Classification of expenditures in the cash flow statement

  • Deloitte Comment Letter Image

19 Feb 2008

We have written to express some disagreement with the basis for IFRIC's tentative decision not to interpet IAS 7 Statement of Cash Flows regarding the classification of certain expenditures as operating or investing.

We disagree with IFRIC's conclusion that the issue could be resolved by referring it to the Board with the recommendation that IAS 7 should be amended to state that only expenditures resulting in the recognition of an asset qualify for classification as 'cash flows from investing activities'. An excerpt from our letter:

We acknowledge that in many instances recognition of an asset is a good indicator for classifying the expenditure as investing cash flows. However, we believe requiring classification of all cash flows that do not result in asset recognition as operating cash flows has the potential to mislead users and possibly misrepresent the statement of cash flows. Furthermore, as a result of changes in IFRSs, if certain expenditures are recognised as an asset or no longer qualify for recognition, this will lead to changes in the allocation within the statement of cash flows without changing the economic substance of the underlying transactions.

Examples of expenditures generally made for investing purposes that, under the IFRIC's proposal, we believe would be classified as part of 'cash flows from operating activities' include:

  • Exploration expenditures where an entity has an accounting policy of non-capitalisation of such expenditures
  • Initial expenditures on development cost that do not qualify for recognition as an asset
  • Acquisition-related expenditures in a business combination that are expensed immediately under the revised version of IFRS 3 Business Combinations
Therefore, we propose amending the recommendation to the Board to clarify the wording in IAS 7 to explain that, in determining the classification of expenditures that do not qualify for asset recognition, judgement needs to be applied.

Click to Download the Deloitte Letter to IFRIC (PDF 104k).

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