Cash and Cash Equivalents 7 – 9 . International Financial Reporting Standards (EU) Print Email. IAS 7 — Determination of cash equivalents. The table below summarises which category they are allowed to be included in: The approach to presenting interest paid/received and dividends received within operating activities follows the logic that these items are included in profit or loss of the entity. Under IAS 7, cash flows are classified into operating, investing and financing activities in a manner which is most appropriate to its business (IAS 7.10-11). cash payments relating to internally generated property, plant and equipment, intangibles and other long-term assets. Others argue that such liabilities do not constitute borrowings unless a counterparty is normally involved in providing financing. On 1 January 20X1 Entity A buys a 2-year zero-coupon government bond with a face value of $10 million. It is however excluded from any of the three major activities and presented as a reconciling item at the end of the cash flow statement (IAS 7.28). cash payments for/receipts from hedge contracts when the hedged item is classified as investing activity. Objective. In 20X1, Entity A reports an outflow of $9 million under investing activities in the statement of cash flows. Cash equivalents would include most bank term deposits with a short maturity period, and would most likely include government bonds that have around three months or less to maturity at the time of acquisition. cash payments to owners to acquire or redeem the entity’s shares. For official information concerning IFRS Standards, visit IFRS.org. Operating activities are the core revenue-producing activities of the entity. In my opinion, both approaches are acceptable. Consider the following example: Example: Interest on zero-coupon instruments in cash flow statement. The fundamental nature of cash equivalents is described in the opening sentence of paragraph 7 of IAS 7. Statement of cash flows simply summarizes the changes in cash and cash equivalents over a period of time as a result of different business activities resulting in cash flows. And 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”. what is the impact of the restrictions of these cash ? Entity A pays $9 million for this bond. Although not specifically required, it is common practice to disclose other kinds of restrictions relating to cash and cash equivalents (e.g. subject to an insignificant risk of changes in value. IAS 7.6 includes the following definitions: ‘Cash’: –Cash on hand (physical currency held) – Demand deposits. The effect of exchange rate changes on cash and cash equivalents held in a foreign currency is shown in cash flow statement in order to reconcile opening and closing balances of cash and cash equivalents. Cash is defined by IAS 7 as cash on hand and demand deposits. However, they need to be disclosed elsewhere in the financial statements (IAS 7.43-44). Again, the point is that the investments are held for meeting short-term cash commitments, which surely have been estimated and planned for, and so any suitable short-term investment of cash pending the planned outflow would need to have the twin characteristics of being highly liquid, and largely certain value, otherwise the short-term commitment may not be completely funded. Use at your own risk. Some entities present cash balance in the statement of cash flows net of any on-demand bank overdrafts (instead of treating it as financing cash flows), whereas in the statement of financial position a negative balance is presented as a liability (IAS 7.8). The accounting standard IAS 7 requires reporting entities to present information about historical changes in cash and cash equivalents through cash flow statements. When actual transfers take place, Entity A reports inflows from financing activities and, at the same time, outflows in investing activities. COMPARISON WITH IAS 7 . Free lectures for the CIMA F1 Financial Reporting and Taxation Exams CIMA Operational Level Non-cash transactions are included in cash flow statement under operating activities in indirect method as adjustments to profit or loss. The amount of such a contingent consideration can change as a result of events that occurred after the acquisition date (e.g. What is the objective of IAS 7? Cash is the money in the form of currency. Post them on our Forum, Reconciliation to the statement of financial position, Definition and examples of investing activities, Acquisition by assumption of long-term payables, Operating/ investing/ financing activities – practical issues, Changes in ownership interests in subsidiaries and other businesses, Reporting cash flows on a gross vs. net basis, Changes in liabilities arising from financing activities. It is however least preferable approach in my opinion, as entity would never report cash flow from its principal activities even after the customer has paid. To find out more about cookies, what they are and how we use them, please see our privacy notice, which also provides information on how to delete cookies from your hard drive. Pages 1. IAS 7 is to require entities to report their historical changes in cash and cash equivalents by means of a Statement of Cash Flows which classifies the period’s cash flows by operating, investing and financing Presentation of a Statement of Cash Flows 10 – 12 . This information shall be provided in the statement of cash flows which classifies cash flows during the period from operating, investing and financing activities. Benefits of Cash Flow Information 4 – 5 . IAS 7 Statement of Cash Flows. The fundamental nature of cash equivalents is described in the opening sentence of paragraph 7 of IAS 7. Principal definitions . If such a difference between the statement of cash flows and the statement of financial position exists, entities are required to provide a reconciliation between the amounts presented in those two statements (IAS 7.45). The classification at initial recognition remains unchanged when the investment approaches its maturity date. 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