Ownership Changes and Reverse Factoring Under Ind AS 7 | Cash Flow Implications

1. Introduction

In the earlier part of this discussion, we examined several special transactions under Ind AS 7 relating to foreign currency cash flows, interest and dividends, taxes on income, and investments in subsidiaries and associates. However, the Statement of Cash Flows also contains several other complex areas that become particularly relevant in modern business structures involving acquisitions, group reorganisations, financing restructurings, and supply chain financing arrangements.

Certain transactions may significantly affect an entity’s financial position even though the actual movement of cash is limited or presented differently in the cash flow statement. Accordingly, Ind AS 7 requires additional presentation and disclosure requirements to ensure that users of financial statements clearly understand the economic substance of such arrangements.

This part discusses important areas relating to changes in ownership interests in subsidiaries and businesses, disclosures relating to liabilities arising from financing activities, and the growing significance of supplier finance arrangements.

2. Changes in Ownership Interests in Subsidiaries and Other Businesses

Acquisitions and disposals of subsidiaries or businesses are among the most significant investing decisions undertaken by entities. Such transactions often involve substantial movement of funds and may materially affect the financial structure and future cash-generating ability of the entity.

Accordingly, Ind AS 7 requires separate presentation of cash flows arising from obtaining or losing control of subsidiaries or other businesses.

2.1 Separate Presentation as Investing Activities

Cash flows arising from the acquisition or disposal of subsidiaries and businesses are classified as investing activities because they relate to long-term strategic investments and business restructuring decisions.

The aggregate cash flows arising from obtaining or losing control are presented separately in the Statement of Cash Flows as a single line item. This separate disclosure helps users distinguish these transactions from ordinary operating, investing, or financing cash flows.

For example, the acquisition of a subsidiary may involve a substantial cash outflow, which is not part of routine business operations. A separate presentation, therefore, improves the transparency and analytical usefulness of the cash flow statement.

2.2 Net Presentation of Consideration Paid or Received

An important feature under Ind AS 7 is that the consideration paid or received for acquisition or disposal is presented net of cash and cash equivalents acquired or disposed of.

This means that where a company acquires a subsidiary that already holds cash balances, the acquired cash is adjusted against the purchase consideration while reporting the investing cash flow.

Example – Acquisition of Subsidiary

Suppose Alpha Ltd. acquires 100% shares of Beta Ltd. for Rs. 25 crore. At the acquisition date, Beta Ltd. already possesses cash and bank balances amounting to Rs. 4 crore.

In the consolidated financial statements, under the Statement of Cash Flows, the net cash outflow disclosed will be Rs. 21 crore because the acquired cash balance is adjusted against the consideration paid.

2.3 Separate Disclosure for Loss of Control

Ind AS 7 does not permit offsetting of cash inflows from disposal transactions against cash outflows from acquisition transactions. Therefore, cash flows arising from obtaining control and losing control must be disclosed separately rather than on a net basis.

This ensures that users can independently evaluate acquisition activities and disposal activities undertaken during the reporting period.

2.4 Additional Disclosures Required

Apart from presenting the aggregate cash flow separately, the entity is also required to disclose additional information relating to acquisitions and disposals. These disclosures generally include:

(a) total consideration paid or received;

(b) amount of consideration consisting of cash and cash equivalents;

(c) cash and cash equivalents acquired or disposed of; and

(d) major classes of assets and liabilities acquired or disposed of.

These disclosures provide users with a better understanding of the nature and financial impact of business combinations and disposals.

2.5 Changes in Ownership without Loss of Control

A different situation arises where the parent company changes its ownership interest in a subsidiary without losing control over the subsidiary. Under Ind AS 110, such transactions are treated as equity transactions because control over the subsidiary continues to remain with the parent entity.

Accordingly, cash flows arising from such changes are classified as financing activities rather than investing activities.

Example – Partial sale without Loss of Control

Suppose Holding Ltd. owns 80% shares in Subsidiary Ltd. and sells 10% stake to outside investors while still retaining control over the subsidiary.

Since control continues with Holding Ltd., the transaction is treated as an equity transaction. Therefore, the cash inflow arising from the sale of shares will be classified as a financing activity.

2.6 Special Case – Investment Entities

Para 27 of Ind AS 110 defines an investment entity as an entity that:

(a) obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;

(b) commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and

(c) measures and evaluates the performance of substantially all of its investments on a fair value basis.

Investment entities primarily invest funds for earning capital appreciation or investment income and measure investments at fair value. For such entities, changes in ownership interests are generally viewed as investment activities. Accordingly, cash flows arising from changes in ownership interests by investment entities are generally classified as investing activities instead of financing activities.

3. Changes in Liabilities arising from Financing Activities

Users of financial statements often face difficulty in understanding how financing liabilities have changed during the year. Borrowings may increase or decrease not only because of cash repayments or fresh loans, but also because of exchange fluctuations, business combinations, lease modifications, fair value changes, or other non-cash adjustments.

To improve transparency, Ind AS 7 requires entities to provide disclosures explaining changes in liabilities arising from financing activities.

3.1 Objective of the Disclosure

The purpose of this disclosure requirement is to enable users to evaluate, how the entity raises finance, how financing obligations change during the year; and the extent to which such changes arise from actual cash flows versus non-cash events.

This disclosure is especially useful for lenders, analysts, and investors assessing leverage and liquidity risks.These disclosures also enable users to distinguish between changes arising from actual cash flows and changes arising from non-cash adjustments.

3.2 Types of Changes Requiring Disclosure

Ind AS 7 requires entities to disclose changes arising from both cash and non-cash movements. Such changes may arise due to financing cash flows, acquisition or disposal of subsidiaries, foreign exchange fluctuations, fair value changes, lease modifications, or other adjustments that do not involve immediate movement of cash.

3.3 Reconciliation of Financing Liabilities

In practice, entities generally provide a reconciliation between the opening and closing balances of financing liabilities. Such reconciliation separately identifies opening balances, cash inflows, cash repayments, non-cash adjustments, and closing balances. This enables users to directly link movements in financing liabilities with the Statement of Financial Position and the Statement of Cash Flows.

Example – Reconciliation of Borrowings

Suppose a company has opening borrowings of Rs. 100 crore. During the year, it repays Rs. 20 crore, obtains additional loans of Rs. 30 crore, and records foreign exchange loss of Rs. 5 crore on foreign currency borrowings.

In such a case, the closing borrowing balance becomes Rs. 115 crore. The reconciliation disclosure would separately identify the fresh borrowings, repayments, and non-cash increase arising from exchange fluctuation so that users can understand the reasons for the overall change in borrowings.