘indirect method’.
According to Ind AS 7, the entities are encouraged to report cash flows from
operating activities using the ‘direct method’ as it provides information which
may be useful in estimating future cash flows and which is not available
under the ‘indirect method’.
Under direct method, major classes of gross cash receipts and payments are
disclosed. However, under indirect method, profit or loss is adjusted for the
effects of transactions of a non-cash nature; deferrals or accruals of past or
future operating cash receipts or payments; and items of income or expenses
associated with investing or financing cash flows.
Principally, final reporting conclusions under both methods are the same; an
entity may follow either the direct method or indirect method.
Considering voluminous operating transactions of commercial entities, it is
difficult to prepare statement of cash flows under direct method as both cash
as well as non-cash transactions are recorded in the books of account under
accrual system of accounting.
Existing Accounting Standard (AS) 3, Cash Flow Statement, permits that an
enterprise may report cash flows from operating activities using either direct
method or indirect method. With regard to AS 3, it may be noted that
Insurance Regulatory and Development Authority (IRDA) in its master
circular on preparation of financial statements of general and life insurance
business has specified that all insurers are required to present the statement
of cash flows as per the direct method. Further, according to Clause 32 of the
listing agreement specified by SEBI, all listed companies are required to
present the statement of cash flows as per the indirect method principles of
AS 3.
Question 11
Which rate should be used in translating the cash flows denominated in a
foreign currency? What is the treatment of unrealised gains and losses
arising from changes in foreign currency exchange rates?
Response
Cash flows arising from the transactions in a foreign currency shall be
recorded in an entity’s functional currency by applying to the foreign currency

10
 Educational Material on Ind AS 7

amount the exchange rate between the functional currency and the foreign
currency at the date of cash flow. Cash flows denominated in a foreign
currency are reported in a manner consistent with Ind AS 21, The Effects of
Changes in Foreign Exchange Rates. For practical reasons, Ind AS 21
permits the use of an exchange rate that approximates the actual rate, for
example, an average rate for a week or a month may be used for all
transactions in each foreign currency occurring during that period. However,
if exchange rates fluctuate significantly, the use of the average rate for a
period is inappropriate.
Unrealised gains and losses arising from changes in foreign exchange rates
do not give rise to actual inflow or outflow of cash or cash equivalents.
However, the effect of such exchange rate changes on cash and cash
equivalents held or due in a foreign currency is reported separately from
cash flows from operating, investing and financing activities in the statement
of cash flows in order to reconcile cash and cash equivalents as per the
statement of cash flows with cash and cash equivalents as per the balance
sheet.
Question 12
What is the classification for interest and dividend paid and received in the
statement of cash flows? How are lease payments under finance lease and
payment towards acquiring a fixed asset on deferred payment basis
presented in the statement of cash flows?
Response
An entity presents cash flows from operating, investing and financing
activities in a manner which is most appropriate to its business. The
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.

11
Educational Material on Ind AS 7

The following are the examples of classification of various activities:

Particulars Classification for reporting

cash flows
Banks and Other
financial entities
institutions
Interest received on loans and advances Operating Investing
given activities activities
Interest paid on deposits and other Operating Financing
borrowings activities activities
Interest and dividend received on Investing Investing
investments in subsidiaries, associates activities activities
and in other entities
Dividend paid on preference and equity Financing Financing
shares, including tax on dividend paid on activities activities
preference and equity shares by other
entities
Finance charges paid by lessee under Financing Financing
finance lease activities activities
Payment towards reduction of outstanding Financing Financing
finance lease liability activities activities
Interest paid to vendor for acquiring fixed Financing Financing
asset under deferred payment basis activities activities
Principal sum payment under deferred Investing Investing
payment basis for acquisition of fixed activities activities
assets
Penal interest received from customers Operating Operating
for late payments activities activities
Penal interest paid to suppliers for late Operating Operating
payments activities activities
Interest paid on delayed tax payments Operating Operating
activities activities
Interest received on tax refunds Operating Operating
activities activities

12
 Educational Material on Ind AS 7

Question 13
What are the examples of cash and cash equivalent balances held by the
entity that are not available for use?
Response
Ind AS 7 requires an entity to disclose together with management
commentary, the amount of significant cash and cash equivalent balances
held by the entity that are not available for use. The examples are as follows:
(a) balance in unpaid dividend account;
(b) balance in bank account for share application money, pending
allotment of shares;
(c) earmarked bank balances for specific purposes. Examples: bank
account for debenture redemption, dividend payment etc.
(d) balance in bank account subject to legal restrictions.
Question 14
Provide illustrative examples where reconciliation statement is required to be
disclosed between the amounts in the statement of cash flows with the
equivalent items reported in the balance sheet.
Response
Paragraph 45 of Ind AS 7 requires the disclosure of components of cash and
cash equivalents in the statement of cash flows. These amounts should be
reconciled with the equivalents items reported in the balance sheet.
Reconciliation may be required for certain items, such as, bank overdrafts
which are repayable on demand form an integral part of an entity’s cash
management, are included as a component of cash and cash equivalents in
the statement of cash flows. However, bank overdrafts will be included in
financial liabilities in balance sheet. Accordingly, such bank overdrafts could
be one element of reconciliation. Where the reporting entity holds foreign
currency cash and cash equivalent balances, these are monetary items that
will be restated at the reporting date in accordance with Ind AS 21, The
Effects of Changes in Foreign Exchange Rates. Any exchange differences
arising on translation will increase or decrease these balances but will not
give rise to cash flows. Accordingly, such unrealised gains or losses arising
from changes in foreign currency exchange rates could be another element
of reconciliation.

13
Educational Material on Ind AS 7

Question 15
How should the sale proceeds from a sale and leaseback transaction be
reported in the statement of cash flows?
Response
A sale and leaseback transaction involves the sale of an asset and the
leasing back of the same asset. The accounting treatment of cash flows
arising from the sale proceeds of a sale and leaseback transaction depends
upon the type of lease involved. If the leaseback is a finance lease, then the
transaction is a financial arrangement between the lessor and the lessee in
substance, whereby the lessor provides finance to the lessee with the asset
as security. Accordingly, in such a case sale proceeds of the asset should be
classified as financing activities in the statement of cash flows. Lease finance
charges and repayment of lease principal in the future are also required to be
reported in the statement of cash flows as financing activities.
If the leaseback is an operating lease, cash flows arising from sale proceeds
of the fixed assets should be recorded as investing activities. The lease
payments to be made in future would be classified as cash flows from
operating activities.
Question 16
How debt securities purchased at a discount/premium are classified in the
statement of cash flows?
Response
Cash flows from investing activities represent the extent to which expenditure
has been made for resources intended to generate future income and cash
flows. Thus, actual cash outflow irrespective of discount or premium will be
presented as investing activity. Example: bonds of face value of Rs. 5,25,000
are purchased in the market at a discount for Rs. 5,21,500. In this case, cash
outflow of Rs. 5,21,500 will be presented in the statement of cash flows
under investing activities.
Question 17
What is the presentation of cash flows arising out of payments for
manufacture or acquisition of assets held for rental to others and
subsequently held for sale in the ordinary course of business?

14
 Educational Material on Ind AS 7

Response
There are certain types of entities whose ordinary activities include routinely
renting out assets to others and selling the assets subsequently in the
ordinary course of business. The proceeds from the sale of such assets are
recognised as revenue in accordance with the Ind AS 18, Revenue. The
derecognition principles of such assets are described in paragraph 68A of
Ind AS 16, Property, Plant and Equipment.
Paragraph 14 of Ind AS 7, inter alia, states that cash payments to
manufacture or acquire assets held for rental to others and subsequently
held for sale as described in paragraph 68A of Ind AS 16, Property, Plant
and Equipment are cash flow from operating activities. The cash receipts
from rent and subsequent sale of such assets are also cash flows from
operating activities.
Therefore, cash flows associated with these type of assets are classified as
cash flows arising from operating activities. This is in contrast with the
normal classification where cash payments made to acquire or manufacture
property, plant and equipment and cash receipts from the sale of such assets
are classified as investing activities.
Question 18
Whether comparative figures are required to be presented in the statement of
cash flows?
Response
An entity is required to present statement of cash flows for the current period
classifying the cash flows from operating, investing and financing activities
with corresponding figures of earlier reporting period for comparison and
analysis.
Question 19
How do you classify purchase and sale of securities in the statement of cash
flows?
Response
An entity presents cash flows from operating, investing and financing
activities in a manner which is most appropriate to its business.
An entity may hold securities for dealing or trading purposes as they relate to
the main revenue generating activity of the entity. In this scenario, cash flows

15
Educational Material on Ind AS 7

arising from the purchase and sale of such securities are classified as
operating activities.
Cash flows arising from the purchase and sale of securities held as
investments are classified as investing activities.
Question 20
How do you classify cash receipts and payments arising out of future
contracts, forward contracts, option contracts and swap contracts?
Response
Paragraph 16 of Ind AS 7, amongst other examples of cash flows arising
from investing activities, provides as follows:
“(g) 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
(h) cash receipts from futures contracts, forward contracts, option contracts
and swap contracts except when the contracts are held for 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.”
From the above paragraphs, it is clear that classification of cash flows from
future contracts, forward contracts, option contracts and swap contracts
depends on whether a contract is accounted for as a hedging instrument for
hedged item or not.
When such a contract is accounted for as a hedge, cash flows arising from
hedging instruments are classified as operating, investing or financing
activities, on the basis of the classification of the cash flows arising from the
hedged item. Example: when a forward contract is taken for repayment of a
foreign currency loan and hedge accounting is followed, cash payments and
receipts of the aforesaid forward contract is classified as financing activities.
When these contracts are not accounted for as hedge, the classification of
cash flows depends on the nature of the contract itself, i.e., if these contracts
are held for dealing or trading purposes, cash flows arising from such
transactions should be classified as cash flows from operating activities.
Otherwise, the cash flows will be classified as investing activities except
where cash flows are classified as financing activities.

16
 Educational Material on Ind AS 7

Question 21
An entity invests in a 10 year bond with a face value of Rs. 6,00,000 by
paying Rs. 2,31,500. The effective rate of interest is 10%. An entity
recognises proportionate interest income in its statement of profit and loss
over the period of bond.
How the interest income will be treated in the statement of cash flows during
the period of bond?
How the maturity proceeds of Rs. 6,00,000 will be treated in the statement of
cash flows?
The entity is not in the business of dealing in securities.
Response
In the given case, since the entity is not in the business of dealing in
securities, a sum of Rs. 2,31,500 invested in a bond will be classified as
investing activities. There is no cash flow of interest during bond period, as
there is no cash receipt. On maturity, proceeds of Rs. 6,00,000 will be
classified as investing activity with a bifurcation of Rs. 3,68,500 as interest
and Rs. 2,31,500 as proceeds towards redemption of bond.
Question 22
Ind AS 7 requires disclosure of non-cash transactions in the financial
statements. Give examples of non-cash transactions?
Response
Investing and financing transactions that do not require the use of cash and
cash equivalents are excluded from the statement of cash flows. Such
transactions are however required to be disclosed elsewhere in the financial
statements in a way that provides all the relevant information. The disclosure
of these significant non-cash transactions is made by way of notes to the
financial statements.
Examples of non-cash transactions:
(a) acquisition of an enterprise by means of issue of equity shares;
(b) conversion of debentures or preference shares into equity shares;
(c) conversion of term loan into equity shares;
(d) issue of bonus shares;

17
Educational Material on Ind AS 7

(e) reduction of capital under restructuring or reduction of capital;

(f) exchange of assets.
Question 23
What is the meaning of ‘contributed equity’ used in the definition of financing
activities?
Response
Ind AS 7 defines financing activities as activities that result in changes in the
size and composition of the contributed equity and borrowings of the entity.
In accounting and finance terms, equity is the residual interest of
shareholders in assets after deducting all liabilities. Thus, equity =
shareholders’ funds or total assets – liabilities.
Shareholders’ funds = share capital + reserves and surplus + money
received against share warrants
Thus, equity is built up by two ways:
 Contributed equity
 Retained earnings
Thus, contributed equity is paid up capital contributed by shareholders of the
company. Cash flows arising from changes in contributed equity on account
of issue of additional capital, buy back of shares etc. are classified as
financing activities.
The change in retained earnings is primarily on account of profit or loss
earned by the entity. Profits are earned from principal revenue-producing
activities and other activities.
Question 24
Ind AS 7 uses the term ‘financial institution’, which has not been defined in
the Standard. What is the meaning of this term?
Response
The term ‘financial institution’ is not defined in the Standard. In the absence
of a specific definition, following definitions of ‘financial institution’ can be
taken as a basis to determine whether the activities of an entity are in the
nature of financial institution or not:
Section 2(39) of the Companies Act, 2013, states that ‘financial institution’

18
 Educational Material on Ind AS 7

includes a scheduled bank, and any other financial institution defined or

notified under the Reserve Bank of India Act, 1934.
Section 45-I of the Reserve Bank of India Act, 1934, defines financial
institution as under:
“financial institution” means any non-banking institution which carries on as
its business or part of its business any of the following activities, namely:
(i) the financing, whether by way of making loans or advances or
otherwise, of any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities
issued by a Government or local authority or other marketable
securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire- purchase
agreement as defined in clause (c) of section 2 of the Hire-Purchase
Act, 1972;
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any
other capacity, of chits or kuries as defined in any law which is for the
time being in force in any State, or any business, which is similar
thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by
whatever name called monies in lump sum or otherwise, by way of
subscriptions or by sale of units, or other instruments or in any other
manner and awarding prizes or gifts, whether in cash or kind, or
disbursing monies in any other way, to persons from whom monies are
collected or to any other person, but does not include any institution,
which carries on as its principal business:
(a) agricultural operations; or
(b) (aa) industrial activity; or;
(c) the purchase or sale of any goods (other than securities) or the
providing of any services; or
(d) the purchase, construction or sale of immovable property, so
however, that no portion of the income of the institution is
derived from the financing of purchases, constructions or sales
of immovable property by other persons.

19
Educational Material on Ind AS 7

[Explanation — For the purpose of this clause, ‘‘industrial activity’’ means

any activity specified in sub-clauses (i) to (xviii) of clause (c) of Section 2 of
the Industrial Development Bank of India Act, 1964]
Question 25
Explain how securitisation of receivables is presented in the statement of
cash flows in the books of originator?
Response
There is no guidance in Ind AS 7 with regard to presentation of cash flows
from securitisations. In this regard, it may be noted that derecognition of
receivables in the books of the originator in accordance with the
requirements laid down in Ind AS 109, Financial Instruments implies that, in
substance it is similar to sale of receivables. Amount received from such
securitisations can be considered as early collection of amounts due from
customers. Accordingly, cash flows arising from proceeds from securitisation
activities derecognised in accordance with the requirements of Ind AS 109
should be classified as part of operating activities even if the entity does not
enter into such transactions regularly.
In other cases, where the receivables are not derecognised in the books of
the originator in accordance with the requirements of Ind AS 109, the
proceeds from securitisation arrangement are recognised as a liability.
Therefore, cash flows arising from such transactions should be classified as
part of financing activities.

20
 Educational Material on Ind AS 7

III Case Studies

Case Study 1: Foreign currency cash flows
Entity A, whose functional currency is Indian Rupee, had a balance of cash
and cash equivalents of Rs. 2,00,000, but no trade receivables or trade
payables on January 1, 20X2. During 20X2, the entity entered into the
following foreign currency transactions:
 Entity A purchased goods for resale from Europe for €1,00,000 when
the exchange rate was €1 = Rs. 50. This balance is still unpaid at
December 31, 20X2 when the exchange rate is €1 = Rs. 45. An
exchange gain on retranslation of the trade payable of Rs. 5,00,000 is
recorded in profit or loss [€1,00,000 x (50 – 45) = Rs. 5,00,000].
 Entity A sold the goods to an American client for $ 1,50,000 when the
exchange rate was $1 = Rs. 40. This amount was settled when the
exchange rate was $1 = Rs. 42. A further exchange gain of Rs.
3,00,000 regarding the trade receivable is recorded in the statement of
profit or loss [$ 1,50,000 x (42 – 40) = Rs. 3,00,000].
 Entity A also borrowed €1,00,000 under a long-term loan agreement
when the exchange rate was €1 = Rs. 50 and immediately converted it
to Rs. 50,00,000. The loan was retranslated at December 31, 20X2 @
Rs. 45 = Rs. 45,00,000, with a further exchange gain of Rs. 5,00,000
recorded in the statement of profit or loss.
 Entity A therefore records a cumulative exchange gain of Rs.
13,00,000 (5,00,000 + 3,00,000 + 5,00,000) in arriving at its profit for
the year.
In addition, Entity A records a gross profit of Rs. 10,00,000 (Rs. 60,00,000 –
Rs. 50,00,000) on the sale of the goods.
How cash flows arising from above transactions would be reported in the
statement of cash flows under indirect method?

21
Educational Material on Ind AS 7

Response
Indirect method of statement of cash flows
Cash flows from operating activities

Particulars Amount
(Rs.)
Profit before taxation (10,00,000 + 13,00,000) 23,00,000
Adjustment for unrealised exchange gains/losses:
Foreign exchange gain on long term loan (5,00,000)
Decrease in trade payables (5,00,000)
Operating Cash flow before working capital changes 13,00,000
Changes in working capital (Due to increase in trade 50,00,000
payables)
Net cash inflow from operating activities 63,00,000
Cash inflow from financing activity 50,00,000
Net increase in cash and cash equivalents 1,13,00,000
Cash and cash equivalents at the beginning of the period 2,00,000
Cash and cash equivalents at the end of the period 1,15,00,000
Note: Taxation is ignored
Case Study 2: Subsidiary acquired in the year
Entity A acquired a subsidiary, entity B, during the year. Summarised
information from the consolidated statement of profit and loss and balance
sheet is provided, together with some supplementary information, to
demonstrate how the statement of cash flows under the indirect method is
derived.
Consolidated statement of profit and Amount
loss (Rs.)
Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
Depreciation (30,000)
Other operating expenses (56,000)

22
 Educational Material on Ind AS 7

Interest cost (4,000)

Profit before taxation 70,000
Taxation (15,000)
Profit after taxation 55,000

Consolidated balance sheet 2016 2015

Assets Amount Amount
(Rs.) (Rs.)
Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Inventories 30,000 35,000
Property, plant and equipment 1,60,000 80,000
Goodwill 18,000 —
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000
Income tax payable 12,000 11,000
Long term debt 1,00,000 64,000
Total liabilities 1,80,000 1,35,000
Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000

Other information
All of the shares of entity B were acquired for Rs. 74,000 in cash. The fair
values of assets acquired and liabilities assumed were:
Particulars Amount (Rs.)
Inventories 4,000
Trade receivables 8,000
Cash 2,000
Property, plant and equipment 1,10,000
Trade payables (32,000)

23
Educational Material on Ind AS 7

Long term debt (36,000)

Goodwill 18,000
Cash consideration paid 74,000
Prepare statement of cash flows.

Response
This information will be incorporated into the consolidated statement of cash
flows as follows:
Statement of cash flows for 2016 (extract) Amount Amount
(Rs.) (Rs.)
Cash flows from opening activities
Profit before taxation
Adjustments for non-cash items: 70,000
Depreciation 30,000
Decrease in inventories (Note 1) 9,000
Decrease in trade receivables (Note 2) 4,000
Decrease in trade payables (Note 3) (24,000)
Interest paid to be included in financing activities 23,000
Taxation (11,000 + 15,000 – 12,000) (14,000)
Net cash inflow from operating activities 79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 – 2,000) (72,000)
Net cash outflow from investing activities (72,000)
Cash flows from financing activities
Interest paid (4,000)
Net cash outflow from financing activities (4,000)
Increase in cash and cash equivalents 3,000
Cash and cash equivalents, beginning of year 5,000
Cash and cash equivalents, end of year 8,000

Note 1:
Total inventories of the Group at the end of the year Rs. 30,000
Inventories acquired during the year from subsidiary (Rs. 4,000)
Rs. 26,000

24
 Educational Material on Ind AS 7

Opening inventory Rs. 35,000

Decrease in inventory Rs. 9,000

Note 2:
Total trade receivable of the Group at the end of the year Rs. 54,000
Trade receivables acquired during the year from subsidiary (Rs. 8,000)
Rs. 46,000
Opening trade receivable Rs. 50,000
Decrease in trade receivable Rs. 4,000

Note 3:
Trade payables at the end of the year Rs. 68,000
Trade payables of the subsidiary assumed during the year (Rs. 32,000)
Rs. 36,000
Opening trade payable Rs. 60,000
Decrease in trade payables Rs. 24,000

25