Understanding Ind AS 7 and Ind AS 12: Key Insights for Financial Reporting

In the ever-evolving landscape of financial reporting, staying up-to-date with Indian Accounting Standards (Ind AS) is crucial for businesses operating in India. In this blog, we will dive into two important standards: Ind AS 7 (Statement of Cash Flows) and Ind AS 12 (Income Taxes). These standards play a vital role in ensuring transparent and accurate financial reporting.

Ind AS 7: Statement of Cash Flows

 Introduction to Ind AS 7

1. Definition: Ind AS 7 outlines the requirements for the preparation and presentation of the Statement of Cash Flows, providing information about an entity's cash inflows and outflows during a reporting period.
2. Objective: To provide relevant information about the cash receipts and cash payments of an entity, enhancing the understanding of its liquidity, solvency, and financial flexibility.

Scope of Ind AS 7

1. Applicability:
   1. Applicable to all entities that prepare financial statements under Ind AS.
   2. The standard applies to both consolidated and separate financial statements.
2. Exclusions:
   1. Ind AS 7 does not apply to cash flows from operating activities of a financial institution, which may be governed by other standards.

Key Definitions

1. Cash: Comprises cash on hand and demand deposits.
2. Cash Equivalents: Short-term, highly liquid investments that are readily convertible to known amounts of cash and have an insignificant risk of changes in value.

Components of Cash Flows

1. Operating Activities: Cash flows from the principal revenue-generating activities of the entity.
2. Investing Activities: Cash flows related to the acquisition and disposal of long-term assets and investments.
3. Financing Activities: Cash flows that result in changes in the size and composition of the equity capital and borrowings of the entity.

Presentation of Cash Flows

1. Methods of Presentation:
   1. Direct Method: Cash receipts and payments are reported, providing a detailed breakdown of cash inflows and outflows.
   2. Indirect Method: Net profit or loss is adjusted for non-cash transactions and changes in working capital, leading to cash flows from operating activities.
2. Preference: Ind AS 7 encourages the direct method but allows the use of the indirect method as well.

Cash Flow Statement Structure

1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
4. Net increase or decrease in cash and cash equivalents
5. Cash and cash equivalents at the beginning and end of the period

Foreign currency cash flows

1. Cash flows arising from transactions in a foreign currency shall be recorded in an entity’s functional currency by applying to the foreign currency amount the exchange rate between the functional currency and the foreign currency at the date of the cash flow.
2. 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.

Disclosures

1. Cash and cash equivalents at the beginning and end of the reporting period.
2. The reconciliation of cash flows from operating activities using both direct and indirect methods, if applicable.
3. Significant non-cash transactions that do not involve cash flows (e.g., acquisitions through share exchanges).

Ind AS 12: Income Taxes

 Introduction to Ind AS 12

1. Definition: Ind AS 12 prescribes the accounting treatment for income taxes, including current tax and deferred tax.
2. Objective: To prescribe the recognition and measurement of income tax expenses and liabilities in financial statements, ensuring that the effects of taxes are appropriately reflected.

Scope of Ind AS 12

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

Key Definitions

1. Current Tax: The amount of income tax payable (or recoverable) in respect of the taxable profit (or loss) for the current period.
2. Deferred Tax: The amount of income tax payable or recoverable in future periods in respect of taxable temporary differences and deductible temporary differences.
3. 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

1. Current Tax:
   1. Recognized as an expense or income in the profit and loss statement, based on taxable profits.
2. Deferred Tax:
   1. 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

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

 Temporary Differences

1. Taxable Temporary Differences:
   1. 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
   2. These arise when the carrying amount of an asset exceeds its tax base, leading to future taxable amounts.
2. Deductible Temporary Differences:
   1. 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
   2. Occur when the tax base of an asset exceeds its carrying amount, leading to future deductible amounts.

Deferred Tax Assets and Liabilities

Recognition Criteria:

1. Deferred Tax Assets: amounts of income taxes recoverable in the future periods  in respect of :
   1. Deductible temporary difference
   2. The carry forward of unused tax losses and
   3. Carry forward of unused tax credits

1. Deferred Tax Liabilities: amounts of income taxes payable in future periods in respect of all taxable temporary differences.

Offsetting:

1. 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

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

Why These Standards Matter

Both Ind AS 7 and Ind AS 12 contribute significantly to the quality and comparability of financial reporting. The Statement of Cash Flows provides crucial information about an entity's cash-generating ability, while the proper accounting for income taxes ensures that tax effects are accurately reflected in financial statements.

By partnering with MBG Corporate Services, you can focus on your core business while we ensure your financial reporting meets the highest standards of accuracy and compliance. Our deep understanding of Indian Accounting Standards, combined with our practical experience, makes us the ideal partner for your financial reporting needs.