AS 3 - Cash Flow Statements
Companies Act 2013 has clearly mentioned what is a financial statement in respect of a company registered under the act.
The act says that the following are considered as financial statements
i. Balance sheet
ii. Profit and loss account / Income and expenditure account
iii. Cash flow statement
iv. Statement of changes in equity
v. Explanatory notes to above statements.
It is clear that cash flow statements are need to be prepared by all types of companies, but there are some which are exempted, like One Person Company, Dormant Company and Small Company.
Thus, cash flow statements are to be prepared by all companies but the act also specifies a certain category of companies which are exempted from preparing the same. Such companies are One Person Company (OPC), Small Company and Dormant Company.
Cash and Cash Equivalents
Accounting standards 3 states that with respect to cash flow statement, it should exclude the movements between items which forms part of cash or equivalents as these are part of an enterprise’s cash management rather than its operating, financing and investing activities.
Cash management consists of investment of excess cash in the cash equivalents.
Cash equivalents means the money held by an enterprise for meeting its shorts term commitments. Investments which can be easily converted in to cash and subject to very low level of risk can be cash equivalents.
Cash management consists of the investment of excess cash in the cash equivalents.
Cash flow can be presented in such a way that cash flows from following activities should be clearly classified and interpreted.
Cash flow from operating activities
Cash flow from investment activities
Cash flow from financing activities.
Such a classification will help the users of the statement to assess the impact of each activities on the overall financial position of the organisation and also the value of the cash and cash equivalents.
For better understanding, each heads of cash flow is explained here under.Cash flow from Operating Activities
Cash flows from operating activities mainly result from the main revenue-generating activities of an organisation like, from sale of goods or/and services, cash received in the form of fees, royalties, commissions and different other forms of revenues and cash paid to the suppliers of goods or services
Cash flow from investment activities.
These includes the outflows of cash from the organisation for the purpose of creating resources for generating cash flows and future income.
Some of the examples are money invested on fixed assets, cash received from the sale of assets including intangible assets, cash invested in joint ventures, invested in shares, debentures etc of other companies.
cash inflows form Financing Activities
Financing activities in this context means the activities which brings changes in composition and size of share capital and borrowing of an organisation.
These includes cash received on issue of securities, borrowings of short term and long term, repayment made on borrowings.
Now comes to the computation of each activities.
Cash flow from operating activities.
There are two methods – Direct and Indirect method.
Direct method is the method where all the major classes of cash receipts and cash payments are presented.
Indirect method is the method where adjustments made to net profit or net loss for
Non cash transaction impacts like depreciation, deferred taxes, provisions, etc.
Accruals or deferrals of future or past operating cash proceeds or payments
Any expense or income related to financing or investing cash flows
Cash Flow from Investing and Financing Activities
It is a statutory requirement that a company should separately record all the major classes of cash receipts and payments from financing and investing activities excluding the ones which need to be reports on net basis.
What are called Cash flow on Net Basis?
Cash flows which arise from below-mentioned operating, financing or investing activities might be reported on a net basis:
(i) Proceeds and payments in cash on behalf of a client where cash flows reflect the activities of such client rather than that of the company itself
(ii) Proceeds and payments in cash for items where the amounts are huge, turnover is quick, and maturities are short
(iii) Proceeds and payments in cash for acceptances and repayments of deposits having fixed maturities
(iv) Placement and withdrawal of deposits from other financial enterprises
(v) Loans and cash advances are given to clients/customers and repayment of such loans and advances
What should be done in the case of Foreign Currency Cash Flows?
Cash flows that arise from the transactions in the foreign currencies must be recorded in the company’s reporting currency by using the below method:
Foreign currency amount * Foreign Exchange rates between the reporting and foreign currency at the date of cash flow.
A rate which approximates actual rate might be used in case the outcome is largely the same as it would have been if the rate at the date of cash flows was used.
The impact of changes in the exchange rate on cash and cash equivalents which is held in the foreign currencies must be reported as a distinct and separate part of the reconciliation of changes in the cash and cash equivalent during the relevant period.
Cash inflows from Extraordinary Items, Dividends & Interests
It must be categorized as arising from operating, financing or investing activities as possible and disclosed differently.
Cash flows from dividends and interest received and paid must be separately disclosed.
Cash flows which arise from dividends and interest received and paid in the case of financial enterprises must be categorized as cash flows from operating activities.
For other enterprises, cash flows which arise from interest paid must be categorized as cash flows from the financing activities whereas dividends and interest received must be categorized as cash flows from the investing activities.
Any dividends paid must be categorized as cash flows from the financing activities.
Cash flows of Taxes on Income
Cash flows which arise from taxes on income must be disclosed separately and must be reported as cash flows from the operating activities except if they could be explicitly related to investing and financing activities.
Cash flows from Acquisitions and Disposal of Business Units including Subsidiaries
The aggregate cash flows which arise from acquisition and from the disposal of business units including subsidiaries must be shown as investing activities and reported separately.
Enterprises must present, in total, with respect to both the acquisitions and disposals of other business units including subsidiaries within the period the followings:
(a) Aggregate purchase or disposal value
(b) The amount of purchase or disposal value which is discharged by way of cash and cash equivalents
In the case of Non-Cash Transactions
Financing and investing transactions which don’t require cash or cash equivalents mustn’t be included in the cash flow statement. Those transactions must be presented elsewhere in financial statements in a way which gives relevant information about such financing and investing activities.
Enterprises must disclose, along with management commentary, the amount of substantial cash and cash equivalents held by an enterprise which isn’t available for use.
Commitments that may arise from discounted bills of exchange and other similar obligations that are undertaken by an enterprise are typically disclosed in financial statements by means of notes, even in case the probability of loss is remote.