Background

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
• classification of cash flows for an operator in a service concession arrangement within the scope of IFRIC 12 Service Concession Arrangements.

The IASB 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.

At the March 2012 meeting, the Committee noted two classification principles used to support previous Committee decisions:

• Principle 1 - cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate (i.e., most appropriate to the business of the entity), or
• Principle 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.

The staff suggested that to provide further guidance on how to implement the primary principle (Principle 1), the following elements could be added to help identify the nature of the cash flows being analysed:

• the cause or reason for which the cash flow is received or paid
• the counterparty who receives or pays the cash flow
• whether cash flows result from transactions that enter into the determination of profit or loss, or
• the predominant source of cash flows.

The Committee discussed the staff’s analysis of six examples (see below) that illustrate the classification of cash flows which was aimed at testing the principle (using the first principle as the primary guidance principle) for classification of the cash flows noted above and to determine how existing guidance in IAS 7 could be clarified.

• Example 1: Cash contributions to a long-term employee benefit fund
  • Nature of transaction - Cash outflows are part of the compensation for employment services and would be classified like any other cash payment on behalf of the employees.
  • Classification - Operating activities
• Example 2: Cash received as compensation for an insured loss for damaged PP&E (property, plant & equipment)
  • Nature of transaction - Cash inflows are received to cover for losses and damages of PP&E. This transaction represents ‘in substance’ a disposal of PP&E and would be classified as an investing activity. Insurance proceeds are not derived from the principal revenue-producing activities of the entity.
  • Classification - Investing activities
• Example 3: Cash payment to purchase of PP&E on deferred payment terms
  • Nature of transaction - Cash outflows are to acquire PP&E and made to a supplier. Consequently they would be classified as an investing activity regardless of when cash flows will be paid.
  • Classification - Investing activities
• Example 4: Cash payment to meet a rehabilitation obligation
  • Nature of transaction - Cash outflows are for costs of rehabilitation, which are derived from the mine’s normal operation activities. These activities are for the decommissioning or dismantlement of an asset. They therefore do not meet the definition of an investing and/or financing activity.
  • Classification – Operating activities
• Example 5: Cash received from a government grant
  • Nature of transaction - Cash inflows from a grant provide the entity with financing for the designated asset/activity. They are in substance financing cash inflows.
  • Classification - Financing activities
• Example 6: Cash payments in a reverse factoring agreement
  • Nature of transaction - The bank has provided credit to the entity to enable the entity’s liabilities to be settled on the due date. The repayment of that amount to the bank is a financing cash outflow.
  • Classification - Financing activities

The staff noted that different conclusions were reached if the classification of cash flows is based on the primary principle identified by the Committee (Principle 1: identify the nature of the cash flow analysed), rather than on the classification of the related or underlying item in the statement of financial position (Principle 2).

At the July 2012 meeting, while the Committee members agreed with using Principle 1 - that cash flows in IAS 7 should be classified in accordance with the nature of the activity to which they relate (i.e., most appropriate to the business of the entity) - a number of Committee members noted that they had arrived at different cash flow classification conclusions despite using the same principle and the above elements. A number of Committee members expressed concern regarding the elements and whether they would be appropriate as guidance or indicators. A few Committee members also expressed concern as to how the principle would be applied to non cash transactions.

There was an acknowledgement that there was a need to clarify IAS 7 but there was mixed reaction as to whether this could be solved through an Annual Improvement project or whether the issue was too broad and should be addressed through a different avenue. A few Committee members suggested performing outreach activities to constituents to seek their views. However, one of the Board members in attendance noted that this had previously been performed as a result of the Board’s project on financial statement presentation.

The Committee asked the staff to summarise the constituents’ views from the previous project on financial statement presentation as well as any views regarding cash flows from the agenda consultation process and to consider ways to clarify the primary principle in IAS 7 as well as useful guidance to implement IAS 7 consistently, including how timing can affect the classification of cash flows and to revisit the definition of operating, financing, and investing activities. Several Committee members noted that if the changes were implemented, this could result in a significant change to current practice and a reduction in diversity arising from the inconsistent application of IAS 7.

The staff had also raised an additional issue relating to IAS 7.16 which states that only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities. The Committee decided not to address this issue at this time and will revisit this issue when it next discusses the topic again.