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CONTENTS

 

AS 3: CASH FLOW STATEMENTS. 2

Applicability. 2

Objective. 2

Scope & Benefits of Cash Flow Statements. 2

Presentation of a Cash Flow Statement. 3

Cash Flow from Operating Activities. 3

Reporting Cash Flows from Operating Activities. 4

Cash Flow from Investing Activities. 5

Reporting Cash Flows from Investing and Financing Activities. 5

Cash Flow from Financing Activities. 5

Reporting Cash Flows on a Net Basis. 6

Cash and Cash Equivalents. 6

Foreign Currency Cash Flows. 6

Extraordinary Items. 7

Treatment of Interest and Dividends. 7

Cash flows from interest and dividends received and paid should each be disclosed separately. [Para 30]. 7

Taxes on Income. 8

Investments in Subsidiaries, Associates and Joint Ventures. 8

Acquisitions and Disposals of Subsidiaries and Other Business Units. 8

Non-cash Transactions. 8

Components of Cash and Cash Equivalents. 9

Other Disclosures. 9

Definitions. 9

 


AS 3: CASH FLOW STATEMENTS

Applicability

 

This Accounting Standard applies to Level I Entities

 

This Accounting Standard is not mandatory for Small and Medium Sized Companies, asdefined in the Notification. Such companies are however encouraged to comply with theStandard.

 

This statement comes into effect in respect of accounting periods commencing on or after 1-4-1997. This Standard is mandatory in nature in respect of accounting periodscommencing on or after 1-4-2004 for the enterprises, which fall in the category of level I, atany time during the accounting period.

 

First Time Applicability:

 

Where anenterprise was not covered by thisstatement during the previous year but qualifies in the current accounting year, they are not supposed to disclose the figures for the corresponding previous years.

 

Where AS - 3 ceases to apply:

 

If anenterprise qualifies under this statement to prepare the cash flow statements during the

Previous year but now disqualified, will continue to prepare cash flow statements for anothertwo consecutive years.

Objective

 

Information about the cash flows of an enterprise is useful in providing users of financial statementswith a basis to:

1.    assess the ability of the enterprise to generate cash and cash equivalents and

2.    the needs of the enterprise to utilize those cash flows.

 

The economic decisions that are taken by usersrequire an evaluation of the ability of an enterprise to generate cash and cash equivalents and thetiming and certainty of their generation.

 

The Standard deals with the provision of information about the historical changes in cash and cashequivalents of an enterprise by means of a cash flow statement which classifies cash flows during theperiod from operating, investing and financing activities.

 

Scope& Benefits of Cash Flow Statements

 

An enterprise should prepare a cash flow statement and should present it for each periodfor which financial statements are presented. [Para 1]

 

AS - 3 is required since, Users of an enterprise's financial statements are interested in how the enterprise generates anduses cash and cash equivalents. Cash flow information enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. [Para 2]

 

A cash flow statement, when used in conjunction with the other financial statements, providesinformation that enables users to evaluate the changes in net assets of an enterprise, its financialstructure (including its liquidity and solvency) and its ability to affect the amounts and timing of cashflows in order to adapt to changing circumstances and opportunities. [Para 3]

 

It also enhances the comparability of the reporting of operating performance by differententerprises because it eliminates the effects of using different accounting treatments for the sametransactions and events. [Para 3]

 

Historical cash flow information is often used as an indicator of the amount, timing and certaintyof future cash flows. It is also useful in checking the accuracy of past assessments of future cash flowsand in examining the relationship between profitability and net cash flow and the impact of changingprices. [Para 4]

 

Presentation of a Cash Flow Statement

 

The cash flow statement should report cash flows during the period classified by operating, investing and financing activities. [Para 8]

 

Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities. [Para 9]

 

The following are the basic heads under which each cash flow of the company will be bifurcated into irrespective of whether a Company follows a direct method or indirect method of preparing the cash flow statement.

 

Sr. No.

Particulars

Amount

1.

Cash From Operating Activities

XXX

2.

Cash From Financing Activities

XXX

3.

Cash From Investing Activities

XXX

 

Net Income / Expense in Cash & Cash Equivalents

XXX

4.

Cash & Cash Equivalents in the beginning of the Year

XXX

 

Cash & Cash Equivalents at the end of the Year:

XXX

 

Each of the above head is explained in detail below:

Cash Flow fromOperating Activities

 

The amount of cash flows arising from operating activities is a key indicator of the extent to whichthe operations of the enterprise have generated sufficient cash flows to maintain the operatingcapability of the enterprise, pay dividends, repay loans and make new investments without recourse toexternal sources of financing. Information about the specific components of historical operating cashflows is useful, in conjunction with other information, in forecasting future operating cash flows. [Para 11]

 

Cash flows from operating activities are primarily derived from the principal revenue-producingactivities of the enterprise. Therefore, they generally result from the transactions and other events thatenter into the determination of net profit or loss. Examples of cash flows from operating activities are: [Para 12]

a.    cash receipts from the sale of goods and the rendering of services;

b.    cash receipts from royalties, fees, commissions and other revenue;

c.     cash payments to suppliers for goods and services;

d.    cash payments to and on behalf of employees;

e.    cash receipts and cash payments of an insurance enterprise for premiums and claims,annuities and other policy benefits;

f.     cash payments or refunds of income taxes unless they can be specifically identified withfinancing and investing activities; and

g.    Cash receipts and payments relating to futures contracts, forward contracts, optioncontracts and swap contracts when the contracts are held for dealing or trading purposes.

 

Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which isincluded in the determination of net profit or loss. However, the cash flows relating to such transactionsare cash flows from investing activities. [Para 13]

 

An enterprise may hold securities and loans for dealing or trading purposes, in which case theyare similar to inventory acquired specifically for resale. Therefore, cash flows arising from the purchaseand sale of dealing or trading securities are classified as operating activities. Similarly, cash advancesand loans made by financial enterprises are usually classified as operating activities since they relateto the main revenue-producing activity of that enterprise.

[Para 14]

Reporting Cash Flows from Operating Activities

 

Example of Disclosures under AS - 3:

Kotak Mahindra Bank Limited:

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in hand, balances with Reserve Bank of India and Balances with Other Banks/Institutions and money at call or short notice (including the effects of changes in exchange rates on cash and cash equivalents in the foreign currency).

 

 

An enterprise should report cash flows from operating activities using either:

 

a)    the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

b)    the indirect method, whereby net 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.

[Para 18]

 

 

DIRECT METHOD: [Para 19]

 

The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either:

a)    from the accounting records of the enterprise; or

b)    by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and lossfor:

                      i.        changes during the period in inventories and operating receivables and payables;

                     ii.        other non-cash items; and

                    iii.        other items for which the cash effects are investing or financing cash flows

 

 

Extract of Cash Flow Statement prepared by Direct Method:

 

 

 

Sr. No.

Particulars

Amount (Rs.)

1.     

Cash Received from Debtors/ Customers

XXX

2.     

Cash Paid to Suppliers

(XXX)

3.     

Cash generated from Operations

XXX

4.     

Cash flow before extraordinary items

XXX

5.     

Taxes Paid

(XXX)

6.     

Net Cash Generated from Operating Activities

XXX

 

 

 

INDIRECT METHOD: [Para 20]

 

 

Under the indirect method, the net cash flow from operating activities is determined by adjusting net profit or loss for the effects of:

(a)   changes during the period in inventories and operating receivables and payables;

(b)   non-cash items such as depreciation, provisions, deferred taxes, and unrealized foreign exchange gains and losses; and

(c)   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 operating revenues and expenses excluding non-cash items disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables.

 


 

Extract of Cash Flow Statement prepared by Indirect Method:

 

 

Sr. No.

Particulars

Amount (Rs.)

1.     

Net Profit before taxation & extraordinary items

XXX

2.     

Adjustments for:

 

 

Non-Operating Expenses

XXX

 

Non-Operating Incomes

XXX

 

Operating Profit before working capital changes

XXX

3.     

Less: Increase in Current Assets

(XXX)

4.     

Add: Decrease in Current Assets

XXX

5.     

Less: Decrease in Current Liabilities

(XXX)

6.     

Add: Increase in Current Liabilities

XXX

 

Cash generated from Operations:

XXX

7.     

Income Taxes Paid

XXX

8.     

Cash flow from extra ordinary items

XXX

 

Net Cash generated from Operating Activities:

XXX

 

Cash Flow fromInvesting Activities

 

The separate disclosure of cash flows arising from investing activities is important because thecash flows represent the extent to which expenditures have been made for resources intended togenerate future income and cash flows. Examples of cash flows arising from investing activities are: [Para 15]

(a)   cash payments to acquire fixed assets (including intangibles).These payments include those relating to capitalized research and development costs andself-constructed fixed assets;

(b)   cash receipts from disposal of fixed assets (including intangibles);

(c)   cash payments to acquire shares, warrants or debt instruments of other enterprises andinterests in joint ventures (other than payments for those instruments considered to be cashequivalents and those held for dealing or trading purposes);

(d)   cash receipts from disposal of shares, warrants or debt instruments of other enterprises andinterests in jointventures (other than receipts from those instruments considered to be cashequivalents and those held for dealing or trading purposes);

(e)  cash advances and loans made to third parties (other than advances and loans made by afinancial enterprise);

(f)   cash receipts from the repayment of advances and loans made to third parties (other thanadvances and loans of a financial enterprise);

(g)   cash payments for futures contracts, forward contracts, option contracts and swap contractsexcept when the contracts are held for dealing or trading purposes, or the payments areclassified as financing activities; and

(h)   cash receipts from futures contracts, forward contracts, option contracts and swap contractsexcept when the contracts are held for dealing or trading purposes, or the receipts areclassified as financing activities.

 

When a contract is accounted for as a hedge of an identifiable position, the cash flows of thecontract are classified in the same manner as the cash flows of the position being hedged. [Para 16]

Reporting Cash Flows from Investing and Financing Activities

 

An enterprise should 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 paragraphs 22 and 24 are reported on a net basis. [Para 21]

Cash Flow fromFinancing Activities

 

The separate disclosure of cash flows arising from financing activities is important because it isuseful in predicting claims on future cash flows by providers of funds (both capital and borrowings) tothe enterprise. Examples of cash flows arising from financing activities are: [Para 17]

(a)   cash proceeds from issuing shares or other similar instruments;

(b)   cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-termborrowings; and

(c)   cash repayments of amounts borrowed.

Reporting Cash Flows on a Net Basis

 

Example of Disclosures under AS - 3:

Wendt (India) Limited

The cash flow statement has been prepared under the "Indirect Method" as set out in the Accounting Standard 3 - Cash Flow Statements.

Cash and cash equivalents include balances with scheduled banks on Dividend account Rs 2,120(000 Rs) [Previous Year ? Rs 1,836(000rs)] and deposits under lien Rs 30(000rs) (Previous Year Rs 30(000rs)) which are available for restricted use by the company.

 

Cash flows arising from the following operating, investing or financing activities may be reported on a net basis: [Para 22]

(a)   cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the enterprise; and

(b)   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 referred to in paragraph 22(a) are: [Para 23]

(a)   the acceptance and repayment of demand deposits by a bank;

(b)   funds held for customers by an investment enterprise; and

(c)   rents collected on behalf of, and paid over to, the owners of properties.

 

Examples of cash receipts and payments referred to in paragraph 22(b) are advances made for, and the repayments of:

 

(a)   principal amounts relating to credit card customers;

(b)   the purchase and sale of investments; and

(c)   other short-term borrowings, for example, those which have a maturity period of threemonths or less.

 

Cash flows arising from each of the following activities of a financial enterprise may be reported on a net basis: [Para 24]

(a) cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date;

(b) the placement of deposits with and withdrawal of deposits from other financial enterprises; and

(c) cash advances and loans made to customers and the repayment of those advances and loans.

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. [Para 6]

 

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. Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity). [Para 7]

 

Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents. [Para 7]

Foreign Currency Cash Flows

 

[Exchange Rate at which the transactions should be recorded]

Cash flows arising from transactions in a foreign currency should be recorded in anenterprise?s reporting currency by applying to the foreign currency amount the exchange ratebetween the reporting currency and the foreign currency at the date of the cash flow.

 

A rate thatapproximates the actual rate may be used if the result is substantially the same as would arise ifthe rates at the dates of the cash flows were used.

 

 

[Separate Reconciliation in case of cash and cash equivalents held in a foreign currency]

The effect of changes in exchange rates oncash and cash equivalents held in a foreign currency should be reported as a separate part ofthe reconciliation of the changes in cash and cash equivalents during the period.

[Para 25]

 

[Reference to AS ? 11]

Cash flows denominated in foreign currency are reported in a manner consistent with AccountingStandard (AS) 11, The Effects of Changes in Foreign Exchange Rates. This permits the use of anexchange rate that approximates the actual rate. For example, a weighted average exchange rate for aperiod may be used for recording foreign currency transactions. [Para 26]

 

[Effect of unrealized gains & losses due to changes in foreign exchange rates]

Unrealised gains and losses arising from changes in foreign exchange rates are not cash flows.However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreigncurrency is reported in the cash flow statement in order to reconcile cash and cash equivalents at thebeginning and the end of the period. This amount is presented separately from cash flows fromoperating, investing and financing activities and includes the differences, if any, had those cash flowsbeen reported at the end-of-period exchange rates. [Para 27]

Extraordinary Items

 

The cash flows associated with extraordinary items should be classified as arising fromoperating, investing or financing activities as appropriate and separately disclosed. [Para 28]

 

The cash flows associated with extraordinary items are disclosed separately as arising fromoperating, investing or financing activities in the cash flow statement, to enable users to understandtheir nature and effect on the present and future cash flows of the enterprise. These disclosures are inaddition to the separate disclosures of the nature and amount of extraordinary items required byAccounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items and Changes inAccounting Policies. [Para 29]

 

Treatment of Interest and Dividends

Cash flows from interest and dividends received and paid should each be disclosed separately. [Para 30]

 

The total amount of interest paid during the period is disclosed in the cash flow statement whether it has been recognised as an expense in the statement of profit and loss or capitalized in accordance with Accounting Standard (AS) 10, Accounting for Fixed Assets. [Para 31]

 

 

In case of a Financial Enterprise

In case of other Enterprises

Cash flows arising from interest paid and interest and dividends received in the case of a financial enterprise should be classified as cash flows arising from operating activities. [Para 30]

In the case of other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flows from financing activities. [Para 30]

Interest paid and interest and dividends received are usually classified as operating cash flows for a financial enterprise [Para 32]

However, there is no consensus on the classification of these cash flows for other enterprises.

Some argue that interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of net profit or loss.

However, it is more appropriate that interest paid and interest and dividends received are classified as financing cash flows and investing cash flows respectively, because they are cost of obtaining financial resources or returns on investments. [Para 32]

 

Some argue that 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 enterprise to pay dividends out of operating cash flows.

 

However, it is considered more appropriate that dividends paid should be classified as cash flows from financing activities because they are cost of obtaining financial resources. [Para 33]


 

Taxes on Income

 

Cash flows arising from taxes on income should be separately disclosed and should beclassified as cash flows from operating activities unless they can be specifically identified withfinancing and investing activities. [Para 34]

 

Taxes on income arise on transactions that give rise to cash flows that are classified asoperating, investing or financing activities in a cash flow statement. While tax expense may be readilyidentifiable with investing or financing activities, the related tax cash flows are often impracticable toidentify and may arise in a different period from the cash flows of the underlying transactions.

 

Therefore, taxes paid are usually classified as cash flows from operating activities. However, when it ispracticable to identify the tax cash flow with an individual transaction that gives rise to cash flows thatare classified as investing or financing activities, the tax cash flow is classified as an investing orfinancing activity as appropriate. When tax cash flow is allocated over more than one class of activity,the total amount of taxes paid is disclosed.

[Para 35]

Investments in Subsidiaries, Associates and Joint Ventures

 

When accounting for an investment in an associate or a subsidiary or a joint venture, aninvestor restricts its reporting in the cash flow statement to the cash flows between itself andthe investee/joint venture, for example, cash flows relating to dividends and advances. [Para 36]

 

Acquisitions and Disposals of Subsidiaries and Other Business Units

 

The aggregate cash flows arising from acquisitions and from disposals of subsidiaries orother business units should be presented separately and classified as investing activities. [Para 37]

 

An enterprise should disclose, in aggregate, in respect of both acquisition and disposal ofsubsidiaries or other business units during the period each of the following:

(a) The total purchase or disposal consideration; and

(b) The portion of the purchase or disposal consideration discharged by means of cashand cash equivalents.

[Para 38]

 

The separate presentation of the cash flow effects of acquisitions and disposals of subsidiariesand other business units as single line items helps to distinguish those cash flows from other cashflows. The cash flow effects of disposals are not deducted from those of acquisitions. [Para 39]

Non-cash Transactions

 

Investing and financing transactions that do not require the use of cash or cashequivalents should be excluded from a cash flow statement. Such transactions should bedisclosed elsewhere in the financial statements in a way that provides all the relevantinformation about these investing and financing activities. [Para 40]

 

Many investing and financing activities do not have a direct impact on current cash flows althoughthey do affect the capital and asset structure of an enterprise. The exclusion of non-cash transactionsfrom the cash flow statement is consistent with the objective of a cash flow statement as these items donot involve cash flows in the current period.

 

Examples of non-cash transactions are:

a)    the acquisition of assets by assuming directly related liabilities;

b)    the acquisition of an enterprise by means of issue of shares; and

c)     the conversion of debt to equity.

[Para 41]


 

Components of Cash and Cash Equivalents

 

An enterprise should disclose the components of cash and cash equivalents and shouldpresent areconciliation of the amounts in its cash flow statement with the equivalent itemsreported in the balance sheet. [Para 42]

 

In view of the variety of cash management practices, an enterprise discloses the policy which itadopts in determining the composition of cash and cash equivalents. [Para 43]

 

The effect of any change in the policy for determining components of cash and cash equivalentsis reported in accordance with Accounting Standard (AS) 5, Net Profit or Loss for the Period, PriorPeriod Items and Changes in Accounting Policies. [Para 44]

Other Disclosures

 

An enterprise should disclose, together with a commentary by management, the amount ofsignificant cash and cash equivalent balances held by the enterprise that are not available foruse by it. [Para 45]

 

There are various circumstances in which cash and cash equivalent balances held by anenterprise are not available for use by it. Examples include cash and cash equivalent balances held bya branch of the enterprise that operates in a country where exchange controls or other legal restrictionsapply as a result of which the balances are not available for use by the enterprise. [Para 46]

 

Additional information may be relevant to users in understanding the financial position andliquidity of an enterprise. Disclosure of this information, together with a commentary by management, isencouraged and may include:

a)    the amount of undrawn borrowing facilities that may be available for future operatingactivities and to settle capital commitments, indicating any restrictions on the use of thesefacilities; and

b)    the aggregate amount of cash flows that represent increases in operating capacityseparately from those cash flows that are required to maintain operating capacity.

[Para 47]

 

The separate disclosure of cash flows that represent increases in operating capacity and cashflows that are required to maintain operating capacity is useful in enabling the user to determinewhether the enterprise is investing adequately in the maintenance of its operating capacity. Anenterprise that does not invest adequately in the maintenance of its operating capacity may beprejudicing future profitability for the sake of current liquidity and distributions to owners. [Para 48]

Definitions

 

[Para 5]

The following terms are used in this Standard with the meanings specified:

 

      i.        Cash - Cash comprises cash on hand and demand deposits with banks

     ii.        Cash Equivalents - Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

 

    iii.        Cash Flows - Cash flows are inflows and outflows of cash and cash equivalents.

 

    iv.        Operating Activities - Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.

 

     v.        Investing Activities - Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

 

    vi.        Financing Activities - Financing activities are activities that result in changes in the size and composition of the owners? capital (including preference share capital in the case of a company) and borrowings of the enterprise.