Start with financing and test the specific exception
Under Ind AS 7 paragraph 8, bank borrowings are generally financing. A bank overdraft is included as a component of cash and cash equivalents when it is repayable on demand and forms an integral part of the entity’s cash management. An account that often moves between a positive balance and overdraft is characteristic of this arrangement. Examine the actual contractual terms and use together; a short tenor or a product label does not establish the exception.
Read the applicable text: MCA: Ind AS 7, paragraphs 8, 9 and 45 ICAI: educational material on Ind AS 7.
Build the evidence facility by facility
Obtain the facility agreement, bank confirmation and daily balance history. Identify the demand repayment terms and show how the account is used to manage day-to-day liquidity. Compare actual sweeps and fluctuations with the treasury policy. An account that stays overdrawn for a sustained period warrants particular scrutiny; the pattern may indicate financing. Do not treat unused borrowing capacity as cash.
Explain why the cash flow total differs from the balance sheet
For a qualifying overdraft, include the drawn amount as a negative component of cash and cash equivalents in the cash flow reconciliation. Under paragraph 45, disclose components and reconcile them with the equivalent balance sheet items. This cash flow treatment does not itself authorise balance sheet offsetting. Under Ind AS 32 paragraph 42, offsetting requires a currently enforceable legal right of set-off and an intention to settle net or to realise the asset and settle the liability simultaneously. Under paragraph 9, movements solely between components of cash and cash equivalents are excluded from cash flows; payments to external parties still need their ordinary activity classification.
Keep non-qualifying borrowings in the financing workpaper
For a non-qualifying facility, leave the drawn amount outside cash and cash equivalents and trace its actual financing cash movements. Reconcile opening and closing debt, gross draws and repayments, and any non-cash changes. Also check the applicable Ind AS 7 disclosures on changes in liabilities from financing activities. Check the appropriate presentation requirements before considering netting of cash flows. Review amendments, renewals and actual use each period instead of carrying forward last year’s conclusion without evidence.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Qualifying facility in the closing bridge
Positive bank balances are ₹950,000 and a separately shown overdraft of ₹180,000 meets both paragraph 8 tests. Cash and cash equivalents for the cash flow reconciliation are ₹770,000, assuming no other components.
Illustrative example 2: Facility fails the demand test
The same amounts apply, but the ₹180,000 facility is repayable at a fixed maturity and does not qualify under paragraph 8. Cash and cash equivalents remain ₹950,000; the ₹180,000 is assessed in the financing working.
Illustrative example 3: Mixed facility portfolio
A company has ₹1,400,000 positive bank balances, a qualifying overdraft of ₹220,000 and non-qualifying drawn debt of ₹300,000. The cash flow total is ₹1,180,000. Deducting both facilities would incorrectly produce ₹880,000.
Illustrative example 4: Movement between components
The company transfers ₹50,000 from a positive balance of ₹300,000 to reduce a qualifying overdraft from ₹120,000 to ₹70,000. The positive balance falls to ₹250,000. Net cash and cash equivalents remain ₹180,000; the internal transfer is excluded from cash flows.
Illustrative example 5: Non-qualifying debt roll-forward
Opening drawn debt is ₹100,000. During the period the company draws ₹250,000 and repays ₹140,000, with no non-cash change. Financing cash movement is a net increase of ₹110,000 and closing debt is ₹210,000. Review presentation separately from this control total.
Illustrative example 6: Compare opening and closing net cash
Opening positive bank balances and qualifying overdrafts are ₹700,000 and ₹150,000. Closing figures are ₹860,000 and ₹240,000. Net cash rises from ₹550,000 to ₹620,000, an increase of ₹70,000 rather than the ₹160,000 increase in positive balances.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | List overdrafts and comparable facilities | Facility register and bank confirmations. |
| 2 | Identify drawn and undrawn amounts | Bank statements and signed reconciliation. |
| 3 | Test whether repayment is on demand | Executed terms and amendments. |
| 4 | Document actual treasury use | Daily balances, sweeps and cash policy. |
| 5 | Investigate persistent negative balances | Duration analysis and treasury explanation. |
| 6 | Classify each overdraft separately | Paragraph 8 conclusion with supporting evidence. |
| 7 | Separate cash-component transfers | Matched bank entries and transfer ledger. |
| 8 | Reconcile non-qualifying debt flows | Opening debt, draws, repayments and non-cash items. |
| 9 | Tie opening and closing cash to the balance sheet | Paragraph 45 reconciliation and accounting policy. |
| 10 | Review changes before finalising the statement | Renewals, use changes and reviewer sign-off. |
Sixteen practitioner FAQs
1. Is an overdraft always financing?
Generally borrowings are financing; qualifying overdrafts meet the specific paragraph 8 exception.
2. Is repayment on demand sufficient?
No. The facility must also be integral to cash management.
3. Is a three-month loan automatically eligible?
No. A short tenor does not establish the overdraft exception.
4. Does a signed cash policy settle the question?
No. Check actual usage and banking terms.
5. What balance pattern supports the conclusion?
Frequent movements between positive and overdrawn are characteristic.
6. Does a sustained negative balance merit follow-up?
Yes. It may indicate a financing arrangement.
7. Are undrawn limits included in cash and cash equivalents?
No. They are funding capacity, not a cash balance.
8. Can one bank account qualify and another fail?
Yes. Evaluate each arrangement on its facts.
9. Does inclusion permit balance sheet offsetting?
No. Evaluate offsetting separately under the applicable presentation rules.
10. Is a transfer between two qualifying components a cash flow?
No. Paragraph 9 excludes movements between those components.
11. Are supplier payments out of a qualifying overdraft ignored?
No. Classify actual external payments according to their nature.
12. How should a non-qualifying drawdown be tracked?
Include the actual draw in the financing working and reconcile the debt.
13. Does paragraph 45 require a bridge to the balance sheet?
Yes. Disclose components and reconcile the equivalent items.
14. Is the change in net cash the same as gross draws less repayments?
Not necessarily; reconcile all relevant components and movements.
15. What if the facility terms are renewed?
Reassess both repayment and cash-management evidence.
16. What should the reviewer retain?
The signed terms, actual balance history, classification conclusion and cash bridge.
Official sources
MCA: Ind AS 7, paragraphs 8, 9 and 45 ICAI: educational material on Ind AS 7