Key Non-compliances Observed by FRRB related to Ind AS 7 | Statement of Cash Flows

The Financial Reporting Review Board (FRRB) of ICAI conducts a review of general purpose financial statements of various enterprises for compliance with generally accepted accounting principles (GAAP), compliance with the reporting obligations of the auditor and compliance with disclosure requirements prescribed by regulatory bodies, statutes and rules and regulations relevant to the enterprise. FRRB was constituted as a proactive mechanism to improve financial reporting practices. This story will take a closer look at some of the key non-compliances and errors observed by the FRRB in relation to the Ind AS 7, Statement of Cash Flows.

I. Relevant Provision: Para 20 of Ind AS 7, Statement of Cash Flows, states as follows:

Under the indirect method, the net cash flow from operating activities is determined by adjusting profit or loss for the effects of:

a) changes during the period in inventories and operating receivables and payables

b) non-cash items such as depreciation, provisions, deferred taxes, unrealized foreign currency gains and losses, and undistributed profits of associates

c) all other items for which the cash effects are investing or financing cash flows

Alternatively, the net cash flow from operating activities may be presented under the indirect method by showing the revenues and expenses disclosed in the statement of profit and loss and the changes during the period in inventories and operating receivables and payables.

II. Disclosure under Cash flow statement: The net profit before tax was used to derive cash flow from operating activities. The re-measurement of the defined benefit plan was deducted under ‘Other Comprehensive Income’.

III. Board Observation: Since the re-measurement of the defined benefit plan is a part of OCI, it should not be adjusted to the net profit before tax while calculating the cash flow from operating activities.

This story further discusses key observations of the Review Board on an increase in trade receivables, gratuity in other comprehensive income, capital expenditure, repayment of external commercial borrowings, and taxes on income in relation to Ind AS 7, Cash flow Statement, in a tabular manner.

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