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IAS 7 – Classification of cash payments for deferred and contingent consideration (continuing)

Date recorded:

The Committee had previously 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: (1) the settlement of contingent consideration should be classified as an operating, an investing or a financing activity in the statement of cash flows; and (2) 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.

With respect to the issue of classification for settlement of contingent consideration, the staff presented the Committee with two possible views. View 1 would classify cash payments for the contingent consideration that are recognised at the acquisition date and any adjustment arising during the measurement period as investing activities. Cash payments for increases in fair value of contingent consideration arising after the measurement period should be classified as operating activities. View 2 would classify any cash payments for contingent consideration as investing activities.

With respect to the issue of classification for settlement of deferred consideration, the staff presented the Committee with three potential views. View 1 would classify cash payments for deferred consideration for recognised liabilities at the acquisition date as investing activities with cash payments for deferred consideration after the measurement period classified as operating activities. View 2 would classify any cash payments for deferred consideration should be classified as investing activities while view 3 would classify them as financing activities.

The staff suggested that the Committee recommend to the Board that IAS 7 be amended through the 2010-2012 annual improvement process to clarify that the classification of cash payments for deferred and contingent consideration related to business combinations shall be classified as investing activities to the extent that the amount was recognised as a financial liability (or financial asset) at the acquisition date. However, cash payments for increases in the fair value of contingent consideration that are not measurement period adjustments and are recognised in profit or loss shall be classified as operating activities.

Several of the Committee members questioned whether the staff recommendation was clarifying the requirements in IAS 7 or whether it was simply creating a rule to reduce diversity. One Committee member asserted that not all contingencies are the same and therefore the cash flow classification should be consistent with the balance sheet and profit or loss recognition and applied consistently. A majority of the Committee members ultimately favoured not making any of the changes proposed by the staff. The staff suggested that the IFRIC Update would reference that the Committee did not believe the issue could be addressed through the annual improvements process.

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