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IAS 7 — Review of requests in relation to IAS 7

Date recorded:

At its January 2012 meeting, the IASB discussed two statement of cash flow issues that had been considered by the Committee. Both of these issues related to classification under IAS 7 Statement of Cash Flows and included:

  • classification of cash payments for deferred and contingent consideration arising from a business combination within the scope of IFRS 3 Business Combinations; and
  • classification of cash flows for an operator in a service concession arrangement within the scope of IFRIC 12.

The Board decided that before it could decide on whether or not these issues should be addressed through the annual improvements project, it would direct the staff to ask the Committee to look collectively at these two issues, as well as all of the previous IAS 7 issues that the Committee has discussed regarding the classification of cash flows, and consider whether these issues could be dealt with collectively.

The staff presented its analysis of IAS 7 issues historically considered by the Committee; noting six issues since 2004. In analysing the nature of these issues, the staff noted that while one issue requested an interpretation of the meaning of ‘cash equivalents´, all other issues related to classification of specific items in the financial statements (i.e., operating, investing or financing classification).

Focusing its attention on cash flow classification issues, the staff identified two possible classification principles used to support previous Committee decisions: (1) cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate or (2) cash flows in IAS 7 should be classified consistently with the classification of the related or underlying item in the statement of financial position (i.e., consistent with the cohesiveness principle in paragraphs 57-58 of the Financial Statement Presentation project's Staff Draft (published in July 2010)).

In considering the staff´s research, many Committee members preferred a principle in which cash flows are classified in accordance with the nature of the activity to which they relate. Reasons cited for this view were primarily based on paragraph 11 of IAS 7 which states ‘An entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business. Classification by activity provides information that allows users to assess the impact of those activities on the financial position of the entity and the amount of its cash and cash equivalents...´.

However, other Committee members expressed concerns with this principle. Specific concerns included:

  • uncertainty as to whether the above principle would take precedent over the definition of operating, investing and financing activities included in paragraph 6 of IAS 7 in classifying cash flows;
  • uncertainty as to the use of the word ‘activity´ within the above principle. For example, in the acquisition of a fixed asset for use in the operations of a business, many Committee members noted that this cash flow should be characterised as an investing cash flow and not an operating cash flow. They noted that the word ‘activity´ does not refer to the entity´s use of the underlying asset, but rather, ‘activity´ is applied in a context similar to paragraph 6 of IAS 7; and
  • operational concerns with application of such a principle for service concession arrangements or other specific transaction types.

At the extreme, one Committee member even suggested that too many classification questions were being raised in practice, and therefore, one potential solution would be to remove the classifications entirely. Instead, disclosure could be required to describe specific types of cash flows to assist users. However, other Committee members expressed concern with this view given the importance operating cash flows play on key performance indicators and debt covenants, for example.

Considering the feedback received, the majority of Committee members expressed support for the core principle that cash flows should be classified in accordance with the nature of the activity to which they relate. Therefore, the Committee requested the staff to apply the underlying principle developed to IAS 7 issues raised to the Committee in the past. If clear answers to the classification questions could be reached in application of the developed principle, the Committee would seek to bring a proposal to the Board in a future meeting.

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