The International Accounting Standard No. 7 (IAS 7) aims to require the provision of information on historical changes in cash and its equivalents of an entity through a cash flow statement in which cash flows for the period are classified based on operating, investing, and financing activities.
There are no substantial differences herein between the criteria set forth in the complete IFRS body, the IFRS for SMEs, nor the local standards related to the cash flow statement filing.
The only relevant point is that bank overdrafts and overdrafts are usually considered financing activities, according to the complete IFRS and IFRS for SMEs. However, the standards clarify that, in some countries, overdrafts due at any time by the bank are an integral part of the entity’s cash management. In such circumstances, these overdrafts are included as components of cash and cash equivalents. This provision is not covered by local standards.
The following points must be known to be able to apply IAS 7 in Argentina:
What are cash flows?
Cash flows are the inflows and outflows of cash, result from the production and sales of goods and/or services intended to generate profits.
IAS 7 establishes the following definitions:
- Cash flows are the inflows and outflows of cash and cash equivalents.
- Cash comprises both cash and demand bank deposits.
- Cash equivalents are short-term and highly liquid investments easily convertible into determined amounts of cash, subject to an insignificant risk of changes in value.
Different cash flows
In economic entities, the generation of cash arises as a result of shares representing positive cash flows, while the use of cash may arise from shares representing negative cash flows. Thus, in general, they can be grouped as follows:
Positive cash flows
- Customer collections.
- Capital contributions from shareholders.
- Bank loans.
- Asset sales.
Negative cash flows
- Payments to suppliers.
- Bank loan payments.
- Operating, administrative, and other expenses.
- Payment of social benefits, wages, and salaries.
- Dividend payments.
- New investments.
Classification of cash flows under IAS 7
The statement of cash flows shall report cash flows during the period, classified by activity:
- Operating activities constitute the main source of income of the entity, as well as other activities that cannot be classified as 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 result in changes in the size and composition of the entity’s equity and borrowings.