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[IAS 7.14].
The requirement to classify payments for such property, plant and equipment held for
rental under operating cash flows is intended to avoid initial expenditure on purchases
of assets being classified as investing activities, while inflows from sales are recorded
within operating activities. However, this means that management will need to
determine, at the time of acquisition or manufacture, which of the assets that it intends
to rent out will be ultimately held for sale in the ordinary course of business.
4.4.6 Cash flows for service concession arrangements
Because a cash flow is only classified in investing activities if it results in a recognised
asset in the statement of financial position, a question arises regarding the classification
of the cash inflows and outflows of the operator of a service concession arrangement
that is within the scope of IFRIC 12 – Service Concession Arrangements.
IFRIC 12 features two possible accounting models – the intangible asset model or the
financial asset model. Under both models, the service element relating to the
construction of the infrastructure asset is accounted for in accordance with IFRS 15 –
Revenue from Contracts with Customers – and the revenue recognised gives rise to an
intangible or a financial asset, in the form of a receivable, respectively. It is unclear
whether cash flows incurred in the construction or upgrade phase should always be
regarded as operating cash flows because they relate to the provision of construction
services; or whether they are more accurately classified as investing activities, as they
reflect cash outflows that result in the recognition of an intangible asset.
In the case of an arrangement under the intangible asset model, the cash flows incurred
during construction or upgrading could be classified in investing activities as they relate
to the acquisition of an intangible that will generate future income and cash flows. Once
the operating phase is reached, the inflows received would be most appropriately
classified in operating activities as most operating and maintenance costs are likely to
be executory and will be accounted for as incurred.
On the other hand, when the financial asset model applies, cash inflows may
considered to be deferred payments and therefore represent the provision of
Statement of cash flows 3021
financing to the grantor. In a corollary of the discussion on deferred payments at 5.4
below, where the time value of money is significant to the transaction, the transaction
may be tantamount to providing a loan, and the repayment of such an instrument
would be considered an investing cash flow (or potentially split between investing and
operating cash flows for the capital and interest components respectively, depending
on the policy of the entity).
Since there is no specific guidance relating to the classification of cash flows for service
concession arrangements, current practice is mixed and therefore either treatment can
be applied. IFRIC 12 is discussed in more detail in Chapter 26.
4.4.7 Treasury
shares
Treasury shares are an entity’s own equity instruments that are acquired and held by
the entity, a subsidiary or other members of the consolidated group. The consideration
paid or received for treasury shares is recognised directly in equity and not as a
movement in investments. [IAS 32.33]. As such, it should be clear that payments and
receipts to acquire or dispose of treasury shares should be classified within financing
activities. [IAS 7.17]. Even where such treasury shares are acquired by the entity as part
of an equity-settled share-based payment transaction, the cash outflow should be
classified under financing activities. Whilst cash payments to and on behalf of
employees are classified under operating activities, [IAS 7.14], the acquisition of treasury
shares does not settle a transaction between the entity and its employees. An equity-
settled share-based payment transaction is completed when the entity transfers its
equity instruments to employees in consideration for the services received.
When a cash payment is made by a subsidiary to its parent or a trust that holds treasury
shares as part of an equity-settled share-based payment arrangement, the payment
should be accounted for as a deduction from equity in the separate financial statements
of the subsidiary, on the grounds that the payment does not settle the transaction with
the employees, but is effectively a distribution to the parent or the trust (see Chapter 30
at 12.4.3 and 12.5.3). Having regarded this as a distribution, it follows that the cash flow
should be classified as either operating or financing, according to the entity’s policy on
dividends as discussed at 4.4.1 above.
4.4.8
Cash flows related to the costs of a share issue
Costs directly related to the issue of shares are required to be deducted from equity.
[IAS 32.35]. As the costs reduce the amount of the proceeds received from the share issue,
they should be classified as a financing cash flow. [IAS 7.17(a)]. However, where a
proposed share issue is cancelled, there would be no proceeds from the issue to record
and the related expenses would be included in profit and loss rather than equity. As
such, the definition of a financing cash flow would not be met, and the transaction costs
would be classified in operating cash flows.
4.4.9
Cash flows on derivative contracts
Payments and receipts relating to derivative contracts can be classified within operating,
investing or financing in different circumstances. Where the contract is held for dealing
or trading purposes, the cash flows are classified under operating activities. [IAS 7.14]. IAS 7
requires that payments for, and receipts from, futures contracts, forward contracts, option
3022 Chapter 36
contracts and swap contracts are classified as cash flows from investing activities, except
when the contracts are held for dealing or trading purposes, or the cash flows are classified
as financing activities. [IAS 7.16].
The standard adds that when a contract is accounted for as a hedge of an identifiable
position, the cash flows of the contract are classified under the same heading as the cash
flows of the position being hedged. [IAS 7.16]. An example is an interest rate swap. An
entity wishing to convert an existing fixed rate borrowing into a floating rate equivalent
could enter into an interest rate swap under which it receives interest at fixed rates and
pays at floating rates. All the cash flows under the swap should be reported under the
same cash flow heading as interest paid (i.e. as financing activities or operating activities,
in accordance with the entity’s determined policy, as discussed at 4.4.1 above), because
they are equivalent to interest or are hedges of interest payments.
The standard suggests that receipts and payments on contracts might be included in
financing cash flows; but, except for the text on contracts accounted for as hedges of an
identifiable position, gives no indication of the circumstances under which such a
classification would be appropriate. [IAS 7.16].
So how should an entity classify the cash flows from a derivative contract that is<
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considered by management as part of a hedging relationship, but for which the entity
elects not to apply hedge accounting (taking all movements to profit or loss) or for which
hedge accounting is not permitted under IFRS 9? Consider the following example.
Example 36.1: Cash flows from derivatives not qualifying for hedge accounting
Company A has the euro as its functional currency. On 1 January 2018, it sells goods to a US customer for
which it charges US$1,000,000. The spot exchange rate on this date is 1:1 and it recognises revenue of
€1,000,000. Payment is due to be received on 30 June 2018. A enters into a forward contract to exchange
US$1,000,000 for €1,095,000 on 30 June 2018. It does not designate it as a hedge because the effects of
movements on the contract and those of retranslating the receivable will already offset in profit or loss. On
30 June 2018 the exchange rate is such that A receives the equivalent of €1,200,000 from its customer and
pays €105,000 on the forward contract.
Taken literally, IAS 7 would suggest that the receipt from the customer of €1,200,000 is classified as an
operating cash inflow; but, because the forward contract is not held for dealing or trading purposes and is not
accounted for as a hedge of an identifiable position, the €105,000 cash outflow on the forward contract cannot
be classified under operating activities. As such, the €105,000 would have to appear in investing or possibly
financing cash flows. However, had the entity elected to apply hedge accounting, the standard would require
the €105,000 to be included in operating cash flows.
This example highlights a current deficiency in IAS 7; its terminology was never updated
or refined when the IASB issued guidance on hedge accounting. This deficiency is
acknowledged by the IASB when it discusses, in the implementation guidance to IFRS 9,
the classification of cash flows from hedging instruments. [IFRS 9.IG.G.2]. Therefore, in our
opinion, since the IASB has not reflected the requirements of IFRS 9 in the text of IAS 7,
it does not require the treatment of cash flows ‘when a contract is accounted for as a
hedge of an identifiable position’, [IAS 7.16], to be restricted only to those hedging
relationships that either are designated as hedges under IFRS 9, or would otherwise
qualify for hedge accounting had they been so designated. Accordingly, in Example 36.1
above, entity A would include the payment on the forward contract in cash flows from
operating activities.
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4.4.10
Classification of cash flows – future developments
As part of their Better Communication in Financial Reporting project, the IASB is
currently exploring targeted improvements to the structure and content of the primary
financial statements, including the statement of cash flows. In this research project the
IASB is considering whether it can reduce presentation choices for items in the
statement of financial performance and statement of cash flows to make it easier for
investors to compare companies’ performances and future prospects. The IASB has
taken a number of tentative decisions in relation to IAS 7.
In November 2017, the IASB tentatively decided to clarify the current description of
‘financing activities’ in IAS 7 by indicating that a financing activity involves:
• the receipt or use of a resource from a provider of finance (or the provision of credit);
• the expectation that the resource will be returned to the provider of finance; and
• the expectation that the provider of finance will be appropriately compensated
through the payment of a finance charge. The finance charge being dependent on
both the amount of the credit and its duration.10
In December 2017, the IASB tentatively decided to remove from IAS 7 options for the
classification of interest and dividends paid and interest and dividends received, and to
prescribe a single classification for each of these items, clarifying that:
• cash flows arising from interest incurred on financing activities should be classified
as financing cash flows;
• cash flows arising from interest paid that is capitalised as part of the cost of an asset
should be classified as financing cash flows;
• cash flows arising from dividends paid should be classified as financing cash flows;
and
• interest and dividends received should be classified as investing cash flows and that
the definition of ‘investing activities’ in IAS 7 should be amended to make that clear.11
In addition, the IASB tentatively decided to require a consistent subtotal as the starting
point for the indirect reconciliation of cash flows from operating activities, that subtotal
being profit before investing, financing and income tax.12
In February 2018, the IASB tentatively decided to propose:
• separate presentation of (i) the cash flows that arise between an entity and its
integral associates and joint ventures and (ii) the cash flows that arise between an
entity and its non-integral associates and joint ventures. The split being the same
as that used in the proposed format for the statement of financial performance; and
• the separate presentation of the investing cash flows of integral and non-integral
associates and joint ventures should be within the investing section of the
statement of cash flows.
The IASB will continue its discussions on the Primary Financial Statements project
throughout 2018 with a view to publishing either a Discussion Paper or an Exposure
Draft in 2019. The project is discussed further in Chapter 3 at 6.3.2.
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5.
OTHER CASH FLOW PRESENTATION ISSUES
5.1
Exceptional and other material cash flows
IAS 1 prohibits the presentation of extraordinary items either on the face of the
statement of comprehensive income, the separate income statement (if presented) or in
the notes. [IAS 1.87]. Consequently, IAS 7 does not refer to extraordinary items.
As regards exceptional and other material cash flows, IAS 1 requires the nature and
amount of material items of income and expense to be disclosed separately. [IAS 1.97]. It
also requires additional line items, headings and sub-totals to be presented on the face
of the statement of financial position when this is relevant to an understanding of the
entity’s financial position. [IAS 1.55]. Therefore, although IAS 7 is silent on the matter, it
would be appropriate for material cash flows or cash flows relating to material items in
the statement of comprehensive income to be presented as separate line items on the
face of the statement of cash flows, provided that they remain classified according to
their nature as either operating, investing or financing cash flows.
If items are described as ‘exceptional’ cash flows, the entity’s statement of accounting
policies should explain the circumstances under which an item would be classified as
exceptional and the notes to the financial statements should include an appropriate
description of the nature of the amounts so treated.
5.2
Gross or net presentation of cash flows
In general, major classes of gross receipts and gross payments should be reported
separately. [IAS 7.21]. Operating, inve
sting or financing cash flows can be reported on a
net basis if they arise from:
(a) cash flows that reflect the activities of customers rather than those of the entity
and are thereby made on behalf of customers; or
(b) cash flows that relate to items in which the turnover is quick, the amounts are large,
and the maturities are short. [IAS 7.22].
Examples of cash receipts and payments that reflect the activities of customers rather
than those of the entity include the acceptance and repayment of demand deposits by
a bank, funds held for customers by an investment company and rents collected on
behalf of, and paid over to, the owners of properties. [IAS 7.23]. Other transactions
where the entity is acting as an agent or collector for another party would be included
in this category, such as the treatment of cash receipts and payments relating to
concession sales.
Examples of cash receipts and payments in which turnover is quick, the amounts are
large and the maturities are short include advances made for and the repayment of:
(a) principal amounts relating to credit card customers;
(b) the purchase and sale of investments; and
(c) other short-term borrowings, such as those with a maturity on draw down of three
months or less. [IAS 7.23A].
An example noted in IAS 20 – Accounting for Government Grants and Disclosure of
Government Assistance – where gross presentation is deemed appropriate for major
Statement of cash flows 3025
classes of cash flows is the receipt of government grants, which ‘are often disclosed as
separate items in the statement of cash flows regardless of whether or not the grant is
deducted from the related asset for presentation purposes in the statement of financial
position’. [IAS 20.28].
See 7.2 below for the gross or net presentation of cash flows for financial institutions.
5.3
Foreign currency cash flows
IAS 21 – The Effects of Changes in Foreign Exchange Rates – excludes from its scope
the translation of cash flows of a foreign operation and the presentation of foreign
currency cash flows in a statement of cash flows. [IAS 21.7]. Nevertheless, IAS 7 requires
foreign currency cash flows to be reported in a manner consistent with IAS 21. [IAS 7.27].