IAS 7 at a glance
IAS 7 ‘Statement of Cash Flows’ was introduced in 2001 and the accounting principles have remained largely unchanged since. The increasing attention on an entity’s cash generation and liquidity position has led to greater focus on the statement of cash flows by financial statement users, regulators and other commentators. However, this additional focus and scrutiny has also highlighted some common errors and inconsistencies in the application of IAS 7.
Our ‘Insights into IAS 7’ series is aimed at simplifying the requirements of the Standard by explaining the fundamentals of reporting cash flows using relatively simple language and providing insights to help entities cut through some of the complexities associated with the requirements. This introductory article provides an overview of the objective, scope and requirements of IAS 7.
Objective of IAS 7
All entities need cash to run their day-to-day operations, pay their obligations and provide returns to investors, regardless of their particular line of business or geographic location. How the entity generates and uses cash and cash equivalents, when used in conjunction with the rest of the financial statements, provides information that enables users to evaluate the changes in net assets of an entity, 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.
As a result, the overall objective of IAS 7 is to require entities to report their historical changes in cash and cash equivalents by means of a statement of cash flows for each financial period reported in the financial statements.
