Ind AS 7: Statement of Cash Flows

Introduction to Ind AS 7

• Definition: Ind AS 7 defines the rules for preparing and presenting the Statement of Cash Flows, which reports an entity’s cash inflows and outflows during a reporting period.
• Objective: It aims to give stakeholders clear information about cash receipts and payments, thereby improving their understanding of the entity’s liquidity, solvency, and overall financial flexibility.

Scope of Ind AS 7

Applicability:

• Ind AS 7 applies to all entities that prepare financial statements under Ind AS.
• Both consolidated and separate financial statements must comply with this standard to ensure consistency in reporting.

Exclusions:

• However, cash flows from operating activities of financial institutions fall outside Ind AS 7 and follow other applicable standards.

Key Definitions

• Cash: Includes cash on hand and demand deposits, which an entity can use immediately for its operations.

• Cash Equivalents: Consist of short-term, highly liquid investments. These investments convert quickly to known cash amounts and carry minimal risk of value changes.

Components of Cash Flows

• Operating Activities: Include cash flows generated from the entity’s main revenue-producing activities. These reflect day-to-day business operations.
• Investing Activities: Cover cash flows related to acquiring and disposing of long-term assets and investments.
• Financing Activities: Capture cash flows that change the size or composition of equity capital and borrowings.

Presentation of Cash Flows

• Methods of Presentation: Companies can report cash flows using either the direct or indirect method. The direct method provides a detailed breakdown of cash receipts and payments. In contrast, the indirect method adjusts net profit or loss for non-cash transactions and changes in working capital to calculate operating cash flows.

• Preference: Ind AS 7 encourages using the direct method. However, companies may choose the indirect method if it suits their reporting process.

Cash Flow Statement Structure

The Statement of Cash Flows provides a clear picture of an entity’s liquidity and financial movements. It breaks down into three main sections:

• Operating Activities: Shows cash generated or used by core business operations.
• Investing Activities: Reflects cash spent on or received from long-term assets and investments.
• Financing Activities: Reports cash inflows and outflows related to equity and borrowings.

Additionally, the statement indicates the net increase or decrease in cash and cash equivalents during the period, along with balances at the beginning and end. By presenting these components in the Statement of Cash Flows, companies allow stakeholders to track cash flow trends, assess financial flexibility, and make informed decisions with proper Financial Accounting practices.

Foreign Currency Cash Flows

The Statement of Cash Flows must also account for transactions in foreign currencies. Companies record cash flows in the entity’s functional currency by applying the exchange rate on the date of each transaction.

For foreign subsidiaries, cash flows should be translated using the exchange rates prevailing on the dates of individual cash flows. This approach ensures that the Statement of Cash Flows accurately reflects the impact of currency fluctuations on liquidity and financial flexibility.

Disclosures (Ind AS 7: Statement of Cash Flows)

• Cash and cash equivalents at the beginning and end of the reporting period must be clearly reported.
• Reconcile cash flows from operating activities using both direct and indirect methods, if applicable.
• Report significant non-cash transactions that do not involve cash flows, such as acquisitions through share exchanges.

For detailed guidance, our Financial Reporting Support services help entities prepare accurate cash flow statements under Ind AS 7.

Ind AS 12: Income Taxes

 Introduction to Ind AS 12

• Definition: Ind AS 12 prescribes accounting treatment for income taxes, including current tax and deferred tax.
• Objective: Ensure recognition and measurement of income tax expenses and liabilities in financial statements, reflecting tax effects accurately.

Scope of Ind AS 12

• Applicability:
  • Ind AS 12 applies to all entities preparing financial statements under Ind AS.
  • It covers all income taxes, including those based on profits, capital gains, and other taxable income.
• Exclusions:
  • Ind AS 12 does not apply to taxes based on sales, value-added tax, or other taxes not based on income.

Key Definitions

• Current Tax: The amount of income tax payable (or recoverable) in respect of the taxable profit (or loss) for the current period.
• Deferred Tax: The amount of income tax payable or recoverable in future periods in respect of taxable temporary differences and deductible temporary differences.
• Tax Base: The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

Recognition of Income Tax

• Current Tax:
  • Recognized as an expense or income in the profit and loss statement, based on taxable profits.
• Deferred Tax:
  • Recognized for temporary differences between the carrying amount of assets and liabilities in the financial statements and their tax bases.

Measurement of Current and Deferred Tax

• Current Tax Measurement:
  • Based on tax rates and laws enacted or substantively enacted at the end of the reporting period.
• Deferred Tax Measurement:
  • Measured using the tax rates that are expected to apply when the asset is realized or the liability is settled.

 Temporary Differences

Taxable Temporary Differences:

• Temporary differences that will result in taxable amounts in determining taxable profits( tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled
• These arise when the carrying amount of an asset exceeds its tax base, leading to future taxable amounts.

Deductible Temporary Differences:

• Temporary differences that will result in amounts that are deductible in determining taxable profits( tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled
• Occur when the tax base of an asset exceeds its carrying amount, leading to future deductible amounts.

Deferred Tax Assets and Liabilities

Recognition Criteria:

• Deferred Tax Assets: amounts of income taxes recoverable in the future periods in respect of :
  • Deductible temporary difference
  • The carry forward of unused tax losses and
  • Carry forward of unused tax credits
• Deferred Tax Liabilities: amounts of income taxes payable in future periods in respect of all taxable temporary differences.

Offsetting:

• Deferred tax assets and liabilities can be offset if they relate to the same taxable entity and the same tax authority.

 Presentation and Disclosure Requirements

• Presentation:
  • Current and deferred tax should be presented separately in the financial statements.
• Disclosure:
  • The major components of tax expense (current and deferred).
  • The effective tax rate reconciled to the statutory tax rate.
  • Information about unrecognized deferred tax assets