Objectives and Scope of IFRS 7

Chapter 21 - Statement of Cash Flows Page 304 3 Objectives, Scope and Definitions of IAS 7

3.1 Objective and scope

The objective of IAS 7 is to provide information about the historical changes in cash, and cash equivalents, of an entity. This information is presented via a statement of cash flows that classifies cash flows under the headings of: [IAS 7.10]  operating activities;  investing activities; and  financing activities. The preparation of a statement of cash flows as part of an entity’s financial statements is required of all entities, with no exceptions. [IAS 7.1] 3.2 What is cash? The nature of cash may, at first, seem obvious, but cash may be held in many forms. Some forms of cash can be accessed immediately while there is a delay in accessing others. As defined by IAS 7, cash includes not only cash itself but also any instrument that can be converted into cash so quickly that it is in effect equivalent to cash. In IAS 7, the statement of cash flows seeks to identify changes in: Classification Amounts included Cash “Cash in hand and demand deposits”. [IAS 7.6] Cash equivalents “Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”. [IAS 7.6] An essential element of a cash equivalent is that it is held for the purpose of meeting short- term cash commitments as they fall due and not for long-term investment purposes. To meet the definition of a cash equivalent, the item should be “readily convertible” which suggests that it has a short maturity of, say, three months or less from the date of acquisition. Cash equivalents may therefore include:  short term deposits;  loan notes;  bank deposit accounts; and  government securities. Equity investments should normally be excluded, because, unlike government securities, they are subject to a significant risk of changes in value. Bank borrowings normally form part of an entity’s financing activities, which are discussed below. A bank overdraft, however, is often used as a key element of an entity’s daily cash management; for example a positive cash balance may be held at the end of one day with an overdraft the next. In such circumstances the overdraft should be included as a component of cash and cash equivalents.