IAS 7

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Overview and Structure

International Accounting Standard 7: Statement of Cash Flows (IAS 7) establishes the requirements for reporting changes in cash and cash equivalents. [1] The statement of cash flows is an integral component of a complete set of financial statements. [2] IAS 7 requires entities to classify cash flows during the period into three distinct categories: operating, investing, and financing activities. [3]

Contents

Operating activities are the principal revenue-producing activities of the entity. [4] Investing activities involve the acquisition and disposal of long-term assets and other investments not included in cash equivalents. [5] Financing activities result in changes in the size and composition of the contributed equity and borrowings of the entity. [6]

Illustrative Example: Cash Flow Reconciliation (Indirect Method)

IAS 7 requires a reconciliation between profit and the net change in cash to arrive at the final cash balance. [7]

Scenario: Cash (Jan 1): $10,000 | Net Profit: $50,000 | Depreciation: $5,000 | Increase in Receivables: $2,000 | Purchase of PPE: $15,000 | Loan Repayment: $8,000.

Calculation: Cash from Operations: $53,000 | Cash from Investing: ($15,000) | Cash from Financing: ($8,000) | Net Cash Increase: $30,000. [8]

Cash Flow Statement Reconciliation:

ItemAmountRationale
Net Profit$50,000Starting point for indirect method. [9]
Adjustments (Depreciation & Working Capital)$3,000Non-cash add-back ($5k) less receivable increase ($2k). [10]
Net Cash from Operating Activities$53,000Subtotal of operations. [11]
Net Cash from Investing & Financing($23,000)Purchase of PPE ($15k) and loan repayment ($8k). [12]
Net Increase in Cash for the Period$30,000Total change in cash position. [13]
Cash and Cash Equivalents (Jan 1)$10,000Opening balance from prior year. [14]
Cash and Cash Equivalents (Dec 31)$40,000Final balance reported on the Balance Sheet. [15]

Disclosure Requirements (IAS 7)

IAS 7 requires an entity to present a statement of cash flows that classifies cash flows during the period from operating, investing, and financing activities. The following disclosures are mandatory: [16]

ParagraphCategoryDisclosure RequirementDescription / Examples
IAS 7.18–20Operating ActivitiesMethod of ReportingDisclosure of whether the Direct Method or Indirect Method is used to report cash flows from operations.
IAS 7.31–34Interest and DividendsSeparate disclosure of cash flows from interest and dividends received and paid, classified consistently from period to period.
IAS 7.35TaxationTaxes on IncomeSeparate disclosure of cash flows arising from taxes on income (usually classified as operating).
IAS 7.39Investing / FinancingAcquisitions and DisposalsThe aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses.
IAS 7.43Non-cash TransactionsMaterial Non-cash ItemsDisclosure of investing and financing transactions that do not require the use of cash (e.g., conversion of debt to equity).
IAS 7.44ANet Debt ReconciliationChanges in LiabilitiesDisclosure that enables users to evaluate changes in liabilities arising from financing activities (both cash and non-cash changes).
IAS 7.45Cash ComponentsReconciliation of CashDisclosure of the components of cash and cash equivalents and a reconciliation to the Statement of Financial Position.
IAS 7.48Restricted CashDisclosure of significant cash and cash equivalent balances held by the entity that are not available for use by the group.

References

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