Nepal Accounting Standard 7 (NAS 7) deals with cash flow statements. It outlines the principles and guidelines for the preparation and presentation of cash flow statements to provide users with information about an entity's historical cash flows.
key concepts of NAS 7
1. Objective: The objective of NAS 7 is to provide information about the historical cash flows of an entity during a specified period. This information helps users assess the entity's ability to generate cash and cash equivalents, as well as its needs for liquidity.
2. Scope: NAS 7 applies to all entities, regardless of size or industry, except for those specifically exempted by law. It requires entities to prepare a cash flow statement in addition to other financial statements, such as the balance sheet and income statement.
3. Presentation: The cash flow statement presents cash flows during the reporting period classified into operating, investing, and financing activities. Operating activities include cash flows from the entity's primary business operations. Investing activities include cash flows from the acquisition and disposal of long-term assets. Financing activities include cash flows from the issuance and repayment of equity and debt instruments.
Further More About Operating, Investing and Financing Activities
- Operating Activities:Cash flows from operating activities represent the cash generated or used by an entity's primary business operations. These cash flows typically result from transactions involving revenue and expenses. Examples of cash flows from operating activities include cash received from customers, cash paid to suppliers and employees, and cash paid for interest and taxes. The direct method provides a more detailed breakdown of these cash flows, while the indirect method starts with net income and adjusts for non-cash items and changes in operating assets and liabilities.
- Investing Activities:Cash flows from investing activities represent the cash generated or used by the acquisition and disposal of long-term assets, such as property, plant, and equipment, as well as investments in other entities. Examples of cash flows from investing activities include cash paid to purchase property, plant, and equipment, cash received from the sale of investments, and cash paid for acquisitions of other entities. These cash flows help users assess the entity's capital expenditure and investment activities.
- Financing Activities:Cash flows from financing activities represent the cash generated or used by the issuance and repayment of equity and debt instruments. Examples of cash flows from financing activities include cash received from issuing shares or bonds, cash received from borrowing, and cash paid for dividends and repayment of borrowings. These cash flows help users assess the entity's financing activities and its ability to raise capital to support its operations and growth initiatives.
4. Cash Equivalents: NAS 7 defines cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of acquisition. Examples of cash equivalents include treasury bills, commercial paper, and money market funds. By including cash equivalents with cash, the cash flow statement provides a more accurate representation of an entity's liquidity position.
5. Direct vs. Indirect Method: NAS 7 allows entities to use either the direct method or the indirect method to report cash flows from operating activities. The direct method requires entities to report major classes of gross cash receipts and payments. The indirect method starts with net income and adjusts for non-cash items and changes in operating assets and liabilities to arrive at cash flows from operating activities.
- Direct Method: The direct method involves presenting major classes of gross cash receipts and gross cash payments from operating activities. It provides a more detailed breakdown of cash flows from operating activities, making it easier for users to understand the sources and uses of cash. However, it may be more complex and costly to implement as it requires detailed tracking of cash receipts and payments.
- Indirect Method: The indirect method starts with net income and adjusts for non-cash items and changes in operating assets and liabilities to arrive at cash flows from operating activities. While the indirect method is less detailed than the direct method, it's often preferred by entities because it relies on information readily available from the income statement and balance sheet. However, it may not provide as clear a picture of cash flows as the direct method.
6. Disclosure: NAS 7 requires entities to disclose additional information to help users understand the nature of cash flows and their impact on the entity's financial position. This includes information about significant non-cash transactions, the composition of cash and cash equivalents, and any restrictions on cash and cash equivalents.
Non-Cash Transactions
While cash flow statements primarily focus on cash transactions, NAS 7 also requires disclosure of significant non-cash transactions that may affect the entity's financial position. These transactions include activities such as acquiring assets through assumption of liabilities or issuing shares for the acquisition of assets. Disclosure of such non-cash transactions provides users with a more complete understanding of the entity's financial activities and their impact on cash flows.
Foreign Currency Transactions
When an entity operates in multiple currencies, cash flows denominated in foreign currencies must be translated into the reporting currency using the exchange rates prevailing at the dates of the cash flows. Any resulting gains or losses from changes in exchange rates are reported as part of cash flows from operating, investing, or financing activities, depending on the nature of the underlying transaction. Disclosure of foreign currency transactions and their effects on cash flows enhances transparency and helps users assess the entity's exposure to currency risk.
Restricted Cash
NAS 7 requires entities to disclose any restrictions on cash and cash equivalents, such as cash held in escrow accounts or cash reserves held to comply with debt covenants. While restricted cash is included in the cash and cash equivalents balance on the balance sheet, it may not be readily available for use in operating activities. Disclosure of restrictions on cash helps users understand the availability of cash for various purposes and assesses the entity's liquidity position more accurately.
Supplementary Information
In addition to the cash flow statement, NAS 7 allows entities to provide supplementary information to enhance the understanding of cash flows. This may include explanations of significant trends or events affecting cash flows, reconciliations of cash and cash equivalents balances between the beginning and end of the reporting period, and explanations of material differences between cash flows and changes in related balance sheet items. Supplementary information provides additional context for users and helps them interpret the cash flow statement more effectively.
Interim Reporting
For interim financial reporting, NAS 7 allows entities to prepare condensed cash flow statements that provide a summary of cash flows during the interim period. While the level of detail may be reduced compared to annual financial statements, condensed cash flow statements should still present cash flows from operating, investing, and financing activities. Interim cash flow statements help users assess the entity's cash flow performance and liquidity position on a periodic basis.
By providing further depth on these specific aspects, entities can ensure compliance with NAS 7 and enhance the usefulness of their cash flow statements for users. Disclosure of non-cash transactions, foreign currency effects, restricted cash, and supplementary information enriches the understanding of an entity's cash flow dynamics and financial performance.
Overall, NAS 7 ensures that entities provide comprehensive information about their cash flows, enabling users to make informed decisions about the entity's financial health and liquidity position. Compliance with NAS 7 enhances transparency and comparability in financial reporting in Nepal.
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