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Thread: 03 Accounting Standard 3 - Cash Flow Statements - AS 3

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    Default 03 Accounting Standard 3 - Cash Flow Statements - AS 3

    Accounting Standard (AS) 3
    (revised 1997)
    Cash Flow Statements

    (This Accounting Standard includes paragraphs set in
    bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards.)


    Accounting Standard (AS) 3,
    ‘Cash Flow Statements(revised 1997), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-1997. This Standard supersedes Accounting Standard (AS) 3, ‘Changes in Financial Position’, issued in June 1981. This Standard is mandatory in
    nature
    2 in respect of accounting periods commencing on or after 1-4-2004 for the enterprises which fall in any one or more of the following categories, at any time during the accounting period:

    (i) Enterprises whose equity or debt securities are listed whether in India or outside India.


    (ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors
    resolution
    in this regard.

    (iii) Banks including co-operative banks.

    (iv) Financial institutions.

    (v) Enterprises carrying on insurance business.

    (vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period
    on the basis of audited financial statements exceeds Rs. 50 crore.

    Turnover does not include
    ‘other income’.


    (vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs.
    10 crore at any time during the accounting period.

    (viii)Holding and subsidiary enterprises of any one of the above at any time during the accounting period.
    The enterprises which do not fall in any of the above categories are encouraged, but are not required, to apply this Standard.
    Where an enterprise has been covered in any one or more of the above categories and subsequently, ceases to be so covered, the enterprise will not qualify for exemption from application of this Standard, until the enterprise ceases to be covered in any of the above categories for two consecutive years. Where an enterprise has previously qualified for exemption fromapplication of this Standard (being not covered by any of the above categories) but no longer qualifies for exemption in the current accounting period, this Standard becomes applicable from the current period. However, the corresponding previous period figures need not be disclosed. An enterprise, which, pursuant to the above provisions, does not present a cash flow statement, should disclose the fact. The following is the text of the Accounting Standard.

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    Default Objective of Accounting Standard 3 - Cash Flow Statements - AS 3

    Objective of Accounting Standard 3 - Cash Flow Statements - AS 3

    Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The Statement deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period fromoperating, investing and financing activities.

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    Default Scope of Accounting Standard 3 - Cash Flow Statements - AS 3

    Scope of Accounting Standard 3 - Cash Flow Statements - AS 3


    1. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented.


    2. Users of an enterprise’s financial statements are interested in how the enterprise generates and uses cash and cash equivalents. This is the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial enterprise. Enterprises need cash for essentially the same reasons, however different their principal revenue-producing activities might be.They need cash to conduct their operations, to paytheir obligations, and to provide returns to their investors.

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    Default Benefits of Cash Flow Information of Accounting Standard 3 - Cash Flow Statements - AS 3

    Benefits of Cash Flow Information of Accounting Standard 3 - Cash Flow Statements - AS 3


    3. A cash flow statement, when used in conjunction with the other financial statements, provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash flows of different enterprises. It also enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.


    4. Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. It is also useful in checking the accuracy of past assessments of future cash flows and in examining the relationship between profitability and net cash flow and the impact of
    changing prices.

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    Default Definitions of Accounting Standard 3 - Cash Flow Statements - AS 3

    Definitions of Accounting Standard 3 - Cash Flow Statements - AS 3


    5. The following terms are used in this Statement with the meanings specified:

    Cash comprises cash on hand and demand deposits with banks.

    Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

    Cash flows are inflows and outflows of cash and cash equivalents.

    Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of the owners’ capital (including preference share capital in the case of a company) and borrowings of the enterprise.

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    Default Cash and Cash Equivalents of Accounting Standard 3 - Cash Flow Statements - AS 3

    Cash and Cash Equivalents of Accounting Standard 3 - Cash Flow Statements - AS 3


    6. Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents; for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount atmaturity).


    7. Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.
    Last edited by Accounting Standards; 18-08-2010 at 11:19 AM.

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    Default Presentation of a Cash Flow Statement of Accounting Standard 3 - Cash Flow Statements - AS 3

    Presentation of a Cash Flow Statement of Accounting Standard 3 - Cash Flow Statements - AS 3


    8. The cash flow statement should report cash flows during the period classified by operating, investing and financing activities.


    9. An enterprise presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the enterprise and
    the amount of its cash and cash equivalents. This information may also be used to evaluate the relationships among those activities.


    10. A single transaction may include cash flows that are classified differently. For example, when the instalment paid in respect of a fixed asset acquired on deferred payment basis includes both interest and loan, the interest element is classified under financing activities and the loan element is classified under investing activities.

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    Default Operating Activities of Accounting Standard 3 - Cash Flow Statements - AS 3

    Operating Activities of Accounting Standard 3 - Cash Flow Statements - AS 3


    11. The amount of cash flows arising from operating activities is a key indicator of the extent towhich the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans and make new investments without recourse to external sources of financing. Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.


    12. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. Examples of cash flows from operating activities are:

    (a) cash receipts fromthe sale of goods and the rendering of services;
    (b) cash receipts fromroyalties, fees, commissions and other revenue;
    (c) cash payments to suppliers for goods and services;
    (d) cash payments to and on behalf of employees;
    (e) cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits;
    (f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and
    (g) cash receipts and payments relating to futures contracts, forward contracts, option contracts and swap contractswhen the contracts are held for dealing or trading purposes.



    13. Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.


    14. An enterprise may hold securities and loans for dealing or trading purposes, in which case they are similar to inventory acquired specifically for resale.Therefore, cash flows arising fromthe purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash
    advances and loans made by financial enterprises are usually classified as operating activities since they relate to the main revenue-producing activity of that enterprise.

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    Default Investing Activities of Accounting Standard 3 - Cash Flow Statements - AS 3

    Investing Activities of Accounting Standard 3 - Cash Flow Statements - AS 3


    15. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent towhich expenditures have been made for resources intended to generate future income and cash flows. Examples of cash flows arising from investing activities are:


    (a) cash payments to acquire fixed assets (including intangibles). These payments include those relating to capitalised research and development costs and self-constructed fixed assets;

    (b) cash receipts fromdisposal of fixed assets (including intangibles);

    (c) cash payments to acquire shares, warrants or debt instruments of other enterprises and interests in joint ventures (other than payments for those instruments considered to be cash equivalents and those held for dealing or trading purposes);

    (d) cash receipts fromdisposalof shares,warrants or debt instruments of other enterprises and interests in joint ventures (other than receipts fromthose instruments considered to be cash equivalents and those held for dealing or trading purposes);

    (e) cash advances and loansmade to third parties (other than advances and loans made by a financial enterprise);

    (f) cash receipts from the repayment of advances and loans made to third parties (other than advances and loans of a financial enterprise);

    (g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as
    financing activities; and

    (h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as
    financing activities.

    16. 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.

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    Default Financing Activities of Accounting Standard 3 - Cash Flow Statements - AS 3

    Financing Activities of Accounting Standard 3 - Cash Flow Statements - AS 3


    17. The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise. Examples of cash flows arising from financing activities are:


    (a) cash proceeds from issuing shares or other similar instruments;

    (b) cash proceeds from issuing debentures, loans, notes, bonds, and other short or long-term borrowings; and

    (c) cash repayments of amounts borrowed.

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