International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

  intangibles and other long-term assets (including payments and receipts relating to

  capitalised development costs and self-constructed property, plant and equipment);

  (b) payments to acquire, and receipts from the sale of, equity or debt instruments of

  other entities and interests in jointly controlled entities (other than payments and

  receipts for those instruments considered to be cash equivalents or those held for

  dealing or trading purposes);

  (c) advances and loans made to, and repaid by, other parties (other than advances and

  loans made by a financial institution); and

  (d) payments for, and receipts from, futures contracts, forward contracts, option

  contracts and swap contracts, except when the contracts are held for dealing or

  trading purposes, or the cash flows are classified as financing activities (see 4.4.9

  below regarding allocation of cash flows on derivative contracts). [IAS 7.16].

  Only expenditures that result in a recognised asset in the statement of financial position

  are eligible for classification as investing activities. [IAS 7.16]. Therefore, cash flows

  relating to costs recognised as an expense cannot be classified within investing activities.

  As a result, payments including those for exploration and evaluation activities and for

  research and development that are recognised as an asset are classified as investing cash

  flows, while entities that recognise such expenditures as an expense would classify the

  related payments as operating cash flows.

  This requirement was added in response to submissions made to the Interpretations

  Committee about the classification of expenditure incurred with the aim of generating

  future revenues, but that may not always result in the recognition of an asset. Examples

  included exploration and evaluation expenditure, advertising and promotional

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  activities, staff training, and research and development. [IAS 7.BC3]. The IASB believes

  this approach aligns the classification of investing cash flows with the presentation in

  the statement of financial position; reduces divergence in practice and, therefore, results

  in financial statements that are easier for users to understand. [IAS 7.BC7]. It does not seem

  unreasonable that recurrent expenditure on items such as research and expensed

  mining costs should be classified as operating cash flows. However, application to other

  items that do not give rise to an asset in the statement of financial position, such as

  acquisition-related costs (discussed at 6.3.1 below) and the settlement of contingent

  consideration in a business combination (discussed at 6.3.3 below) may prove to be

  more complicated.

  The Interpretations Committee and the IASB have discussed the application of this

  requirement in practice, as some users appear to have given precedence to the

  classification of cash flows consistently with the classification of the related item in the

  statement of financial position, [IAS 7.BC7], (sometime referred to as the ‘cohesiveness

  principle’) over the objective in the standard to classify cash flows in accordance with

  the nature of the activity giving rise to the cash flow. [IAS 7.11]. In discussion, the IASB

  agreed that the primary principle for the classification of cash flows should be in

  accordance with the nature of the activity, and that the requirement for the recognition

  of an asset should be read as a constraint on the application of the primary principle,

  rather than as a competing principle.5

  Major classes of gross receipts and gross payments arising from investing activities are

  reported separately, except for those items that IAS 7 permits to be reported on a net

  basis, as discussed at 5.2 below. [IAS 7.21].

  4.3

  Cash flows from financing activities

  Financing activities are defined as those ‘activities that result in changes in the size and

  composition of the contributed equity and borrowings of the entity’. [IAS 7.6]. The

  standard states that this information is useful in predicting claims on future cash flows

  by providers of capital to the entity. [IAS 7.17]. However, it would seem more likely that

  information on financing cash flows would indicate the extent to which the entity has

  had recourse to external financing to meet its operating and investing needs in the

  period. The disclosure of the value and maturity of the entity’s financial liabilities would

  contribute more to predicting future claims on cash flows.

  Cash flows arising from financing activities include:

  (a) proceeds from issuing shares or other equity instruments;

  (b) payments to owners to acquire or redeem the entity’s shares;

  (c) proceeds from issuing, and outflows to repay, debentures, loans, notes, bonds,

  mortgages and other short or long-term borrowings; and

  (d) payments by a lessee for the reduction of the outstanding liability relating to a

  lease. [IAS 7.17].

  In consolidated financial statements, financing cash flows will include those arising from

  changes in ownership interests in a subsidiary that do not result in a loss of control

  (see 6.2 below). [IAS 7.42A].

  Statement of cash flows 3017

  Major classes of gross receipts and gross payments arising from financing activities

  should be reported separately, except for those items that can be reported on a net basis,

  as discussed at 5.2 below. [IAS 7.21].

  Disclosure requirements in respect of changes in liabilities arising from financing

  activities are discussed at 5.5 below.

  4.4

  Allocating items to operating, investing and financing activities

  Sometimes it is not clear how cash flows should be classified between operating,

  investing and financing activities. IAS 7 provides additional guidance on the

  classification of certain transactions, including interest, dividends and income taxes,

  while other questions are not addressed explicitly in the standard. These, as well as

  some common areas where judgement may be required to classify cash flows, are

  discussed below.

  4.4.1

  Interest and dividends

  An entity is required to disclose separately cash flows from interest and dividends

  received and paid, and their classification as either operating, investing or financing

  activities should be applied in a consistent manner from period to period. [IAS 7.31]. For

  a financial institution, interest paid and interest and dividends received are usually

  classified as operating cash flows. However, IAS 7 notes that there is no consensus on

  the classification of these cash flows for other entities and suggests that:

  • interest paid may be classified under either operating or financing activities; and

  • interest received and dividends received may be included in either operating or

  investing cash flows. [IAS 7.33].

  The standard allows dividends paid to be classified as a financing cash flow (because

  they are a cost of obtaining financial resources) or as a component of cash flows from

  operating activities. [IAS 7.34].

  In Extract 36.6 at 4 above, AstraZeneca has included interest paid under operating

  activities, interest received under investing activities and dividends paid under financing

  activities, as permitted by the standard. A different treatment is adopted by Anh
euser-

  Busch InBev in Extract 36.8 at 4.1.2 above, where interest paid, interest received and

  dividends received are all disclosed as operating cash flows.

  All of these treatments are equally acceptable. Nevertheless, it could be argued that

  entities which do not include interest or dividends received within revenue should not

  include interest or dividends in operating cash flows, because cash flows from operating

  activities are primarily derived from the principal revenue-producing activities of the

  entity, [IAS 7.14], and the amount of cash flows arising from operating activities is intended

  to be a key indicator of the extent to which the operations of the entity have generated

  sufficient cash flows to repay loans, pay dividends and make new investments without

  recourse to external sources of financing. [IAS 7.13]. On this basis, where management does

  not consider these items as part of the operating profit of the entity, interest paid would

  be a financing cash flow and interest and dividends received classified as investing cash

  flows. [IAS 7.33]. Similarly, entities could treat dividends paid as a financing cash flow,

  because they are a cost of obtaining financial resources. [IAS 7.34]. In addition, the standard

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  requires the total amount of interest paid during the period to be disclosed in the

  statement of cash flows, whether it has been recognised as an expense or capitalised as

  part of the cost of an asset in accordance with IAS 23 – Borrowing Costs. [IAS 7.32]. A literal

  reading of this requirement might suggest that interest paid should be presented as a single

  figure under operating or financing activities. However, it would also seem appropriate to

  include the cash outflow relating to capitalised borrowing costs under investing activities,

  provided that when this is done, the total amount of interest paid is also disclosed, either

  on the face of the statement of cash flows or in the notes. This gives rise to an apparent

  inconsistency between paragraph 16 of IAS 7 and paragraphs 32 to 33 of IAS 7, but

  attempts to clarify the issue through an annual improvement6 received negative feedback

  from respondents and ultimately no amendment was made.7

  4.4.2

  Taxes on income

  Cash flows arising from taxes on income should be separately disclosed within operating

  cash flows unless they can be specifically identified with investing or financing activities.

  [IAS 7.35].

  Whilst it is possible to match elements of tax expense to transactions for which the cash

  flows are classified under investing or financing activities; taxes paid are usually classified

  as cash flows from operating activities because it is often impracticable to match tax cash

  flows with specific elements of tax expense. Also, those tax cash flows may arise in a

  different period from the underlying transaction. [IAS 7.36]. This is the presentation adopted

  by Anheuser-Busch InBev in Extract 36.8 at 4.1.2 above. However, when it is practicable

  to make this determination, the tax cash flow is identified as an investing or financing

  activity in accordance with the individual transaction that gives rise to such cash flows. In

  cases where tax cash flows are allocated over more than one class of activity, the entity

  should disclose the total amount for taxes paid. [IAS 7.36].

  4.4.3

  Sales taxes and other non-income tax cash flows

  Although it provides guidance on the treatment of taxes on income, IAS 7 does not

  specifically address the treatment of cash flows relating to other taxes, such as value

  added tax (VAT) or other sales taxes and duty. The Interpretations Committee has

  considered whether it should add the question about VAT to its agenda and decided

  that it was not appropriate to develop an interpretation. Instead, it suggested that the

  issue of cash flows relating to VAT be considered by the IASB in its review of IAS 7 as

  part of the project on Financial Statement Presentation.

  In explaining why it would not add this question to its agenda, the Interpretations

  Committee noted that ‘IAS 7 does not explicitly address the treatment of VAT’ and added

  that ‘while different practices may emerge, they are not expected to be widespread’.8

  Therefore, it seems that entities can choose to disclose VAT receipts and VAT payments

  separately in the statement of cash flows or as part of the related cash inflows and

  outflows. Given the availability of alternative treatments, the Interpretations Committee

  noted that it would be appropriate in complying with IAS 1 – Presentation of Financial

  Statements – for entities to disclose whether cash flows are presented inclusive or

  exclusive of related VAT.9 We believe that the same principles should be applied for

  other non-income taxes.

  Statement of cash flows 3019

  4.4.4

  Cash flows from factoring of trade receivables and supply-chain

  financing

  Another question not explicitly addressed in the standard is the classification of cash

  receipts from the factoring of trade receivables and deferred cash payments to suppliers

  through supply-chain financing.

  In the case of debt factoring, an entity aims to provide cash flow from trade receivables

  more quickly than would arise from normal collection from customers, generally by

  transferring rights over those receivables to a financial institution. In our view, the

  classification of the cash receipt from the financial institution depends on whether the

  transfer results in derecognition of the trade receivables, or to the continued recognition

  of the trade receivables and the recognition of a financial liability for the funding

  received from the factoring entity. The characteristics determining which of these

  accounting treatments would be appropriate are discussed in Chapter 48 at 4.5 and 5.

  Only to the extent that the factoring arrangement results in the derecognition of the

  original trade receivable would it be appropriate to regard the cash receipt in the same

  way as any other receipt from the sale of goods and rendering of services and classify it

  in operating activities. [IAS 7.14(a)]. In cases where the trade receivable is not

  derecognised and a liability is recorded, the nature of the arrangement is a borrowing

  secured against trade receivables and accordingly we believe that the cash receipt from

  factoring should be treated in the same way as any short-term borrowing and included

  in financing activities. [IAS 7.17(c)]. The later cash inflow from the customer for settlement

  of the trade receivable would be included in operating cash flows and the reduction in

  the liability to the financial institution would be a financing outflow. Following the

  principle in IFRS 9 – Financial Instruments – for the disclosure of income and

  expenditure relating to a transferred asset that continues to be recognised, [IFRS 9.3.2.22],

  these two amounts would not be netted off in the statement of cash flows. However, it

  would be acceptable for the entity to disclose the net borrowing receipts from, and

  repayments to, the financial institution, if it was determined that these relate to

  advances made for and the repayment of short-term borrowings such as those which

  have a maturity period of three months or less. [IAS 7.23A]. In some cases, the factoring

 
arrangement requires customers to remit cash directly to the financial institution. When

  the transfer does not give rise to derecognition of the trade receivable by the reporting

  entity, we believe that entity can apply either of the following ways to depict the later

  settlement of the debt by the customer:

  (a) as a non-cash transaction. No cash flows would be reported at the time of the

  ultimate derecognition of the trade receivable and the related factoring liability; or

  (b) as a transaction in which the factoring entity collects the receivable as agent of the

  entity and then draws down amounts received in settlement of the entity’s liability

  to the financial institution. In this case the entity would report an operating cash

  inflow from the customer and a financing cash outflow to the financial institution.

  In the case of supply-chain financing or reverse factoring arrangements, typically a

  purchaser aims to defer cash flows through an arrangement with a financial intermediary,

  see Chapter 48 at 6.5. In this scenario cash outflows would arise on the settlement of the

  debt payable to the intermediary. An entity would need to consider whether these cash

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  flows are operating or financing in nature, and would reach this conclusion based on

  factors similar to those considered for deferred payments, as discussed at 5.4.1 below.

  4.4.5 Property, plant and equipment held for rental

  Payments to acquire and receipts from the sale of, property, plant and equipment are

  usually included in investing cash flows; however, this is not always the case.

  A number of entities routinely sell assets that were previously held for rental, for

  example, car rental companies that acquire vehicles with the intention of holding them

  as rental cars for a limited period and then selling them. IAS 16 – Property, Plant and

  Equipment – requires an entity, that, in its ordinary course of business, routinely sells

  items of property, plant and equipment that it has held for rental to others, to classify

  gains on the sale of such property, plant and equipment as revenue. [IAS 16.68A].

  Accordingly, the proceeds from the sale of such assets are classified as cash flows from

  operating activities, as are cash payments to manufacture or acquire property, plant and

  equipment held for rental to others and routinely sold in the ordinary course of business.