IAS 7 – Classification of cash payments for deferred and contingent consideration (new)
The Committee received a request for guidance on the classification of cash payments for deferred and contingent considerations under IAS 7 Statement of Cash Flows. More specifically, the submitter asked the Committee to clarify whether: (i) the settlement of contingent consideration should be classified as an operating, an investing or a financing activity in the statement of cash flows; and (ii) whether the subsequent settlement of deferred consideration for a business combination should be classified as an investing or a financing activity in the statement of cash flows.
The staff presented to the Committee its analysis that paragraphs 16 in IAS 7 provided sufficient guidance for the classification of cash payments for deferred and contingent considerations in the statement of cash flows. Cash payments for the contingent/deferred consideration recognised at the acquisition date and any adjustment arising during the measurement period (as defined in paragraphs 45-50 of IFRS 3) should be classified as investing activities in accordance with paragraph 16 of IAS 7, because these cash flows lead to the recognition of the acquiree's net assets in a business combination. Cash payments relating to interest resulting from accretion of the discount on the contingent/deferred consideration liability balance should be classified in financing or operating cash flow in accordance with other interest expenses, as stated in paragraphs 31—34 of IAS 7. All other cash payments in excess of the acquisition date fair value of the contingent/deferred consideration should be classified as operating activities, because these cash flows do not result in a recognised asset.
While many Committee members agreed with the analysis of the staff, most were concerned with the wording of any tentative agenda decision not to add this issue to the Committee's agenda as a result of clarity of the guidance. General concerns expressed by the Committee during deliberations included the following:
- A few Committee members cited diversity in practice on this topic and expressed a desire to include this topic as part of an Annual Improvement. However, other Committee members expressed a concern with the scope of this project given that other cash flow projects have already been undertaken in recent years. This led to a debate as to whether a larger cash flow project should be undertaken.
- Certain Committee members further referenced the accounting for finance leases which provides for a unique application compared to the guidance above.
- Certain Committee members desired to exclude guidance in the agenda decision out of fear that the agenda decision would appear interpretative.
As a result of deliberations, the Committee expressed the following tentative views:
- Diversity in practice appears prevalent. Thus, a straight rejection of the issue appears inappropriate.
- Support exists for adding this item as an Annual Improvement project. Many supported limiting the project scope to operating cash flows under business combinations as opposed to a larger cash flow project. The staff will bring back further analysis on a potential project scope at a future meeting.
- The IASB is currently working on its leasing project, which includes cash flow considerations relating to currently termed 'finance leases'. The Committee expressed a desire to understand the outcome of these deliberations given interpretation concerns outlined above.