Cash flow statement mandatory under Companies Act 2013 (2024)

CA Pankaj Kumar Agrawal

Article discusses applicability of cash flow statement orcash flow applicability under Companies Act 2013.

Companies Act 2013 – Financial Statements to include Cash Flow Statement and Statement for Changes in Equity

The Companies Act, 2013 (the Act or New Act) brought in many changes which directly impact preparation of financial statements and require understanding of the new definitions and provisions. Earlier, The Company act 1956 didn’t include cash flow statement in the Definition of Financial statement. The Applicability of Cash Flow Statements is governed by the Companies (Accounting Standards) Rules, 2006. However as per the company act 2013, the Cash flow statement shall to prepare and included in Financial Statements subject to certain exemption specified in the act.

Definition of Financial Statement as per CA, 2013

As per Section 2(40) of the CA, 2013 “financial statement” in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause (i) to sub-clause (iv):

Exemption from Applicability of Cash Flow Statements

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement i.e. there is an exemption given to OPC, small company and dormant Company for preparing the Cash flow statement for purpose of inclusion in financial statement.

What is OPC, Small Company and dormant company ?

a) One Person Company

As per sec 2(62) of The CA, 2013 “One Person Company” means a company which has only one person as a member.

b) DORMANT COMPANY

As per sec 455 of The CA, 2013 “Dormant Company” means a company

(1) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

Explanation.—For the purposes of this section,—

(i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

(ii) “significant accounting transaction” means any transaction other than—

(a) payment of fees by a company to the Registrar;

(b) payments made by it to fulfill the requirements of this Act or any other law;

(c) allotment of shares to fulfill the requirements of this Act; and

(d) payments for maintenance of its office and records

c) SMALL COMPANIES:

Sec 2(85) ‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees (Rs 50 Lakhs ) or such higher amount as may be prescribed which shall not be more than five crore rupees; ( Rs 5 Crores) or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees ( Rs 2 crore ) or such higher amount as may be prescribed which shall not be more than twenty crore rupees ( Rs 20 crores ).

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

Analysis of Small Company:-

(1) A public company will never be a small company.

(2) A Private company should have a maximum of :-

(a)Paid up capital of Rs 50 Lakhs

(b) Turnover of Rs 2 Crores.

(3) Holding and Subsidiary will always be out of the picture of small companies.

Scenario as per old Companies Act, 1956

Such definition of ‘Financial statement’ neither was available under the CA, 1956 nor was the term used in any sections in that Act. Earlier, the Companies (Accounting Standards) Rules, 2006 exempted ‘SMCs’ from preparing the cash flow statement.

Format to be used for preparing Cash Flow Statement

Since no format is prescribed in Schedule III to the CA, 2013, the cash flow statement shall be prepared in the format prescribed in the AS-3 –Cash Flow Statement only.

Applicability of Accounting Standards

Section 129 of the CA, 2013 requires that the financial statements shall comply with the accounting standards notified under Section 133 and Section 133 provides that the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

Rule 7 of the Companies (Accounts) Rules, 2014 provides that as a transition provision, the standards of accounting as specified under the Companies Act, 1956 (i.e. the Companies (Accounting Standards) Rules, 2006) shall be deemed to be the accounting standards until accounting standards are specified by the Central Government under Section 133.

Conclusion

The inclusion of cash flow along with balance sheet and P&L for all companies is a new requirement. Earlier only listed companies under listing agreement clause no. 32 are required to prepare cash flow statement as per AS 3 of Accounting standards issued by the ICAI.

Simply, We can state that the cash flow statement is applicable for all companies (including Private Company) however the certain exemption is provided to OPC, Dormant Companies and Small Companies in respect of Applicability of Cash Flow Statement.

Since the Companies Act, 2013 does not lay down any format for preparation of cash flow statement, companies will need to follow AS 3 in this regard. In respect of listed companies, the listing agreement requires the indirect method for preparing cash flow statements. Thus, under the Companies Act, 2013, non-listed companies will have a choice of either applying the direct or indirect method under AS 3 to prepare the cash flow statement. Due to the listing agreement requirement, that choice will not be available to listed companies.

This means a private limited company with paid up share capital of less than 50 lakh rupees or such higher amount as may be prescribed (not exceeding 5 crore ruppes) or with a turnover of less than 2 crore rupees or such higher amount as may be prescribed (not exceeding 20 crore rupees) is not required to prepare cash flow statements while preparing financial statements at the end of the financial year or say Cash Flow Statement is not applicable to Such Companies.

Please remember, it’s not a mandatory provision. Despite non Applicability of Cash Flow Statement If a small companies want then they can prepare their cash flow statements and file it with registrar of companies or ROC.

(Author can be reached at caagrawalpankaj@gmail.com)

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Cash flow statement mandatory under Companies Act 2013 (2024)

FAQs

Cash flow statement mandatory under Companies Act 2013? ›

Hence, As per the Companies Act, 2013, all companies, except for One Person Companies (OPCs), Small Companies, and Dormant Companies, are required to prepare and furnish a cash flow statement along with their financial statements.

Is a cash flow statement mandatory for companies? ›

The Applicability of Cash Flow Statements is governed by the Companies (Accounting Standards) Rules, 2006. However as per the company act 2013, the Cash flow statement shall to prepare and included in Financial Statements subject to certain exemption specified in the act.

Is a cash flow statement a legal requirement? ›

Overview. IAS 7 Statement of Cash Flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements.

Is a statement of cash flows required? ›

A company is required to present a statement of cash flows that shows how its cash and cash equivalents have changed during the period. Cash flows are classified as either operating, investing or financing activities, depending on their nature.

When did the cash flow statement become mandatory? ›

The balance sheet and income statement have been required statements for years, but the cash flow statement has been formally required in the United States only since 1988. However, cash flow statements, in some form or another, have a long history in the United States.

Which companies are exempted from cash flow statements? ›

AS 3 exempts one-person company, small company and dormant company from the requirement to prepare cash flow statements. It is to be noted here that the exemption does not refer to the companies which meet the SMC definition but extends the definition to a one-person company, small company, and dormant company.

Who requires a cash flow statement and why? ›

It is usually helpful for making cash forecast to enable short term planning. The cash flow statement shows the source of cash and helps you monitor incoming and outgoing money. Incoming cash for a business comes from operating activities, investing activities and financial activities.

What is the requirement for the cash flow statement under FRS 102? ›

Accounting treatment under FRS 102

FRS 102 requires an entity to present a statement of cash flows providing information about the changes in cash and cash equivalents for a reporting period classified under three headings: a) operating activities; b) investing activities; c) financing activities.

Can you have profit without cash flow? ›

Statement: Cash flow is reported on the cash flow statement, and profits can be found in the income statement. Simultaneous: It's possible for a business to be profitable and have a negative cash flow at the same time. It's also possible for a business to have positive cash flow and no profits.

Is cash flow statement required for financial analysis? ›

Cash Flow Analysis Is Critical for Every Business

A more detailed cash flow analysis — provided through ERP and advanced accounting software — offers insights into the financial health and future performance of a business.

What are the rules for the statement of cash flow? ›

Four simple rules to remember as you create your cash flow statement: Transactions that show an increase in assets result in a decrease in cash flow. Transactions that show a decrease in assets result in an increase in cash flow. Transactions that show an increase in liabilities result in an increase in cash flow.

Which companies should prepare cash flow statement? ›

Alongside Balance Sheet and Income Statement, all registered companies are mandated to prepare a cash flow statement, according to the revised Accounting Standard – III (AS – III).

Why a statement of cash flows must be prepared for a company? ›

This statement enables users of the financial statements to determine how well a business' income generates cash and to predict the potential of a business to generate cash in the future.

What is the new term for cash flow statement? ›

A cash flow statement may go by a few different names — CSF, statement of cash flow, SCF, or consolidated statement of cash flows — but each name represents the same thing: a financial statement where a company's operating, investing, and financing activities are reported in terms of incoming and outgoing money.

What is the FASB 95 statement of cash flows? ›

This Statement requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category.

What is the new name for the cash flow statement? ›

The cash flow statement (previously known as the flow of funds statement), shows the sources of a company's cash flow and how it was used over a specific time period.

Why do all businesses need to draw up a cash flow? ›

The cash flow statement helps a company make informed decisions for managing business operations. The cash flow management tool is an essential tool in determining how well a company can earn cash to pay its debts and manage its operating expenses.

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