IAS 7 — Review of definitions of operating, financing and investing

Date recorded:

The purpose of the discussion on the statement of cash flows was to try to identify ways to make the definitions of operating, investing and financing activities in paragraph 6 of IAS 7 clearer to achieve consistency in application.

The staff, in analysing current definitions in IAS 7, proposed the following:

  • Operating cash flows classification:
    • operating cash flows are the cash-basis equivalent of transactions that enter into the determination of ‘profit or loss’.
    • the section on cash flows from ‘operating activities’ should be maintained as a residual. However, the section on ‘operating activities’ in the statement of cash flows should segregate ‘other activities’ that do not represent principal-revenue-producing activities of the entity and that remain undefined.
  • Financing cash flows classification:
    • the definition of financing activities in paragraph 6 of IAS 7 should indicate that the nature of a financing activity involves (a) the receipt or use of a resource from a provider of finance (or provision of credit); (b) the expectation that the resource will be returned to the provider of finance; and (c) the expectation that the provider of finance will be appropriately compensated through a payment of a finance charge.
    • the definition of financing activities should state that cash flows that provide finance to an entity that are derived from the issue of an entity’s own equity instruments (as defined in IAS 32 Financial Instruments: Presentation) are considered financing by nature.
    • financing activities include those purchase transactions that have been negotiated on extended credit terms.
  • Investing cash flows classification:
    • the description of ‘other investments not included in cash equivalents’ in the definition of investing activities should be supplemented with examples.
    • discussion of the classification of expenditures could be made more clear by eliminating certain discussion included in paragraph 16 of IAS 7.
  • Classification of interest and dividends:
    • cash outflows for interest paid and dividends paid should be classified as financing cash flows.
    • cash inflows for interest received and dividends received should be classified as operating cash flows.

The Committee members expressed concerns about a number of issues related to the proposals, such as:

  • the operating category being the residual category even though it is considered to be the most important category of the statement of cash flows.
  • adding more items in the operating category through establishing a subsection of “other activities” under operating activities.
  • presentation of the financing component related to providing extended payment terms as a financing activity, while collections on extended payment terms would be classified as operating activities (mismatch).
  • complicating the use of the indirect method while easing the application of the direct method of preparing the statement of cash flows (even though both methods are allowed).

Several Committee members expressed support for adding flowcharts to the Standard – as included in the staff paper - to clarify the classification of items between the categories. A few members did, however, express concern with the content included in the staff’s proposed flowchart as well as how the flowchart would be interpreted in practice.

Finally, the Committee decided after a vote that it could not conclude on a way to proceed without more fundamentally modifying the Standard. However, some did see merit in the deletion of one specific sentence in paragraph 16 of IAS 7 relating to investing activities (“Only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities”). A majority of the Committee members agreed with the deletion of the sentence on the basis that recognition of an asset as a result of the cash outflows should not be a prerequisite for classification of the cash flows in the investing category, nor should all the cash flows resulting in the recognition of an asset be categorised as investing.

It was noted, however, that the IASB had added the sentence now suggested for deletion to the Standard not that long ago with extractive activities specifically in mind. While the deletion would seem appropriate when considering presentation of R&D activities, allowing some of those costs to be presented under investing activities, the Committee members were conscious about the opportunities it opened for the presentation for costs incurred on exploration activities within the investing category.

The Committee agreed to recommend to the IASB the deletion of the specific sentence as part of the annual improvements project.

Several Committee members questioned whether other issues previously deliberated by the Committee but not yet issued as an agenda decision (pending the completion of this broader statement of cash flows project) would be assessed further. The Committee Chair believed these issues should not be assessed on a piecemeal basis (i.e., the issues will be held indefinitely). Committee members generally supported this view.

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