AS -3: Cash Flow Statement

2

Introduction:

Part of the General Purpose Financial Statements

Need not be prepared for SMC.

Standard deals with the : What constitutes “Cash” Structure of the Cash Flow Statement Disclosure Requirements Impact of Discontinuing Operations, Extra-Ordinary items etc., on Cash Flow

3

Why is Cash Flow Statement required? To evaluate the changes in Net Assets of an Enterprise. To evaluate the financial structure – Liquidity and Solvency Comparability – Eliminates different accounting treatments for the same

transaction Is often used to project future cash flows Relationship with Profitability and Net Cash Flow

4

What does “Cash” constitute in AS 3? Cash – comprises cash on hand and

demand deposits with Bank

Also includes Cash Equivalents: Short Term, Highly Liquid

Investments Readily convertible into Cash On conversion no significant risk of

changes in value.

As per Companies Act, 2013:

Cash and Cash Equivalents shall be classified as Balance with Banks, Cheques, Drafts on Hand, Cash on Hand, Others.

Earmarked Balances with Banks Balances held as margin money or

security against the borrowings, guarantees, other commitments

Repatriation restrictions, Bank Deposits with more than twelve

months maturity shall be disclosed. Others – Items such as balances with

banks held as margin money / security against borrowings and bank deposits with more than 3 months maturity. Bank deposits >12 months maturity will be disclosed separately.

5

Other Important Aspects Operating Activities :

Principal Revenue producing activities of the enterprise

How much has the business earned in terms of cash in flow?

Has the business been successful in using the available cash in flow to meet its core business cash out flows – the regular expenses

Or is there any dependency on other than core activities to generate cash?

Loss or Profit on Sale of Asset, Dividend Income, etc., and other non-core activities though appears in P&L, should not be considered here in operating activities.

6

Other Important Aspects Investing Activities:

Cash Flows arising from Investing activities

Expenditure include those relating to Investment in resources for future income

Cash Payments to acquire fixed assets

Cash Receipts from disposal of fixed assets

Cash Payments to acquire Shares, or instruments of other enterprises / interests

Cash Receipts from disposal of the Shares…

7

Other Important Aspects Financing Activities:

Indicates the claims on future cash flows by providers of capital

On Issue of Shares, Debentures, Bonds

Changes in borrowing structure

Indicates how much cash has been actually invested in the Company - Whether due to Equity or Debt.

8

Cash Flow from Operating Activities – Direct Method

Direct Method

Major classes of Gross Cash Receipts and Gross Cash Payments are disclosed

Information sourced from Accounting records – Normal process or

Adjusting Sales, Cost of Sales along with changes in Inventory, Operating Receivables and Payables, Other Non-Cash items and other non-operating cash flows.

9

Cash Flow from Operating Activities – Indirect Method

Indirect Method

Whereby net profit or loss is adjusted for the effects of non-cash nature, any deferral or accruals of past / future cash flows, and any other investing and operating cash flow.

Changes during the period of Inventories, Receivables and Payables.

Adjustment to Non-Cash Items such as depreciation, provisions, deferred taxes and unrealized foreign exchange gains and losses;

All other items which are non-operating cash flow.

10

Other Aspects Foreign Currency Cash Flows:

Use the rate applicable as on the date of cash flow (i.e., spot rate)

Any other rate which approximates the spot rate – also acceptable

Cash and Cash Equivalents – are monetary items – hence foreign currency translation as per AS 11 is required.

Effect of changes in exchange rates on account of foreign currency should be reported as reconciliation to the cash and cash equivalents during the period.

Unrealised Gains and Losses – Not Cash Flow. It’s only restatement of the balance.

11

Other Aspects

Extraordinary Items : Should be disclosed under Operating, Investing or Financing Activities as the case may be.

Interest and Dividends: Interest and Dividends received in the case of a financial enterprise should be classified as cash flows from operating activities. In other enterprises: Interest outflow is Financing Activity, Interest inflow and Dividend inflow is Investing Activity.

Interest expense includes that which is Capitalised under AS 16 as well, but this gets adjusted in movement in fixed assets as well.

Taxes on Income: Always classified as Operating Activity, unless they can be specifically identified with financing and investing activities.

Investments in Subsidiaries, Associates and Joint Ventures: Classified as Investment activity. Acquisition and disposal should be disclosed separately. When the acquisition is through non-cash mode, Cash Flow Statement, obviously, is not affected. Other disclosures would be required.

12

AS 3, Vs. IAS 7, Ind AS 7.

Particulars AS 3 IAS 7 Ind AS 7

Bank Overdraft Part of Financing Activity

Included in Cash and Cash Equivalents

Similar to IAS 7.

Extraordinary items Separate Disclosure No concept of extraordinary items

Similar to IAS 7.

Acquisition and Disposal of Investment Properties

No specific guidance.

If it is used for rentals, then classified as Operating Activities.

Similar to IAS 7.

Impact of Discontinued Operations

To be disclosed as Note to Cash Flow Statement

To be presented on the face of Cash Flow Statement

Similar to IAS 7.

13

From FRRB:

Foreign Exchange variations disclosed as Extraordinary items under Operating Activities.

Interest paid classified as Operating Activity. Interest received classified as Financing Activity

FD with bank shown as cash flow from financing activity

Proceeds from General Reserve indicated as Financing Activity (FRRB – not clear on the transaction).

Increase in share capital / public issues of shares classified as Investing activity

There can be only 3 activities. A Company had disclosed few transactions as “Other Activities”

14

Any Questions?