HKAS 7 - Statement of Cash Flows (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Objective & Scope | Purpose and applicability | Requires all entities to present a statement of cash flows as an integral part of financial statements, providing historical changes in cash and cash equivalents classified by operating, investing, and financing activities. |
| Definitions | Cash, cash equivalents, cash flows | Cash includes cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments with โค3 months maturity from acquisition date, subject to insignificant risk of value changes. |
| Classification of Cash Flows | Operating, investing, financing activities | Operating activities are principal revenue-producing activities. Investing activities involve acquisition/disposal of long-term assets. Financing activities result in changes in equity and borrowings. |
| Reporting Methods | Direct vs. indirect method | Direct method discloses major classes of gross cash receipts/payments (encouraged). Indirect method adjusts profit or loss for non-cash items, deferrals/accruals, and investing/financing items. |
| Special Topics | Foreign currency, interest, taxes, subsidiaries | Foreign currency cash flows recorded at date of cash flow. Interest/dividends disclosed separately. Taxes usually operating. Subsidiary control changes classified as investing. |
| Disclosures | Components, non-cash transactions, financing liabilities | Must disclose components of cash/cash equivalents, exclude non-cash transactions, and provide reconciliation of changes in liabilities from financing activities. |
Objective and Scope
Objective of HKAS 7
The objective is to require provision of information about historical changes in cash and cash equivalents through a statement of cash flows classified by operating, investing, and financing activities.
- Assess ability to generate cash and cash equivalents
- Evaluate needs to utilise those cash flows
- Understand timing and certainty of cash generation
- Evaluate changes in net assets and financial structure
- Enhance comparability by eliminating effects of different accounting treatments
Scope (Paragraphs 1-3)
All entities must prepare a statement of cash flows as an integral part of financial statements for each period presented. This applies regardless of the nature of principal revenue-producing activities.
| Reason for Universal Requirement |
|---|
| All entities need cash to conduct operations, pay obligations, and provide returns to investors. |
Definitions
Key Terms (Paragraph 6)
| Term | Definition |
|---|---|
| Cash | Cash on hand and demand deposits |
| Cash equivalents | Short-term, highly liquid investments readily convertible to known amounts of cash with insignificant risk of value changes |
| Cash flows | Inflows and outflows of cash and cash equivalents |
| Operating activities | Principal revenue-producing activities and other activities not investing or financing |
| Investing activities | Acquisition and disposal of long-term assets and other investments not included in cash equivalents |
| Financing activities | Activities that result in changes in size and composition of contributed equity and borrowings |
Cash and Cash Equivalents (Paragraphs 7-9)
- Held for meeting short-term cash commitments, not investment
- Readily convertible to known amount of cash
- Subject to insignificant risk of changes in value
- Normally maturity of three months or less from date of acquisition
Important: Equity investments are excluded unless they are, in substance, cash equivalents (e.g., preferred shares acquired near maturity with specified redemption date). Bank overdrafts repayable on demand that form part of cash management are included as cash equivalents.
Classification of Cash Flows
Three Categories (Paragraph 10)
The statement of cash flows shall report cash flows classified by: (1) Operating activities, (2) Investing activities, and (3) Financing activities.
Operating Activities (Paragraphs 13-15)
Key indicator of whether operations generated sufficient cash to repay loans, maintain operating capability, pay dividends, and make new investments without external financing.
| Examples of Operating Cash Flows |
|---|
| Cash receipts from sale of goods and services |
| Cash receipts from royalties, fees, commissions |
| Cash payments to suppliers and employees |
| Cash payments/refunds of income taxes (unless identifiable with financing/investing) |
| Cash receipts/payments from contracts held for dealing/trading |
Investing Activities (Paragraph 16)
Examples include cash payments to acquire PPE, intangibles, equity/debt instruments of other entities, and cash receipts from sales of such assets.
Financing Activities (Paragraph 17)
Examples include proceeds from issuing shares, payments to acquire/redeem entity's shares, proceeds from issuing borrowings, repayments of amounts borrowed, and lease liability payments.
Reporting Cash Flows
Operating Activities: Direct vs. Indirect Method (Paragraphs 18-20)
| Method | Description | Encouraged? |
|---|---|---|
| Direct Method | Discloses major classes of gross cash receipts and gross cash payments | Yes - provides useful information for estimating future cash flows |
| Indirect Method | Adjusts profit or loss for: (a) changes in inventories and operating receivables/payables, (b) non-cash items (depreciation, provisions, deferred taxes, unrealised FX gains/losses), (c) items with investing/financing cash effects | No |
Investing and Financing Activities (Paragraph 21)
Report separately major classes of gross cash receipts and payments, except as allowed for net basis reporting.
Net Basis Reporting (Paragraphs 22-24)
May report on net basis for:
- Cash receipts/payments on behalf of customers (e.g., demand deposits, funds held for customers, rents collected for owners)
- Items with quick turnover, large amounts, short maturities (e.g., credit card principal, investment purchases/sales, short-term borrowings โค3 months)
- Financial institution activities: deposits, placements with other institutions, customer loans
Special Topics
Foreign Currency Cash Flows (Paragraphs 25-30)
- Record at exchange rate at date of cash flow
- Foreign subsidiary cash flows translated at rates at dates of cash flows
- Weighted average rate permitted
- Unrealised FX gains/losses are not cash flows but reported separately to reconcile beginning and ending cash
Interest and Dividends (Paragraphs 31-34)
| Item | Classification Options |
|---|---|
| Interest paid | Operating or financing |
| Interest received | Operating or investing |
| Dividends received | Operating or investing |
| Dividends paid | Operating or financing |
Total interest paid must be disclosed regardless of whether expensed or capitalised.
Taxes on Income (Paragraphs 35-36)
Usually classified as operating activities unless specifically identifiable with financing or investing activities. When allocated over multiple classes, disclose total taxes paid.
Investments and Non-Cash Transactions
Subsidiaries, Associates, and Joint Ventures (Paragraphs 37-42B)
| Transaction | Classification |
|---|---|
| Obtaining/losing control of subsidiaries | Investing activities (presented separately) |
| Changes in ownership without loss of control | Financing activities |
| Equity method investments | Only cash flows between entity and investee (dividends, advances) |
Disclosures for Subsidiary Acquisitions/Disposals (Paragraph 40)
- Total consideration paid/received
- Portion consisting of cash and cash equivalents
- Cash and cash equivalents in subsidiary
- Assets and liabilities other than cash, by major category
Non-Cash Transactions (Paragraphs 43-44)
Examples: acquisition of assets by assuming liabilities or lease, acquisition by equity issue, conversion of debt to equity.
Disclosure Requirements
Changes in Liabilities from Financing Activities (Paragraphs 44A-44E)
Must disclose changes enabling evaluation of both cash flow and non-cash changes:
| Change Type | Examples |
|---|---|
| From financing cash flows | Proceeds, repayments |
| From obtaining/losing control of subsidiaries | Acquisition/disposal |
| Effect of foreign exchange rates | FX translation |
| Changes in fair values | Fair value adjustments |
| Other changes | Non-cash movements |
One way to fulfil: provide reconciliation between opening and closing balances in statement of financial position.
Components of Cash and Cash Equivalents (Paragraphs 45-47)
- Disclose components
- Present reconciliation with statement of financial position
- Disclose policy for determining composition
- Report policy changes per HKAS 8
Other Disclosures (Paragraphs 48-52)
Required: Significant cash and cash equivalent balances not available for use by the group (e.g., due to exchange controls).
Encouraged: Undrawn borrowing facilities, cash flows for increases vs. maintenance of operating capacity, segmental cash flows.
Effective Date and Summary
Effective Date (Paragraphs 53-61)
Operative for periods beginning on or after 1 January 2005. Various amendments applied from 2009-2017.
Key Takeaways Summary
| Topic | Key Point |
|---|---|
| Objective | Provide historical changes in cash and cash equivalents classified by operating, investing, financing activities |
| Cash | Cash on hand and demand deposits |
| Cash equivalents | Short-term, highly liquid investments with โค3 months maturity, insignificant risk of value changes |
| Operating activities | Principal revenue-producing activities; key indicator of cash generation capability |
| Investing activities | Acquisition/disposal of long-term assets; only expenditures resulting in recognised assets qualify |
| Financing activities | Changes in contributed equity and borrowings |
| Direct method | Discloses major classes of gross cash receipts/payments (encouraged) |
| Indirect method | Adjusts profit or loss for non-cash items, deferrals/accruals, investing/financing items |
| Foreign currency | Record at exchange rate at date of cash flow; weighted average rate permitted |
| Interest and dividends | Disclosed separately; classified consistently as operating, investing, or financing |
| Taxes on income | Usually operating unless specifically identifiable with investing/financing |
| Subsidiaries | Obtaining/losing control โ investing; changes without loss of control โ financing |
| Non-cash transactions | Excluded from statement of cash flows; disclosed elsewhere |
| Financing liabilities reconciliation | Required disclosure of changes from cash flows and non-cash changes |
| Restricted cash | Disclose amounts not available for use by the group |
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