PAS 7 is a Philippine Accounting Standard adopted by the Financial Reporting Standards Council (FRSC) that requires entities to prepare a cash flow statement showing how changes in cash and cash equivalents arise from operating, investing, and financing activities.
The standard mirrors International Accounting Standard 7 (IAS 7) issued by the International Accounting Standards Board. In the Philippines, all entities following Philippine Financial Reporting Standards (PFRS) must comply with PAS 7 when preparing financial statements.
Key Provisions
PAS 7 establishes the following requirements:
- Cash and Cash Equivalents: Includes currency on hand, demand deposits, and short-term investments (less than 3 months) that are readily convertible to known cash amounts with minimal risk of value changes
- Three-Activity Classification: Cash flows must be categorized into operating, investing, and financing activities
- Operating Activities Reporting: Entities may use either the direct method (recommended) or indirect method to report operating cash flows
- Reconciliation Requirement: Companies must reconcile opening and closing balances for financing activities in their statement of financial position
- Non-Cash Disclosure: Investing and financing transactions that do not use cash must still be disclosed
Who is Affected?
PAS 7 applies to:
- All Philippine corporations required to file audited financial statements
- Real estate developers registered with DHSUD
- PRC-licensed brokers operating corporate brokerage firms
- Any entity preparing financial statements under PFRS
Small and medium enterprises (SMEs) may follow the simplified PFRS for Small Entities, though the cash flow statement remains a required component.
Penalties
Failure to comply with PAS 7 may result in:
- Qualified or adverse audit opinions from external auditors
- SEC penalties for publicly listed companies filing non-compliant statements
- BIR scrutiny when tax returns are inconsistent with reported cash flows
- Revocation of professional licenses for accountants who prepare non-compliant reports
Relevance to Philippine Real Estate
For real estate brokerages and developers, PAS 7 compliance is essential for:
- Tracking commission management disbursements as operating cash outflows
- Classifying payment tracking collections from buyers correctly
- Reporting accounts receivable movements from property sales
- Presenting VAT management cash impacts on operating activities
- Supporting BIR tax reports with consistent cash flow data
The income statement and balance sheet alone cannot show liquidity position. Real estate companies with high receivables from installment sales need the cash flow statement to demonstrate actual cash generation.
Real estate accounting software with integrated cash flow statement generation helps ensure PAS 7 compliance by automatically classifying transactions according to the standard's requirements.
Related Terms
References
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