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treatment of bank o/d in cash flow statements

GAURAV BEHL (CA-FINAL ) (228 Points)

30 October 2009

i had a debate with my friend ragarding the treatment of bank overdrafts in cash flow statement.. my view is that it is a part of cash and cash equivalents and should be adjusted in opening and closing cash and cash equivalents.. as per as-3 cash flow statements cash equivalents include demand deposits with bank.. demand deposits include positive and negative balance of bank.. so it is a part of cash equivalents.

my friend is of the view that it is a part of finacing activity and it should be adjusted in the same..

you guys are requested to plz advice on the issue.. answers with source of data will be highly oblized...

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24 Replies

FATEMA (CHARTERED ACCOUNTANT) (719 Points)
Replied 30 October 2009

Dear Gaurav,

I think ur friend is right.Bank overdraft is a part of financing activity.

According to AS-3 "An investment normally qualifies as a cash equivalent only when it has short maturity of say,three months or less from the date of acquisition"

Bank overdraft is not an investment so it does not fit in this definition of cash and cash equivalents.

GAURAV BEHL (CA-FINAL ) (228 Points)
Replied 30 October 2009

dear kajri,

as i have already stated as per as-3 cash flow statements cash equivalents include demand deposits with bank.. demand deposits include positive and negative balance of bank.. so it is a part of cash equivalent

i agree that cash equivalents include short term marketable securities but it does not mean that only investments are part of cash equivalents.. hope u r getting my point..

CA Trinath Galla (student) (3130 Points)
Replied 30 October 2009

I agree with gaurav. They should be adjusted in opening and closing balances of cash and cash equivalents. cash and cash equivalents include demand deposits with bank, it is clearly mentioned that they include that. obviously negative balances also should be considered under the same head.

CA LOVELY ARORA (C.A. B.Com (H) Graduate) (2151 Points)
Replied 30 October 2009

it's not a point to clear to any one..... it's one of the most debatable point of all the time....... as no one yet has clarify this point.... so, do what do you want, but if asking for exams point of view, give clarification note about your treatment......

Amol Gopal Kabra (CA,CS,DISA) (Practicing CA) (8539 Points)
Replied 30 October 2009

In my opinion, the Bank Overdraft shall form part of Cash and Cash Equivalents. However, the Cash Credit availed from bank shall form part of Financing Activity. Many a times, people confuse with Bank OD and Cash Credit and consider the same on equal footings. So, Gaurav, you are right in considering the Bank OD as part of Cash and Cash Equivalents.

2 Like

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 31 October 2009

Thanks Mr Amol Gopal Kabra for giving the views on the same

GAURAV BEHL (CA-FINAL ) (228 Points)
Replied 02 November 2009

thanx amol sir but the question arises why should there be a discrimination in treatment of bank o/d and cc ?

CA Rahul Jain (CA) (1162 Points)
Replied 03 November 2009

As per AS-3 , Cash equivalents include demand deposits with banks. Demand deposit necessarily means the deposits which can be demanded later on. Bank overdraft(Negaative balance in A/c.) is not a deposit.

Further, Under GAAP, changes in overdraft balances - sources of cash from increasing overdraft balances or uses of cash forreducing them- should be reported as financing activities on the statement of cash flows.

Also, in balance sheet we prefer different treatment to bank deposits & bank overdrafts. Any balance with bank is shown under the head " Cash & Bank Balance" while Bank O/d is always shown as a current liability.

And as per Financial Accounting Standard No. 95 (Statement of Cash Flows) , cash balances on the cash flow statement should relate to the amounts reported on the balance sheet.

As far as CC limit is concerned, I agree with Gaurav. for the purpose of cfs, we shall not discriminate between CC and O/d as CC can also have the positive balance.

does it clarify Gaurav bro.........

2 Like

GAURAV BEHL (CA-FINAL ) (228 Points)
Replied 10 November 2009

The Institute of Chartered Accountants of India (ICAI) has issued an exposure draft of revised Accounting Standard (AS) 3, which relates to Statement of Cash Flows, on the lines of corresponding International Accounting Standard-7 for public comments. According to an official communiqué, the exposure draft of revised AS-3 contains more disclosure requirements compared with the existing AS-3 regarding Cash Flow Statements and contains specific treatment for various items, such as bank overdrafts, cash flows from changes in interests in a subsidiary that do not result in a loss of control, among others. The existing AS-3 does not provide for any specific treatment on these issues, the statement added

GAURAV BEHL (CA-FINAL ) (228 Points)
Replied 10 November 2009

PLZ REFER APPENDIX D PAGE 29 OF THE ATTACHED FILE POINT NO (i)

Attached File : 47 13331announ061008 a.pdf downloaded: 420 times

Anil Agarwal (IPCC) (29 Points)
Replied 23 December 2009

Gaurav the question u r raising is absolutely right.It should be part of cash and not cash equivalent because cash includes demand deposits with the bank i.e. current account balance.So it is negative cash.But in India we treat it as Financing activity which i thing is wrong at all.Infact US GAAP also do the same treatment.But IFRS/IAS-7 differentiate between bank borrowings and bank o/d.It takes bank borrowings as financing activity and bank o/d as Cash and cash equivalent.Logically thish is the right treatment.But for examination purposes i think we should take it as Cash and cash equivalent by giving a note to the same.Ultimately we are going to adopt IFRS in future so our thinking is absolutely right.

1 Like

Anil Agarwal (IPCC) (29 Points)
Replied 23 December 2009

My email id is anil02_agarwal @ yahoo.com. My mobile no is 9810326632.Any one want to discuss matters with me is most welcome.I am IPCC student going to give Exam in May 2010.

Desperado (Cost And Management Accountant) (129 Points)
Replied 23 December 2009

Dear Gaurav,
Both of the treatments are correct, no issue can be arisen in either case, In this regard, no assumption is required to be taken in the examinations for the purpose of clarification.
Furthermore, you are requested to go through IAS-7, under which both of the practises are allowed.

Best Regards,
Desperado

First!!!! (student) (162 Points)
Replied 23 December 2009

Bank OD is a Debatable item. . . .In the Balance Sheet also u can put it in the Current Liabilities or Secured loan as it is not repayable in near future or u can also put in Current liabilities as it can be repayed at any point of time. . .So it has two treatments.