HKAS 7 - Statement of Cash Flows
Objective of HKAS 7
The objective of HKAS 7 is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities.
Information about cash flows is useful in providing users of financial statements with a basis to assess:
Scope (Paragraphs 1-3)
Paragraph 1: An entity shall prepare a statement of cash flows in accordance with the requirements of this Standard and shall present it as an integral part of its financial statements for each period for which financial statements are presented.
Paragraph 2: This Standard supersedes SSAP 15 Cash Flow Statements revised in 2001.
Paragraph 3: All entities need cash for essentially the same reasons regardless of their principal revenue-producing activities:
Therefore, this Standard requires all entities to present a statement of cash flows.
Benefits of Cash Flow Information (Paragraphs 4-5)
Paragraph 4: A statement of cash flows, when used with the rest of the financial statements, provides information enabling users to evaluate:
Cash flow information:
Paragraph 5: Historical cash flow information is used as an indicator of:
Definitions (Paragraph 6)
| Term | Definition |
|---|---|
| Cash | Cash on hand and demand deposits |
| Cash equivalents | Short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value |
| Cash flows | Inflows and outflows of cash and cash equivalents |
| Operating activities | Principal revenue-producing activities of the entity and other activities that are not investing or financing activities |
| 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 the size and composition of contributed equity and borrowings of the entity |
Cash and Cash Equivalents (Paragraphs 7-9)
Paragraph 7: Cash equivalents are held for meeting short-term cash commitments, not for investment purposes. To qualify as a cash equivalent:
Important: Equity investments are excluded from cash equivalents unless they are, in substance, cash equivalents (e.g., preferred shares acquired within a short period of their maturity with a specified redemption date).
Paragraph 8: Bank borrowings are generally financing activities. However, bank overdrafts repayable on demand that form an integral part of an entity's cash management are included as a component of cash and cash equivalents. A characteristic is that the bank balance often fluctuates from positive to overdrawn.
Paragraph 9: Cash flows exclude movements between items that constitute cash or cash equivalents because these are part of cash management, not operating, investing or financing activities.
Presentation of a Statement of Cash Flows (Paragraphs 10-12)
Paragraph 10: The statement of cash flows shall report cash flows during the period classified by:
Paragraph 11: An entity presents cash flows in a manner most appropriate to its business. Classification by activity allows users to assess the impact of those activities on financial position and cash equivalents.
Paragraph 12: A single transaction may include cash flows classified differently. For example, when a loan repayment includes both interest and capital:
Operating Activities (Paragraphs 13-15)
Paragraph 13: Cash flows from operating activities is a key indicator of the extent to which operations have generated sufficient cash flows to:
Paragraph 14: Cash flows from operating activities are primarily derived from principal revenue-producing activities and generally result from transactions that enter into determination of profit or loss.
Examples of cash flows from operating activities:
| Type | Description |
|---|---|
| (a) | Cash receipts from sale of goods and 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) | [Deleted] |
| (f) | Cash payments or refunds of income taxes (unless specifically identified with financing and investing activities) |
| (g) | Cash receipts and payments from contracts held for dealing or trading purposes |
Note: Sale of an item of plant gives rise to gain/loss included in profit or loss, but the cash flows relating to such transactions are investing activities. However, cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale (per HKAS 16 paragraph 68A) are operating activities. Cash receipts from rents and subsequent sales of such assets are also operating activities.
Paragraph 15: Securities and loans held for dealing or trading purposes are similar to inventory. Therefore, cash flows from purchase and sale of dealing or trading securities are classified as operating activities. Cash advances and loans made by financial institutions are usually classified as operating activities.
Investing Activities (Paragraph 16)
Paragraph 16: Separate disclosure of cash flows from investing activities is important because they represent expenditures made for resources intended to generate future income and cash flows.
Critical Rule: Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities.
Examples of cash flows from investing activities:
| Type | Description |
|---|---|
| (a) | Cash payments to acquire property, plant and equipment, intangibles and other long-term assets (including capitalised development costs and self-constructed assets) |
| (b) | Cash receipts from sales of property, plant and equipment, intangibles and other long-term assets |
| (c) | Cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than cash equivalents or dealing/trading instruments) |
| (d) | Cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than cash equivalents or dealing/trading instruments) |
| (e) | Cash advances and loans made to other parties (other than by a financial institution) |
| (f) | Cash receipts from repayment of advances and loans made to other parties (other than by a financial institution) |
| (g) | Cash payments for futures, forward, option and swap contracts (except dealing/trading or financing activities) |
| (h) | Cash receipts from futures, forward, option and swap contracts (except dealing/trading or financing activities) |
When a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged.
Financing Activities (Paragraph 17)
Paragraph 17: Separate disclosure of cash flows from financing activities is useful in predicting claims on future cash flows by providers of capital.
Examples of cash flows from financing activities:
| Type | Description |
|---|---|
| (a) | Cash proceeds from issuing shares or other equity instruments |
| (b) | Cash payments to owners to acquire or redeem the entity's shares |
| (c) | Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other borrowings |
| (d) | Cash repayments of amounts borrowed |
| (e) | Cash payments by a lessee for reduction of outstanding liability relating to a lease |
Reporting Cash Flows from Operating Activities (Paragraphs 18-20)
Paragraph 18: An entity shall report cash flows from operating activities using either:
Direct Method (Paragraph 18(a) and 19)
Major classes of gross cash receipts and gross cash payments are disclosed.
Under the direct method, information may be obtained either:
(a) From the accounting records of the entity; or
(b) By adjusting sales, cost of sales and other items in the statement of comprehensive income for:
Encouragement: Entities are encouraged to report cash flows from operating activities using the direct method as it provides information useful in estimating future cash flows not available under the indirect method.
Indirect Method (Paragraph 18(b) and 20)
Profit or loss is adjusted for:
(a) Changes during the period in inventories and operating receivables and payables
(b) Non-cash items such as:
(c) All other items for which the cash effects are investing or financing cash flows
Alternatively, net cash flow from operating activities may be presented by showing revenues and expenses disclosed in the statement of comprehensive income and the changes during the period in inventories and operating receivables and payables.
Reporting Cash Flows from Investing and Financing Activities (Paragraph 21)
Paragraph 21: An entity shall 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.
Reporting Cash Flows on a Net Basis (Paragraphs 22-24)
Paragraph 22: Cash flows arising from the following may be reported on a net basis:
(a) Cash receipts and payments on behalf of customers when the cash flows reflect the activities of the customer rather than those of the entity
(b) Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short
Paragraph 23: Examples of cash receipts and payments referred to in paragraph 22(a):
(a) Acceptance and repayment of demand deposits of a bank
(b) Funds held for customers by an investment entity
(c) Rents collected on behalf of, and paid over to, the owners of properties
Paragraph 23A: Examples of cash receipts and payments referred to in paragraph 22(b):
(a) Principal amounts relating to credit card customers
(b) Purchase and sale of investments
(c) Other short-term borrowings with a maturity period of three months or less
Paragraph 24: Cash flows arising from each of the following activities of a financial institution may be reported on a net basis:
(a) Cash receipts and payments for acceptance and repayment of deposits with a fixed maturity date
(b) Placement of deposits with and withdrawal of deposits from other financial institutions
(c) Cash advances and loans made to customers and the repayment of those advances and loans
Foreign Currency Cash Flows (Paragraphs 25-30)
Paragraph 25: Cash flows arising from transactions in a foreign currency shall be recorded in an entity's functional currency by applying the exchange rate between the functional currency and the foreign currency at the date of the cash flow.
Paragraph 26: The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows.
Paragraph 27: Cash flows denominated in a foreign currency are reported in a manner consistent with HKAS 21. This permits the use of an exchange rate that approximates the actual rate (e.g., weighted average exchange rate for a period). However, HKAS 21 does not permit use of the exchange rate at the end of the reporting period when translating the cash flows of a foreign subsidiary.
Paragraph 28: Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash flows. However, the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency is reported in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period. This amount is presented separately from cash flows from operating, investing and financing activities and includes the differences, if any, had those cash flows been reported at end of period exchange rates.
Paragraphs 29-30: [Deleted]
Interest and Dividends (Paragraphs 31-34)
Paragraph 31: Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities.
Paragraph 32: The total amount of interest paid during a period is disclosed in the statement of cash flows whether it has been recognised as an expense in profit or loss or capitalised in accordance with HKAS 23 Borrowing Costs.
Paragraph 33: Classification guidance:
Paragraph 34: Dividends paid may be classified as:
Taxes on Income (Paragraphs 35-36)
Paragraph 35: Cash flows arising from taxes on income shall be separately disclosed and shall be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.
Paragraph 36: While tax expense may be readily identifiable with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transaction. Therefore, taxes paid are usually classified as operating activities. When it is practicable to identify the tax cash flow with an individual transaction classified as investing or financing, the tax cash flow is classified accordingly. When tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is disclosed.
Investments in Subsidiaries, Associates and Joint Ventures (Paragraphs 37-38)
Paragraph 37: When accounting for an investment in an associate, a joint venture or a subsidiary accounted for by use of the equity or cost method, an investor restricts its reporting in the statement of cash flows to the cash flows between itself and the investee (e.g., dividends and advances).
Paragraph 38: An entity that reports its interest in an associate or a joint venture using the equity method includes in its statement of cash flows the cash flows in respect of its investments in the associate or joint venture, and distributions and other payments or receipts between it and the associate or joint venture.
Changes in Ownership Interests in Subsidiaries and Other Businesses (Paragraphs 39-42B)
Paragraph 39: The aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses shall be presented separately and classified as investing activities.
Paragraph 40: An entity shall disclose, in aggregate, in respect of both obtaining and losing control of subsidiaries or other businesses during the period each of the following:
(a) The total consideration paid or received
(b) The portion of the consideration consisting of cash and cash equivalents
(c) The amount of cash and cash equivalents in the subsidiaries or other businesses over which control is obtained or lost
(d) The amount of the assets and liabilities other than cash or cash equivalents in the subsidiaries or other businesses over which control is obtained or lost, summarised by each major category
Paragraph 40A: An investment entity, as defined in HKFRS 10, need not apply paragraphs 40(c) or 40(d) to an investment in a subsidiary that is required to be measured at fair value through profit or loss.
Paragraph 41: The separate presentation of the cash flow effects of obtaining or losing control of subsidiaries or other businesses as single line items, together with separate disclosure of amounts of assets and liabilities acquired or disposed of, helps to distinguish those cash flows from other operating, investing and financing activities. The cash flow effects of losing control are not deducted from those of obtaining control.
Paragraph 42: The aggregate amount of cash paid or received as consideration for obtaining or losing control of subsidiaries or other businesses is reported in the statement of cash flows net of cash and cash equivalents acquired or disposed of as part of such transactions.
Paragraph 42A: Cash flows arising from changes in ownership interests in a subsidiary that do not result in a loss of control shall be classified as cash flows from financing activities, unless the subsidiary is held by an investment entity and is required to be measured at fair value through profit or loss.
Paragraph 42B: Changes in ownership interests in a subsidiary that do not result in a loss of control (e.g., subsequent purchase or sale by a parent of a subsidiary's equity instruments) are accounted for as equity transactions (see HKFRS 10), unless the subsidiary is held by an investment entity and is required to be measured at fair value through profit or loss. Accordingly, the resulting cash flows are classified in the same way as other transactions with owners described in paragraph 17.
Non-Cash Transactions (Paragraphs 43-44)
Paragraph 43: Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.
Paragraph 44: Examples of non-cash transactions:
(a) Acquisition of assets either by assuming directly related liabilities or by means of a lease
(b) Acquisition of an entity by means of an equity issue
(c) Conversion of debt to equity
Changes in Liabilities Arising from Financing Activities (Paragraphs 44A-44E)
Paragraph 44A: An entity shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
Paragraph 44B: To the extent necessary to satisfy the requirement in paragraph 44A, an entity shall disclose the following changes in liabilities arising from financing activities:
(a) Changes from financing cash flows
(b) Changes arising from obtaining or losing control of subsidiaries or other businesses
(c) The effect of changes in foreign exchange rates
(d) Changes in fair values
(e) Other changes
Paragraph 44C: Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. The disclosure requirement also applies to changes in financial assets (e.g., assets that hedge liabilities arising from financing activities) if cash flows from those financial assets were, or future cash flows will be, included in cash flows from financing activities.
Paragraph 44D: One way to fulfil the disclosure requirement is by providing a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities, including the changes identified in paragraph 44B. Where an entity discloses such a reconciliation, it shall provide sufficient information to enable users to link items included in the reconciliation to the statement of financial position and the statement of cash flows.
Paragraph 44E: If an entity provides the disclosure required by paragraph 44A in combination with disclosures of changes in other assets and liabilities, it shall disclose the changes in liabilities arising from financing activities separately from changes in those other assets and liabilities.
Components of Cash and Cash Equivalents (Paragraphs 45-47)
Paragraph 45: An entity shall disclose the components of cash and cash equivalents and shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items reported in the statement of financial position.
Paragraph 46: An entity discloses the policy which it adopts in determining the composition of cash and cash equivalents.
Paragraph 47: The effect of any change in the policy for determining components of cash and cash equivalents is reported in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Other Disclosures (Paragraphs 48-52)
Paragraph 48: An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.
Paragraph 49: Examples of circumstances where cash and cash equivalent balances are not available for use include balances held by a subsidiary operating in a country where exchange controls or other legal restrictions apply.
Paragraph 50: Additional information that may be relevant and is encouraged to be disclosed:
(a) The amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on use
(b) [Deleted]
(c) The aggregate amount of cash flows that represent increases in operating capacity separately from those required to maintain operating capacity
(d) The amount of cash flows arising from operating, investing and financing activities of each reportable segment (see HKFRS 8)
Paragraph 51: Separate disclosure of cash flows representing increases in operating capacity and those required to maintain operating capacity is useful in determining whether the entity is investing adequately in maintenance of its operating capacity.
Paragraph 52: Disclosure of segmental cash flows enables users to obtain a better understanding of the relationship between the cash flows of the business as a whole and those of its component parts.
Effective Date (Paragraphs 53-61)
Paragraph 53: This Standard becomes operative for financial statements covering periods beginning on or after 1 January 2005. Earlier application is encouraged.
Paragraph 54: HKAS 27 (as amended in 2008) amended paragraphs 39-42 and added paragraphs 42A and 42B. Apply for annual periods beginning on or after 1 July 2009.
Paragraph 55: Paragraph 14 was amended by Improvements to HKFRSs issued in October 2008. Apply for annual periods beginning on or after 1 January 2009.
Paragraph 56: Paragraph 16 was amended by Improvements to HKFRSs issued in May 2009. Apply for annual periods beginning on or after 1 January 2010.
Paragraph 57: HKFRS 10 and HKFRS 11 amended paragraphs 37, 38 and 42B and deleted paragraph 50(b).
Paragraph 58: Investment Entities (Amendments to HKFRS 10, HKFRS 12 and HKAS 27) amended paragraphs 42A and 42B and added paragraph 40A. Apply for annual periods beginning on or after 1 January 2014.
Paragraph 59: HKFRS 16 Leases amended paragraphs 17 and 44.
Paragraph 60: Disclosure Initiative (Amendments to HKAS 7) added paragraphs 44A-44E. Apply for annual periods beginning on or after 1 January 2017. When first applying, comparative information for preceding periods is not required.
Paragraph 61: HKFRS 17 Insurance Contracts amended paragraph 14.
Key Takeaways Summary
| Topic | Key Point |
|---|---|
| Objective | Provide information about historical changes in cash and cash equivalents classified by operating, investing and financing activities |
| Cash | Cash on hand and demand deposits |
| Cash equivalents | Short-term, highly liquid investments with ≤3 months maturity from acquisition date, 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 and payments (encouraged) |
| Indirect method | Adjusts profit or loss for non-cash items, deferrals/accruals, and investing/financing items |
| Foreign currency | Record at exchange rate at date of cash flow; use weighted average rate permitted |
| Interest and dividends | Disclosed separately; classified consistently as operating, investing or financing |
| Taxes on income | Usually operating activities unless specifically identifiable with investing/financing |
| Subsidiaries | Obtaining/losing control → investing activities; changes without loss of control → financing activities |
| 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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