International Accounting Standard 7
International Accounting Standard 7 (IAS 7), titled Statement of Cash Flows, is an International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB) that prescribes the principles for the preparation and presentation of a cash flow statement. The standard requires entities to provide information about historical changes in cash and cash equivalents by classifying cash flows into operating, investing, and financing activities. IAS 7 is one of the core accounting standards within the International Financial Reporting Standards (IFRS) framework and applies to all entities preparing general-purpose financial statements under IFRS.
History
The predecessor to IAS 7 was issued by the International Accounting Standards Committee (IASC) in December 1977 under the title Statement of Changes in Financial Position. At that time, entities were permitted to present information based on changes in working capital rather than cash flows.
In December 1992, the standard was substantially revised and renamed Cash Flow Statements, replacing the statement of changes in financial position with the cash flow statement as a required component of financial reporting.
Following the establishment of the International Accounting Standards Board (IASB) in 2001, responsibility for IAS 7 was transferred to the IASB, which has subsequently amended the standard on several occasions while retaining its original numbering.
Objective
The objective of IAS 7 is to require entities to provide information about historical changes in cash and cash equivalents through a statement of cash flows that classifies cash flows according to:
- operating activities;
- investing activities;
- financing activities.
The information enables users of financial statements to evaluate an entity's ability to generate cash and cash equivalents, meet financial obligations, and finance future operations.
Scope
IAS 7 applies to all entities preparing financial statements in accordance with International Financial Reporting Standards.
The standard requires every complete set of financial statements to include a cash flow statement, regardless of the nature or size of the reporting entity.
Cash and cash equivalents
IAS 7 defines cash as:
- cash on hand; and
- demand deposits.
Cash equivalents are defined as short-term, highly liquid investments that:
- are readily convertible to known amounts of cash;
- are subject to an insignificant risk of changes in value; and
- generally have original maturities of three months or less from the date of acquisition.
Classification of cash flows
IAS 7 requires cash flows to be classified into three categories.
Operating activities
Operating activities are the principal revenue-producing activities of the entity.
Examples include:
- cash receipts from customers;
- cash payments to suppliers;
- employee compensation;
- income taxes paid, unless specifically attributable to investing or financing activities.
Operating cash flows indicate the extent to which business operations generate sufficient cash to sustain ongoing activities.
Investing activities
Investing activities relate to the acquisition and disposal of long-term assets and investments.
Examples include:
- purchase of property, plant and equipment;
- proceeds from disposal of non-current assets;
- acquisition of subsidiaries;
- purchase and sale of investments;
- loans advanced to other entities.
Financing activities
Financing activities result in changes to the size and composition of an entity's equity and borrowings.
Examples include:
- proceeds from issuing shares;
- borrowings from financial institutions;
- repayment of loans;
- redemption of debt securities;
- payment of dividends, where classified as financing under applicable accounting policy.
Methods of reporting operating cash flows
IAS 7 permits two methods for reporting cash flows from operating activities.
Direct method
The direct method reports major classes of gross cash receipts and gross cash payments, such as:
- cash received from customers;
- cash paid to suppliers;
- cash paid to employees.
The IASB encourages the use of the direct method because it provides more useful information about cash receipts and payments.
Indirect method
The indirect method begins with profit or loss and adjusts for:
- non-cash transactions;
- depreciation and amortization;
- gains and losses on investing activities;
- changes in working capital;
- other non-cash items.
The indirect method is widely used in practice because it reconciles accounting profit with operating cash flow.
Disclosure requirements
IAS 7 requires entities to disclose information including:
- reconciliation of cash and cash equivalents;
- significant non-cash investing and financing transactions;
- restrictions on the use of cash balances, where applicable;
- accounting policies relating to cash and cash equivalents.
Additional disclosures may be required under other IFRS standards.
Relationship with other financial statements
IAS 7 forms part of the broader IFRS financial reporting framework.
| Financial statement | Relevant standard |
|---|---|
| Balance sheet (Statement of Financial Position) | International Accounting Standard 1 |
| Income statement (Statement of Profit or Loss and Other Comprehensive Income) | International Accounting Standard 1 |
| Cash flow statement | International Accounting Standard 7 |
| Statement of Changes in Equity | International Accounting Standard 1 |
Together, these statements provide a comprehensive view of an entity's financial position, performance, and cash flows.
Importance
IAS 7 improves the usefulness of financial reporting by:
- enhancing transparency regarding cash generation;
- facilitating liquidity analysis;
- improving assessment of solvency;
- supporting comparisons between entities;
- assisting investment and lending decisions.
Because cash flows are less affected by accounting estimates than reported profits, the cash flow statement is widely regarded as an important indicator of financial health.
Impact
International Accounting Standard 7 has established a globally consistent framework for reporting cash flows under IFRS. By requiring entities to classify cash movements into operating, investing, and financing activities, the standard enhances the transparency and comparability of financial reporting. IAS 7 plays a significant role in investment analysis, credit evaluation, financial management, and corporate finance by enabling users of financial statements to assess an entity's liquidity, financial flexibility, and ability to generate cash.
See also
- International Accounting Standards
- International Financial Reporting Standards
- International Accounting Standards Board
- Cash flow statement
- Financial statement
- Balance sheet
- Income statement
- Financial accounting
- Accounting
- Working capital
- Financial management
- Corporate finance
- Liquidity
- Cash management
- Generally Accepted Accounting Principles