Cash flows for income tax and sales tax

Cash flows for income tax and sales taxCash flows for income tax and sales tax – IAS 7 includes some specific standards for the treatment of cash flows in the Statement of cash flows for income tax and sales tax (and other taxes).

(i) Income taxes

IAS 7.35 requires cash flows arising from income taxes to be disclosed separately, and classified within operating activities unless they can be specifically associated with financing or investing activities. Cash flows for income tax and sales tax

(ii) Sales taxes

IAS 7 does not provide guidance covering sales taxes (such as VAT or GST) that are collected by entities on behalf of third parties (typically governments). The approach adopted will vary, depending on whether the entity follows the direct or indirect method in preparing its statement of cash flows.

If the direct method is followed, the following approaches might be followed: Cash flows for income tax and sales taxUSD

  • Include cash flows associated with sales taxes as separate line items Cash flows for income tax and sales tax
  • Include cash flows associated with sales taxes in the payments to suppliers and receipts from customers.

If the indirect method is followed, sales taxes will be included in the increase or decrease in accounts payable.

Example Cash flows for income tax and sales tax

Entity A has a single transaction during its reporting period, being a sale to a customer for CU120 (inclusive of sales tax of CU20).

Something else -   Classification of cash flows

At entity A’s reporting date, the customer has settled the amount due of CU120 in cash, but the sales tax has not yet been remitted to the tax authorities.

Direct method Cash flows for income tax and sales tax

Entity A could include either of the following in its statement of cash flowsQuality: Cash flows for income tax and sales tax

––Receipts from customers of CU100 and indirect taxes collected of CU20, or Cash flows for income tax and sales tax

––Receipts from customers of CU120. Cash flows for income tax and sales tax

Indirect method Cash flows for income tax and sales tax

Entity A would show working capital movement of an increase in accounts receivable of CU20. Cash flows for income tax and sales tax

(iii) Other taxes Cash flows for income tax and sales tax

For other taxes, it is appropriate for the cash flows to be included within the same activity as the cash flows arising from the transaction that gave rise to the tax cash flows.

This approach results in consistency between the way in which amounts are presented in the statement of cash flows and in other primary statements.

These taxes include withholding taxes related to dividend payments, employees’ tax on earnings that is remitted by an entity to the tax authorities, and capital taxes incurred on the acquisition of a property. Cash flows for income tax and sales tax

banner3

Cash flows for income tax and sales tax

This approach results in consistency between the way in which amounts are presented in the statement of cash flows and in other primary statements. These taxes include withholding taxes related to dividend payments, employees’ tax on earnings that is remitted by an entity to the tax authorities, and capital taxes incurred on the acquisition of a property. This approach results in consistency between the way in which amounts are presented in the statement of cash flows and in other primary statements. These taxes include withholding taxes related to dividend payments, employees’ tax on earnings that is remitted by an entity to the tax authorities, and capital taxes incurred on the acquisition of a property. These taxes include withholding taxes related to dividend payments, employees’ tax on earnings that is remitted by an entity to the tax authorities, and capital taxes incurred on the acquisition of a property.

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   Share-based payment

Leave a comment