AS 3 - Cash Flow Statements

Purpose: This statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period into operating, investing and financing activities.

Scope: An enterprise should prepare a cash flow statement and present the same along with the financial statements for each period.

Definitions

• Cash comprises cash on hand and demand deposits with banks.
• 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.
• Cash Flows are inflows and outflows of cash and cash equivalents.
• Operating Activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities.
• Investing Activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
• Financing Activities are activities that result in changes in the size and composition of the owner's capital (including preference share capital in the case of a company) and borrowings of the enterprise.

Presentation of Cash Flow Statement: The cash flow statement should report cash flows during the period. The cash flows have to be classified activity-wise into operating, investing and financing activities.

Reporting Cash Flows from Operating Activities

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

1. The direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or
2. the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a noncash 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.

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 below are reported on a net basis.

Reporting of Cash Flows on Net Basis

AS-3 allows reporting of cash flows under 3 major activities on net basis under the following conditions -

1. The cash flows are on behalf of customers (i.e.) it reflects the activities of the customer rather than those of the enterprise; e.g. acceptance and repayment of demand deposits by a bank.
2. Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short e.g. Principal amounts relating to credit card operation.

Apart from the above, the cash flows arising from each of the following activities of a financial enterprise may be reported on net basis:

1. Cash receipts and payment for acceptance and repayment of deposits with a fixed maturity date.
2. The placement of deposits with and withdrawal of deposits from other financial enterprise.
3. Cash and advances and loans made to customers and repayment of such loans and advances.

Foreign Currency Cash Flows

Cash flows arising from transactions in a foreign currency should be recorded in an enterprise's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the cash flow. A rate that approximates the actual rate may be used if the result is substantially the same as would arise if the rates at the dates of the cash flows were used.

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

Extraordinary Items: The cash flows associated with extraordinary items should be classified as arising from operating, investing or financing activities as appropriate and separately disclosed.

Interests and Dividends: Cash flows from interest and dividends received and paid should each be disclosed separately.

Taxes on Income: Cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.

Accounting for Investments in Subsidiaries, Associates & Joint Ventures: The investor should restrict its reporting in the cash flow statement to the cash flows between itself and the investee/joint venture, for eg. Dividends and advances.

Acquisitions and Disposals of Subsidiaries & Other Business Units: The aggregate cash flows arising from the above should be classified as investing activities.

Non-Cash Transactions: Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement.

Disclosures

1. An enterprise should disclose the components of cash and cash equivalents and should present a reconciliation of the amounts in its cash flow statement with the equivalent items reported in the balance sheet.
2. An enterprise should disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the enterprise that are not available for use by it.