Overview
IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.
IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial statements covering periods beginning on or after 1 January 1994.
History of IAS 7
| June1976 | Exposure Draft E7 Statement of Source and Application of Funds |
| October1977 | IAS 7 Statement of Changes in Financial Position |
| July1991 | Exposure Draft E36 Cash Flow Statements |
| December1992 | IAS 7 (1992) Cash Flow Statements |
| 1January1994 | Effective date of IAS 7 (1992) |
| 6September2007 | Retitled from Cash Flow Statements to Statement of Cash Flows as a consequential amendment resulting from revisions to IAS 1 |
| 16April2009 | IAS 7 amended by Annual Improvements to IFRSs 2009 with respect to expenditures that do not result in a recognised asset. |
| 1July2009 | Effective date for amendments from IAS 27(2008) relating to changes in ownership of a subsidiary |
| 1January2010 | Effective date of the April 2009 revisions to IAS 7 |
| 29 January2016 | Amended by Disclosure Initiative (Amendments to IAS 7) |
| 1January2017 | Effective date of theJanuary2016 revisions to IAS 7 |
| 25 May 2023 | Amended by Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) |
| 1January2024 | Effective date of the May2023 revisions to IAS 7 |
Related Interpretations
- None
Amendments under consideration by the IASB
- None
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:
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:Cash receipts from customers xx,xxx Cash paid to suppliers xx,xxx Cash paid to employees xx,xxx Cash paid for other operating expenses xx,xxx Interest paid xx,xxx Income taxes paid xx,xxx Net cash from operating activities xx,xxx Profit before interest and income taxes xx,xxx Add back depreciation xx,xxx Add back impairment of assets xx,xxx Increase in receivables xx,xxx Decrease in inventories xx,xxx Increase in trade payables xx,xxx Interest expense xx,xxx Less Interest accrued but not yet paid xx,xxx 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, joint ventures, and subsidiaries, where the equity or cost method is used, the statement of 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]
- 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 statement of cash flows, but they should be separately disclosed elsewhere in the financial statements [IAS 7.43]
- entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities [IAS 7.44A-44E]
- an entity shall disclose information about its supplier finance arrangements that enables users of financial statements to assess the effects of those arrangements on the entity’s liabilities and cash flows and on the entity’s exposure to liquidity risk [IAS 7.44F]
- 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]
You will find sample IFRS statements of cash flows in our Model IFRS financial statements.
I've got a comprehensive grasp of IAS 7, the Statement of Cash Flows. It's an essential component of financial reporting, mandating the presentation of an entity's cash flow details across operating, investing, and financing activities. The historical changes in cash and cash equivalents are dissected, emphasizing their classification and presentation within financial statements.
Let's break down the key concepts:
Evolution and Timeline:
- 1976-77: Exposure Drafts related to financial statements and changes in financial positions.
- 1992: Initial issuance of IAS 7 focused on cash flow statements.
- 2007: Renamed as Statement of Cash Flows due to IAS 116 revisions.
- 2009: Amendments addressing unrecognizable expenditures and ownership changes.
- 2016-17: Amendments through the Disclosure Initiative.
- 2023-24: Further amendments related to Supplier Finance Arrangements.
Objective of IAS 7:
- Cash and Equivalents Definition: Detailed specifications regarding cash, cash equivalents, and inclusion criteria.
- Operating, Investing, and Financing Activities: Clear classification principles for each activity type.
Presentation Guidelines:
- Operating Activities: Encouragement for the direct method but acceptance of the indirect method.
- Direct Method: Detailed depiction of gross cash receipts and payments.
- Indirect Method: Adjustment of net profit for non-cash transactions.
Currency and Subsidiary Considerations:
- Exchange Rates: Guidance on the usage of exchange rates for cash flow translation.
- Foreign Subsidiaries: Handling cash flows based on transaction times.
- Associates, Joint Ventures, and Subsidiaries: Reporting cash flows as per equity, cost, or proportionate consolidation methods.
Other Noteworthy Points:
- Investing and Financing Transactions: Reporting gross, except for specific cases allowed on a net basis.
- Non-cash Transactions: Exclusion from the cash flow statement but required disclosure elsewhere.
- Disclosures: Extensive requirements for disclosures related to liabilities, supplier finance arrangements, cash and equivalents details, and unavailable cash for group use.
This standardizes the reporting of cash flow information, offering transparency and comparability across entities following IFRSs. It's a fundamental aspect for investors, creditors, and stakeholders to assess an entity's financial health and operational efficiency.
