Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 7 - Statement of Cash Flows

Indian equivalent: Ind AS 7 - Statement of Cash Flows

Objective and scope

IAS 7 requires a statement tracking the actual cash that flowed in and out during the period, classified into three activities, because profit and cash are not the same thing and a business is ultimately killed by running out of cash, not by low accrual profit.

Core principle

A company can be profitable on paper yet collapse from lack of cash. IAS 7 splits every cash movement into Operating, Investing and Financing buckets, so readers see exactly where cash came from and where it went - and whether the core business actually generates cash.

Defined terms and technical terminology

Term

Technical meaning

Cash and cash equivalents

Physical cash, bank balances, and short-term, highly liquid investments (typically maturing within 3 months) readily convertible to known amounts of cash with insignificant risk of value change.

Operating activities

Cash from the principal revenue-producing activities - collecting from customers, paying suppliers, staff, and taxes.

Investing activities

Cash from acquiring/disposing of long-term assets and investments - buying machinery, buildings, or other businesses.

Financing activities

Cash from owners and lenders - issuing shares, raising or repaying loans, paying dividends.

Direct method

Present actual gross cash receipts and payments (encouraged but rarely used).

Indirect method

Start from profit before tax and adjust for non-cash items and working-capital changes to derive operating cash (the common method).

Application and worked illustrations

Why cash flow matters even when profit looks good

TechStart Ltd reports a healthy ₹10 lakh profit. But all sales were on credit and customers have not paid, while it bought ₹8 lakh of equipment for cash. The profit statement smiles; the bank is nearly empty. IAS 7 exposes this: the Operating section shows little cash actually collected, and Investing shows the ₹8 lakh outflow. A lender reading this instantly sees the liquidity risk that profit alone hides.

The three buckets with a full example

Operating: received ₹5,00,000 from customers; paid ₹3,00,000 to suppliers and staff → net +₹2,00,000. Investing: bought a delivery van for ₹8,00,000 → −₹8,00,000. Financing: raised a ₹6,00,000 loan; paid ₹50,000 dividends → net +₹5,50,000. Total change = 2,00,000 − 8,00,000 + 5,50,000 = −₹50,000. So despite the reported profit, cash fell by ₹50,000 - a fact only the cash-flow statement reveals.

The indirect method, step by step

Start with profit before tax. Add back non-cash expenses - the biggest is depreciation (an accounting charge, no cash leaves) and amortisation, plus losses on asset sales. Remove non-operating items like interest and gains on disposal (shown under investing/financing). Then adjust for working-capital movements: an increase in receivables means less cash collected → subtract it; an increase in payables means you delayed paying → add it; an increase in inventory ties up cash → subtract it. The result is net cash from operating activities.

Example: profit before tax ₹4,00,000; depreciation ₹1,00,000 (add); receivables rose ₹50,000 (subtract); payables rose ₹30,000 (add); inventory rose ₹20,000 (subtract). Operating cash = 4,00,000 + 1,00,000 − 50,000 + 30,000 − 20,000 = ₹4,60,000.

Common mistake: classifying interest and dividends inconsistently year to year. IAS 7 allows choice (e.g., interest paid under operating or financing) but the classification must be consistent.

Common mistake: treating a bank overdraft as financing. If it is repayable on demand and part of cash management, it is included within cash and cash equivalents.

IND AS LINK

Ind AS 7 is substantially the same. Under the Companies Act, a cash-flow statement is mandatory for most companies; certain small companies, OPCs and dormant companies are exempted. Ind AS 7 also carries enhanced disclosure of changes in liabilities arising from financing activities.

Further worked illustrations

Extra numeric example - converting a credit sale year to cash

QuickServe reports revenue of ₹80,00,000 but its receivables rose from ₹10,00,000 to ₹22,00,000 during the year. Cash actually collected = opening receivables + sales − closing receivables = 10,00,000 + 80,00,000 − 22,00,000 = ₹68,00,000. So although the income statement shows ₹80 lakh of sales, only ₹68 lakh hit the bank - the ₹12 lakh rise in receivables is cash not yet collected, which the operating section of IAS 7 lays bare.

INDIAN REGULATORY CONTEXT

Indian companies commonly present interest and dividends received under investing activities and interest and dividends paid under financing, which is one of the permitted IAS 7 choices and aligns with the Schedule III cash-flow format most Indian auditors expect. The key is consistency year on year.

TECHNICAL EDGE CASE

A company buys machinery worth ₹30,00,000 by issuing shares to the seller instead of paying cash. This is a genuine investing and financing event, but no cash moved, so it appears nowhere in the cash-flow statement itself. IAS 7 requires it to be disclosed separately (usually in the notes) so readers aren't misled into thinking no significant investing/financing activity occurred.

Extended technical analysis

Classification architecture and the indirect method reconciliation

IAS 7 requires cash flows to be classified into operating, investing and financing activities. The classification is not cosmetic: analysts derive free cash flow, cash conversion and quality of earnings metrics from it, and misclassification (for example, presenting an operating outflow as investing) directly distorts those metrics.

Complete indirect-method format

Statement of Cash Flows - Indirect Method (₹ in lakhs)

Particulars

FY 2025-26

FY 2024-25

A. CASH FLOWS FROM OPERATING ACTIVITIES

Profit before tax

4,340

3,270

Adjustments to reconcile PBT to operating cash flows:

Depreciation and amortisation expense

2,260

2,110

Finance costs

1,180

1,240

Interest income

(310)

(275)

Dividend income

(85)

(60)

(Profit)/loss on sale of property, plant and equipment

(140)

35

Impairment loss on financial assets (ECL)

210

185

Share-based payment expense

320

290

Unrealised foreign exchange (gain)/loss

(75)

110

Operating profit before working capital changes

7,700

6,905

Movements in working capital:

(Increase)/decrease in trade receivables

(520)

(410)

(Increase)/decrease in inventories

(280)

195

Increase/(decrease) in trade payables

1,220

(150)

Increase/(decrease) in provisions and other liabilities

95

70

Cash generated from operations

8,215

6,610

Income taxes paid (net of refunds)

(1,240)

(935)

Net cash from operating activities (A)

6,975

5,675

B. CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant and equipment and intangibles

(3,480)

(2,940)

Proceeds from sale of property, plant and equipment

420

185

Purchase of investments

(1,150)

(880)

Proceeds from sale/maturity of investments

760

640

Acquisition of subsidiary, net of cash acquired

(1,200)

-

Interest received

295

262

Dividend received

85

60

Net cash used in investing activities (B)

(4,270)

(2,673)

C. CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issue of equity share capital

-

500

Proceeds from non-current borrowings

1,500

900

Repayment of non-current borrowings

(2,200)

(1,650)

Principal payment of lease liabilities

(365)

(340)

Interest paid

(1,145)

(1,205)

Dividends paid (including tax thereon)

(680)

(520)

Net cash used in financing activities (C)

(2,890)

(2,315)

Net increase/(decrease) in cash (A+B+C)

(185)

687

Cash and cash equivalents at beginning of year

1,870

1,183

Effect of exchange differences on cash held

625

-

Cash and cash equivalents at end of year

2,310

1,870

Classification of contentious items

Classification Matrix - Interest, Dividends and Taxes

Item

IFRS (IAS 7) permitted classification

Common Indian practice (Ind AS 7)

Interest paid

Operating or Financing

Financing

Interest received

Operating or Investing

Investing

Dividends received

Operating or Investing

Investing

Dividends paid

Operating or Financing

Financing

Income taxes paid

Operating, unless specifically identifiable with investing/financing

Operating

Bank overdraft repayable on demand

Included within cash and cash equivalents where integral to cash management

Same

Principal element of lease payment

Financing

Financing

Interest element of lease payment

Operating or Financing (policy choice)

Financing

Non-cash transactions and the financing liability reconciliation

Investing and financing transactions not requiring cash - acquisition of assets by assuming liabilities or by a lease, conversion of debt to equity, acquisition of an entity by share issue - are excluded from the statement of cash flows and disclosed separately. In addition, IAS 7.44A requires a reconciliation of movements in liabilities arising from financing activities, distinguishing cash flows from non-cash changes (acquisitions, foreign exchange, fair value changes).

Reconciliation of Liabilities from Financing Activities (IAS 7.44A)

Particulars

Opening

Cash flows

Non-cash: new leases

Non-cash: FX / other

Closing

Non-current borrowings

8,900

(700)

-

-

8,200

Current borrowings

1,320

130

-

-

1,450

Lease liabilities

3,150

(365)

180

(85)

2,880

Total

13,370

(935)

180

(85)

12,530

IFRS vs Ind AS - Comparative Analysis

Aspect

IFRS / IAS position

Ind AS position (carve-out / carve-in)

Method

IAS 7 permits direct or indirect; direct encouraged.

Ind AS 7 permits both, but the indirect method is near-universal in Indian practice.

Interest and dividends

Free policy choice among permitted classifications.

Ind AS 7 restricts the choice for non-financial entities: interest/dividends paid → financing; interest/dividends received → investing. This is an Indian carve-out.

Applicability

Required for all entities presenting IFRS statements.

Mandatory under the Companies Act; One Person Companies, small companies and dormant companies are exempt.

Bank overdrafts

Included in cash equivalents if integral to cash management.

Same treatment.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.