Monday, 7 October 2013


A Cash Flow Statement no doubt helps the investor in making economic decisions as it helps in ascertaining the entities ability and certainty to generate cash and cash equivalent. As we all know that the way market and scope of merger, acquisitions takeover, etc., has grown over the last decade entities cash flow stream have a huge impact on the entities valuation as going concern. One of the advantages of the Cash flow Statement is that it helps in bifurcating the entities cash flows (inflow/outflow) in operating activities, investing activities and financing activities respectively.  

Enactment of Companies Act, 2013 have certainly is going to be change the financial reporting requirements for the Indian Entities including preparation of Cash Flow Statement need to be presented by the entities as a part of financial statements. As per the definition prescribed u/s 2 (40) of the Companies Act, 2013, a set of financial statement includes Cash Flow Statements. However certain categories of Companies such as One Person Companies (OPC) and Dormant Companies are exempted from the requirement of preparing Cash Flow Statements. It is also need to be kept in mind that after the enactment of Companies Act, 2013, it is expected that the process of notifying IFRS converged Indian Accounting Standards (Ind ASs) may be expedited by the Government.

   Existing AS and Ind AS dealing with Cash Flow Statements defined Cash Equivalent as follows:

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

Some of the people believe that an investment such as fixed deposits, debentures with a remaining maturity period of less than three months at the balance sheet date constitute cash equivalent, which is absolutely incorrect. As per the definition cash equivalent are 'short term' investment, which means a investment with a original maturity period of less than three month or less from the date of acquisition rather than remaining period to maturity from the balance sheet date. For example, sometimes it does happen that pending approval for some project or due to other reasons entities invest their money in the very short term investment options such as fixed deposits, treasury bills, etc., such investment qualifies to be termed as Cash Equivalent.

Contributed by-
CA. Achin Poddar