International Accounting Standard 7

Statement of Cash Flows

In April 2001 the International Accounting Standards Board adopted IAS 7 Cash Flow
Statements, which had originally been issued by the International Accounting Standards
Committee in December 1992. IAS 7 Cash Flow Statements replaced IAS 7 Statement of
Changes in Financial Position (issued in October 1977).
As a result of the changes in terminology used throughout the IFRS Standards arising from
requirements in IAS 1 Presentation of Financial Statements (issued in 2007), the title of IAS
7 was changed to Statement of Cash Flows.
In January 2016 IAS 7 was amended by Disclosure Initiative (Amendments to IAS 7). These
amendments require entities to provide disclosures about changes in liabilities arising
from financing activities.
Other Standards have made minor consequential amendments to IAS 7. They include
IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements
(issued May 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)
(issued October 2012) and IFRS 16 Leases (issued January 2016).

Objective:
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 utilize those cash flows. The economic decisions
that are taken by users require an evaluation of the ability of an entity to generate cash and
equivalents and the timing and certainty of their generation.
The objective of this Standard is to require the provision 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 from operating, investing and financing
activities.

Scope:
 An entity shall prepare a statement of cash flows in accordance with the
requirements of this Standard and shall present it as an integral part of its financial
statements for each period for which financial statements are presented.
 This Standard supersedes IAS 7 Statement of Changes in Financial Position,
approved in July 1977.
 Users of an entity’s financial statements are interested in how the entity generates
and uses cash and cash equivalents. This is the case regardless of the nature of the
entity’s activities and irrespective of whether cash can be viewed as the product of
the entity, as may be the case with a financial institution. 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 returns to their investors. Accordingly, this Standard
requires all entities to present a statement of cash flows .

Definitions:
The following terms are used in this Standard with the meanings specified:
 Cash: Cash comprises cash on hand and demand deposits.
 Cash equivalents: 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 changes in value.
 Cash flows: Cash flows are inflows and outflows of cash and cash equivalents.
 Operating activities: Operating activities are the principal revenue-producing
activities of the entity and other activities that are not investing or financing
activities.
 Investing activities: Investing activities are the acquisition and disposal of long-
term assets and other investments not included in cash equivalents.
 Financing activities: Financing activities are activities that result in changes in the
size and composition of the contributed equity and borrowings of the entity.

Cash and cash equivalents:

 Cash equivalents are held for the purpose of meeting short-term cash commitments
rather than for investment or other purposes. For an investment to qualify as a cash
equivalent it must be readily convertible to a known amount of cash and be subject
to an insignificant risk of changes in value. Therefore, an investment normally
qualifies as a cash equivalent only when it has a short maturity of, say, three months
or less from the date of acquisition. Equity investments are excluded from cash
equivalents unless they are, in substance, cash equivalents, for example in the case
of preferred shares acquired within a short period of their maturity and with a
specified redemption date.
 Bank borrowings are generally considered to be financing activities. However, in
some countries, bank overdrafts which are repayable on demand form an integral
part of an entity’s cash management. In these circumstances, bank overdrafts are
included as a component of cash and cash equivalents. A characteristic of such
banking arrangements is that the bank balance often fluctuates from being positive
to overdrawn.
 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 its operating, investing and financing activities. Cash
management includes the investment of excess cash in cash equivalents.
Presentation of a statement of cash flows:
An entity presents its cash flows from operating, investing and financing activities in a
manner which is most appropriate to its business.

Operating activities:
 Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of the entity.
 Operating activities is a key indicator of the extent to which the operations of the
entity have generated sufficient cash flows to repay loans, maintain the operating
capability of the entity, pay dividends and make new investments without recourse
to external sources of financing.
 Examples of cash flows from operating activities are:
 Cash receipts from the sale of goods and the rendering of services.
 Cash receipts from royalties, fees, commissions and other revenue.
 Cash payments to suppliers for goods and services.
 Cash payments to and on behalf of employees.
 Cash receipts and cash payments of an insurance entity for premiums and
claims, annuities and other policy benefits.

Investing activities:
 The separate disclosure of cash flows arising from investing activities is important
because the cash flows represent the extent to which expenditures have been made
for resources intended to generate future income and cash flows.
 Examples of cash flows arising from investing activities are:
 Cash payments to acquire property, plant and equipment, intangibles and
other long-term assets. These payments include those relating to capitalized
development costs and self-constructed property, plant and equipment.
 Cash receipts from sales of property, plant and equipment, intangibles and
other long-term assets.
 Cash payments to acquire equity or debt instruments of other entities and
interests in joint ventures.

Financing activities:
 The separate disclosure of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of capital
to the entity.
 Examples of cash flows arising from financing activities are:
 Cash proceeds from issuing shares or other equity instruments.
 Cash payments to owners to acquire or redeem the entity’s shares.
 Cash repayments of amounts borrowed.
Reporting cash flows from operating activities:
 An entity shall report cash flows from operating activities using either:
 The direct method, whereby major classes of gross cash receipts and gross
cash payments are disclosed.
 The indirect method, whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.
 Entities are encouraged to report cash flows from operating activities using the
direct method. The direct method provides information which may be useful in
estimating future cash flows and which is not available under the indirect method.
 Under the direct method, information about major classes of gross cash receipts and
gross cash payments may be obtained either:
 From the accounting records of the entity.
 By adjusting sales, cost of sales (interest and similar income and interest
expense and similar charges for a financial institution) and other items in the
statement of comprehensive income for:
 Changes during the period in inventories and operating receivables
and payables.
 Other non-cash items.
 Other items for which the cash effects are investing or financing cash
flows.
 Under the indirect method, the net cash flow from operating activities is determined
by adjusting profit or loss for the effects of:
 Changes during the period in inventories and operating receivables and
payables.
 Non-cash items such as depreciation, provisions, deferred taxes, unrealized
foreign currency gains and losses, and undistributed profits of associates;
and
 All other items for which the cash effects are investing or financing cash
flows.
 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 comprehensive income and the changes during the period in
inventories and operating receivables and payables.

Reporting cash flows from investing and financing

activities:
An entity shall report separately major classes of gross cash receipts and gross cash
payments arising from investing and financing activities, except to the extent that cash
flows described in a net basis.

Reporting cash flows on a net basis:

 Cash flows arising from the following operating, investing or financing activities
may be reported on a net basis:
 Cash receipts and payments on behalf of customers when the cash flows
reflect the activities of the customer rather than those of the entity.
 Cash receipts and payments for items in which the turnover is quick, the
amounts are large, and the maturities are short.
 Examples of cash receipts and payments are:
 The acceptance and repayment of demand deposits of a bank.
 Funds held for customers by an investment entity.
 Rents collected on behalf of, and paid over to, the owners of properties.
 Examples of cash receipts and payments are advances made for, and the repayment
of:
 Principal amounts relating to credit card customers.
 The purchase and sale of investments.
 Other short-term borrowings, for example, those which have a maturity
period of three months or less.
 Cash flows arising from each of 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 a fixed maturity date.
 The placement of deposits with and withdrawal of deposits from other
financial institutions.
 Cash advances and loans made to customers and the repayment of those
advances and loans.
Specific Transactions and Events:
Foreign currency cash flows:
 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.
 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.
Interest and dividends:
 Cash flows from interest and dividends received and paid shall each be disclosed
separately. Each shall be classified in a consistent manner from period to period as
operating, investing or financing activities.
 The total amount of interest paid during a period is disclosed in the statement of
cash flows whether it has been recognized as an expense in profit or loss or
capitalized in accordance with IAS 23 Borrowing Costs.
 Dividends paid may be classified as a financing cash flow because they are a cost of
obtaining financial resources. Alternatively, dividends paid may be classified as a
component of cash flows from operating activities in order to assist users to
determine the ability of an entity to pay dividends out of operating cash flows.
Taxes on income:
 Cash flows arising from taxes on income shall be separately disclosed and shall be
classified as cash flows 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 a statement of cash flows. While tax
expense may be readily identifiable 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 the underlying transaction. Therefore, taxes paid are usually
classified as cash flows from operating activities.
Investments in subsidiaries, associates and joint ventures:
 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.
Non-cash transactions:
 Investing and financing transactions that do not require the use of cash or cash
equivalents shall be excluded from a 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.
 Many investing and financing activities do not have a direct impact on current cash
flows although they do affect the capital and asset structure of an entity.
 The exclusion of non-cash transactions from the statement of cash flows is
consistent with the objective of a statement of cash flows as these items do not
involve cash flows in the current period.
 Examples of non-cash transactions are:
 The acquisition of assets either by assuming directly related liabilities or by
means of a lease.
 The acquisition of an entity by means of an equity issue.

Other disclosures:
 An entity shall disclose, together with a commentary by management, the amount of
significant cash and cash equivalent balances held by the entity that are not
available for use by the group.
 There are various circumstances in which cash and cash equivalent balances held by
an entity are not available for use by the group. Examples include cash and cash
equivalent balances held by a subsidiary that operates in a country where exchange
controls or other legal restrictions apply when the balances are not available for
general use by the parent or other subsidiaries.
 Additional information may be relevant to users in understanding the financial
position and liquidity of an entity. Disclosure of this information, together with a
commentary by management, is encouraged and may include:
 The amount of undrawn borrowing facilities that may be available for future
operating activities and to settle capital commitments, indicating any
restrictions on the use of these facilities.
 The aggregate amount of cash flows that represent increases in operating
capacity separately from those cash flows that are required to maintain
operating capacity.
 The amount of the cash flows arising from the operating, investing and
financing activities of each reportable segment.
 The separate disclosure of cash flows that represent increases in operating capacity
and cash flows that are required to maintain operating capacity is useful in enabling
the user to determine whether the entity is investing adequately in the maintenance
of its operating capacity. An entity that does not invest adequately in the
maintenance of its operating capacity may be prejudicing future profitability for the
sake of current liquidity and distributions to owners.
  The disclosure of segmental cash flows enables users to obtain a better
understanding of the relationship between the cash flows of the business as a whole
and those of its component parts and the availability and variability of segmental
cash flows.

Effective date:
 This Standard becomes operative for financial statements covering periods
beginning on or after 1 January 1994.
 IAS 27 (as amended in 2008) amended an entity shall apply those amendments for
annual periods beginning on or after 1 July 2009. If an entity applies IAS 27
(amended 2008) for an earlier period, the amendments shall be applied for that
earlier period. The amendments shall be applied retrospectively.
 It was amended by Improvements to IFRSs issued in May 2008. An entity shall apply
that amendment for annual periods beginning on or after 1 January 2009. Earlier
application is permitted.
 It was amended by Improvements to IFRSs issued in April 2009. An entity shall
apply that amendment for annual periods beginning on or after 1 January 2010.
Earlier application is permitted. If an entity applies the amendment for an earlier
period it shall disclose that fact.
 IFRS 10 and IFRS 11 Joint Arrangements, issued in May 2011. An entity shall apply
those amendments when it applies IFRS 10 and IFRS 11.
 Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in
October 2012. An entity shall apply those amendments for annual periods beginning
on or after 1 January 2014. Earlier application of Investment Entities is permitted. If
an entity applies those amendments earlier it shall also apply all amendments
included in Investment Entities at the same time.
 IFRS 16 Leases, issued in January 2016 an entity shall apply those amendments
when it applies IFRS 16.
 Disclosure Initiative (Amendments to IAS 7), issued in January 2016 an entity shall
apply those amendments for annual periods beginning on or after 1 January 2017.
Earlier application is permitted. When the entity first applies those amendments, it
is not required to provide comparative information for preceding periods.

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