The Statement of Cash Flows

Statement of Cash Flows

IAS 7.10 requires an entity to analyse its cash inflows and outflows into three categories:

  • Operating;
  • Investing; and
  • Financing.

IAS 7.6 defines these as follows:

‘Operating activities are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.’

‘Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.’

‘Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.’

1. Operating activities

It is often assumed that this category includes only those cash flows that arise from an entity’s principal revenue producing activities.

However, because cash flows arising from operating activities represents a residual category, which includes any cashStatement of cash flows flows that do not qualify to be recorded within either investing or financing activities, these can include cash flows that may initially not appear to be ‘operating’ in nature.

For example, the acquisition of land would typically be viewed as an investing activity, as land is a long-term asset. However, this classification is dependent on the nature of the entity’s operations and business practices. For example, an entity that acquires land regularly to develop residential housing to be sold would classify land acquisitions as an operating activity, as such cash flows relate to its principal revenue producing activities and therefore meet the definition of an operating cash flow.

2. Investing activities

An entity’s investing activities typically include the purchase and disposal of its intangible assets, property, plant and equipment, and interests in other entities that are not held for trading purposes. However, in an entity’s consolidated financial statements, cash flows from investing activities do not include those arising from changes in ownership interest of subsidiaries that do not result in a change in control, which are classified as arising from financing activities.

It should be noted that cash flows related to the sale of leased assets (when the entity is the lessor) may be classified as operating or investing activities depending on the specific facts and circumstances.

If the leased assets, which were previously held for rental, were routinely sold as part of its ordinary activities, then an entity would reclassify the assets as inventories at their carrying amount, with the resulting cash flows classified as an operating activity.

If the sale of previously leased assets were non-routine, then they would not meet the definition of inventory prior to the time of sale, and therefore the disposal of the assets would be classified in investing activities in accordance with IAS 7.16.

Investing activities also include cash inflows and outflows associated with the draw down and repayment of inter-company and other loans (provided the entity’s principal activities do not include the lending of funds). One common example in practice is funds that are advanced to, and related repayments from, related parties.

3. Financing activities

An entity’s financing activities typically include the following:

  • The issue and repurchase by an entity of its own share capital
  • Distributions (dividends) paid to equity shareholders (note that IAS 7 contains an option for the classification of these distributions – see below)
  • The draw down and repayment of borrowings from third parties
  • Cash payment by a lessee for the reduction of a lease liability in the scope of IFRS 16 (i.e. the portion of the payment relating to the principal amount of the lease liability – see Classification of interest and dividends below for discussion of the interest portion of a payment made related to a lease)
  • Any other cash flows related to items classified in equity.

3.1. Disclosure of changes in liabilities arising from financing activities

In January 2016 the IASB amended IAS 7 to require additional disclosures surrounding the change in liabilities arising from financing activities. These additional requirements were added to IAS 7.44A-44E. This amendment was made in response to feedback from users of financial statements who felt that it was challenging to understand the changes in debt and other bank borrowings based on the existing disclosure requirements of IFRS. Non-cash movements in financing activities resulted in the movement in borrowings being challenging to reconcile.

IFRS 7.44C also requires disclosure of changes in financial assets (e.g. assets that hedge liabilities arising from financing activities) if cash flows from those financial assets were, or future cash flows will be, included in cash flows from financing activities.

The requirements added to IAS 7 mean that an entity needs to provide disclosures that enable users to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. Examples of these changes may include:

  • Changes from financing cash flows;
  • Changes arising from obtaining or losing control of subsidiaries or other businesses;
  • The effect of changes in foreign exchange rates; and
  • Changes in fair values.

Entities that do not have complex movements in borrowings (e.g. the only change being cash payments on term debt) may not require additional disclosure beyond what is presented in the statement of cash flows in order to comply with these requirements.

Entities which have more complex movements in borrowings (e.g. foreign exchange, fair value movements, business combinations, etc.) may require tabular reconciliation with each category of change in borrowing activities being a separate column in the table.

The reconciliation should be presented in such a way that enables users to link items included in the reconciliation to the statement of financial position and the statement of cash flows (i.e. line items in the reconciliation should tie to other applicable line items in the financial statements). Such tabular disclosure may also need to be supplemented by narrative disclosure in some cases.

The European Securities and Markets Authority noted that entities are encouraged to provide the tabular format for disclosure purposes, in order to meet the requirements of IAS 7.

An illustration of tabular disclosure:

Amounts in CU’000

Long-term borrowing

Lease liabilities

Total long-term debt

Opening 20×1

1,040

1,040

Cash flows

250

-90

160

Acquisition

200

200

New leases

900

900

Closing 20×2

1,490

810

2,300

4. Classification of interest and dividends

IAS 7.31 requires cash flows from interest and dividends received and paid to be disclosed separately, and permits each of them to be classified within either operating, financing, or investing activities. The classification chosen must be applied consistently from period to period.

However, it is also necessary to consider other requirements of IAS 7. In particular, if borrowing costs are capitalised to ‘qualifying assets’ in accordance with IAS 23 Borrowing Costs, the related cash flows must be classified as well.

Food for thought – Interest presentation

In practice, some regulators require consistent classification between interest paid and interest received (i.e. including the two line items within the same classification), particularly when an entity classifies interest received as an operating activity (i.e. financial institutions).

Similar regulatory requirements have also been seen in some jurisdictions in respect of the presentation of cash flows relating to dividends paid and received. When classifying cash flows relating to borrowing costs that have been capitalised as part of the carrying value of a qualifying asset as required by IAS 23, inconsistencies exist in the requirements of IAS 7 as to how such interest cash flows should be presented.

It could be interpreted that the capitalised borrowing costs should be classified consistently with the cash flows related to the acquisition of the asset (e.g. in investment activities) since IAS 7.16 requires cash flows that relate to the acquisition of items such as property, plant and equipment to be classified as investing activities.

Despite this requirements of IAS 7.16, IAS 7.33 states that interest cash flows may be classified as either operating or investing/financing activities as an accounting policy choice.

Therefore, in general, it is considered acceptable to classify capitalised borrowing costs as either an investing cash flow (i.e. consistent with the cash flows to acquire the qualifying asset) or consistently with other interest cash flows that are not capitalised as borrowing costs (i.e. dependent on the entity’s accounting policy choice for such cash flows).

5. Common classification errors in practice

Although the definitions of operating, financing and investing activities may appear straightforward, in practice aStatement of cash flows number of classification errors are frequently made. These include:

(i) Cash outflows related to the acquisition of intangible assets and items of property, plant and equipment incorrectly included within operating activities

Something else -   Operating cash flows under IAS 7

Some items of property, plant and equipment are purchased from suppliers on standard credit terms that are similar to those for inventory and for amounts payable to other creditors.

Because of this, the transactions for property, plant and equipment may incorrectly be included within changes in accounts payable for operating items.

Consequently, unless payments for property, plant and equipment are separated from other payments related to operating activities, they may be allocated to the incorrectly to operating activities.

(ii) Cash inflows and outflows related to deposits held by financial institutions, or the purchase of short term investments, included within operating activities

Surplus funds are sometimes used to purchase investments with short-to-medium term maturities that do not meet the definition of cash and cash equivalents (e.g. a deposit with a fixed term maturity that is greater than 3 months (IAS 7.7)).

Entities sometimes argue that, because these funds are included in their working capital balances (because the funds will be used in the short-to-medium term for operating activities), the cash flows related to these investments should be classified within operating activities.

This is incorrect. – Why? – Here is the answer

The entity is acquiring debt instruments of another entity that neither meet the definition of cash and cash equivalents, nor are held for dealing and trading purposes. Consequently, these cash outflows and inflows should be classified as investing (IAS 7.16(c)). Upon maturity of the investment the subsequent use of the funds for operating activities will result in cash flows being included in that category.

In contrast, if an entity holds financial assets that are classified as held for dealing or trading activities (such as cash held by most financial institutions), then cash flows associated with those assets are classified within operating activities. This is because financial assets classified as held for dealing or trading purposes are typically held by an entity in the short-term (a matter of days) for the purposes of short term profits or losses. Consequently, they fall within the entity’s operating activities.

(iii) Failure to classify cash flows arising from an entity’s principal operating activities as operating

An entity in the financial services sector typically derives operating income from advancing loans to customers in return for future payments of principal and interest. Although IAS 7.31 permits an entity to classify interest cash flows as operating, investing or financing, the requirements of IAS 7.6 (which includes the definition of operating activities) override this option.

Consequently, cash flows relating to loans advanced to customers by a financial institution are required to be classified as operating activities.

(iv) Including cash flows in investing activities when they do not result in the recognition of an asset

Some cash outflows relate to items which do not qualify to be recorded as assets (for example, research costs and certain development costs do not qualify to be capitalised as intangible assets in accordance with IAS 38 Intangible Assets). Some argue that such cash outflows should be included within investing activities, because they relate to items which are intended to generate future income and cash flows.

IAS 7.16 states that for a cash flow to be classified as an investing cash outflow, the expenditure must result in an asset being recognised in the statement of financial position (IAS 7.BC7).

This is particularly relevant for entities operating in the extractive industry which apply IFRS 6 Exploration for and Evaluation of Mineral Resources, as these entities have a (temporary) exemption from applying the requirements of IAS 8.11-12 when developing an accounting policy in respect of the recognition of exploration and evaluation assets.

If the accounting policy adopted by the entity in accordance with IFRS 6 does not result in the recognition of an asset, then those cash flows do not qualify to be included within investing activities.

(v) Cash receipts relating to the leased assets of lessors

When an entity is the lessor of assets, cash receipts relating to rental income as well as any subsequent sale of the leased assets are classified within operating activities.

This may seem to contradict the requirement of IAS 7.16(b) which lists cash receipts from sale of assets as investing activities. However IAS 7.15 makes it clear that for lessors, cash flows received from lessees in respect of leased assets are classified in operating activities.

6. Group cash pooling arrangements in an entity’s separate financial statements

Cash pooling arrangements arise where one group entity (which may be the ultimate group parent, or a fellow subsidiary) acts as the treasury function for the rest of the group. Under these arrangements, one entity within a group holds and maintains all cash balances with an external financial institution(s) and advances funds to group entities.

Often, a group treasury function is used in order to make the most efficient use of cash resources within a group, and to enable hedge accounting transactions to be entered into at group-level at the lowest overall cost. Typically, the group entities that act as a treasury function are not financial institutions. In some cases, subsidiaries do not have bank accounts at all, and instead amounts due are settled directly from centrally controlled funds.

Questions then arise as to whether the cash flow statement should be prepared at all.

In general, a statement of cash flows which reflects the actual cash flows of an entity during the period is required to be prepared in all cases, regardless of the balance of cash and cash equivalents held at each period end. This is consistent with the requirements of IAS 7, which contain no exemption from the preparation of a statement of cash flows.

This is regardless of whether an entity has a cash and cash equivalents balance at its reporting date, or merely a balance with a treasury function entity. In circumstances in which an entity makes net deposits or withdrawals of funds, these will give rise to inter-company balances. These deposits or withdrawals will be shown as investing or financing activities, respectively.

The question which then arises is whether it is appropriate in the separate financial statements of an entity that has deposited cash and cash equivalents with a group treasury function, to present those amounts as cash and cash equivalents in its statement of cash flows.

Many consider that the classification of such amounts as cash and cash equivalents to be inappropriate, on the basis that:

  • The concept of cash is restricted to amounts that are held by independent financial institutions and are subject to protection by the regulatory requirements that are imposed on those financial institutions
  • Deposits with group entities are subject to inherent risks that are not usually associated with cash deposits
  • All group entities are controlled by a parent entity, meaning that it is difficult to conclude that a group entity could demand repayment of deposits independently of whether the parent entity would agree to the repayment
  • In many cases funds are transferred to the treasury entity for unspecified and indeterminate periods.

Food for thought – Group treasury

In general, it is very unlikely that it would be appropriate for cash and cash equivalents deposited by entities within a group treasury function to be classified as cash and cash equivalents.

However, in very rare cases, it is possible that this would be appropriate – limited to those which involve a combination of at least the following factors:

  • The treasury entity itself operates in accordance with strict and well defined controls
  • The intra-group balances behave in a manner similar to cash balances. That is, they are highly liquid, available on demand or in the short term and have terms that are similar to those which would be expected if the deposits had been made with an independent third party financial institution
  • The group maintains collective cash balances (or has access to cash via lines of credit) to meet demand notices served by subsidiaries that have deposited excess funds with the treasury entity.
  • Even if these characteristics existed, it is not clear how an entity could claim that it, individually, has control over whether it can require the repayment of cash and cash equivalents from a central treasury company. It would appear difficult to overcome the presumption that the ultimate parent company will control the repayment of funds, and in any event the purpose of a treasury function is to centralise the pooling and use of funds; the ability of a group entity to require repayment would appear contrary to the group policy.

If they were presented as cash and cash equivalents, a logical implication would be that it would be appropriate for these balances to be identified on the face of the statement of financial position and/or in the notes to the financial statements (depending on their significance) as being amounts deposited with another group entity.

It might also be appropriate to include additional information about the group cash pooling arrangements that are relevant to the users of financial statements in their understanding of the financial position and liquidity of the entity, as required by IAS 7.50.

7. Definition of cash and cash equivalents

IAS 7.6 includes the following definitions:

‘Cash’:

  • Cash on hand (physical currency held)
  • Demand deposits.
Something else -   Restrictions on transferred assets

‘Cash equivalents’:

  • Short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

IAS 7.7 then notes that cash equivalents are held for the purpose of meeting short term cash commitments rather than for investment or other purposes. IAS 7.7 also notes that:

‘….an investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.’

7.1. Demand deposits

Demand deposits are not defined in IFRS. However, in order to qualify as cash, the related balance needs to have the same liquidity as cash itself, and so funds on ‘demand deposit’ need to be capable of being withdrawn at any time without penalty.

In general, deposits which can be withdrawn without penalty within 24 hours, or one working day, are regarded as being demand deposits. These include amounts deposited at financial institutions (such as funds in a bank current account), and may extend to cover deposits at non-financial institutions such as legal advisers, if funds are held for client in separate and designated accounts that can be called upon by the client at any time.

If a deposit does not qualify to be regarded as cash, it may qualify to be classified as a cash equivalent.

Food for thought – On demand cash

Questions arise about whether investments that can be withdrawn on demand (e.g. money market funds) could qualify to be regarded as cash equivalents.

In general it is considered possible, but only in very limited circumstances.

This is because, in addition to the existence of the demand feature, all of the other requirements of IAS 7 need to be met. An interest bearing deposit at a financial institution might result in the amount of cash that would be received being known, and there might be an insignificant risk of changes in value (in particular in the current low interest rate environment), even if there is an early withdrawal penalty.

However, it is also necessary for it to be demonstrated that the investment is being held for the purpose of meeting short-term cash commitments rather than for investment or other purposes (IAS 7.7).

It may be difficult to reconcile this last requirement to the characteristics of the investment, particularly as its maturity (excluding the demand feature) increases.

7.2. Short term maturity

Although the reference to three months in IAS 7.7 might not be viewed as establishing a ‘bright line’ threshold, it is a benchmark that is widely used in practice. One point which is frequently overlooked is that the three month period to maturity is based on the date on which an entity acquires an asset. Consequently, a one year fixed term deposit held by an entity does not become a cash equivalent when the period to maturity has reached three months.

Food for thought – Three months maturity

The reference in IAS 7 to three months is often interpreted as meaning that this time period is by itself sufficient to reach a conclusion that an investment would not be subject to a more than insignificant risk of changes in value.

However, this is not an automatic qualification, and it is still necessary to consider other attributes of short term investments.

It is possible that an entity would be able to invest funds on a short term basis at a high rate of return that would put these funds at a more than insignificant risk of changes in value (for example, investments with low credit ratings such as certain asset backed securities).

In these cases, the investments would not be regarded as being cash equivalents because they are subject to a more than insignificant change in value.

7.3. Investments in equity instruments

In almost all cases, investments in equity instruments are excluded from being classified as cash and cash equivalents, because they typically have no maturity and are subject to significant potential changes in value. However, it is possible that an instrument such as a redeemable preference share, which is purchased with a short period remaining to its maturity date, will meet the definition of a cash equivalent.

7.4. Changes in liquidity and risk

The definition of cash equivalents makes reference to them being both highly liquid and subject to an insignificant risk of changes in value. IAS 7 does not include any specific requirement to revisit either of these criteria after the initial recognition of a cash equivalent.

In general, amounts that initially meet the definition of cash equivalents would not be expected to be subject to significant risk of adverse changes in liquidity and changes in value. However, it is possible that such changes could take place. For example, a short-term maturity corporate (or government) bond that would otherwise meet the definition of a cash equivalent might be subject to a sudden adverse change in the issuer’s credit status.

Food for thought – Credit status/risk

This represents a less obvious feature of cash equivalents which is easily missed. At each reporting date, entities need to consider whether there are any indicators that items previously classified as cash equivalents now fail to meet the classification criteria.

In recent years, a number of governments and financial institutions have seen their credit status decline dramatically within a very short period.

7.5 Cryptocurrencies

IFRS does not contain specific accounting requirements for cryptocurrencies. However, at its June 2019 meeting, the IFRS Interpretations Committee discussed how existing IFRS Standards apply to holdings of cryptocurrencies and issued an Agenda Decision in which, among other things, it was concluded that a cryptocurrency is not cash.

For the purposes of its discussion, the Interpretations Committee considered cryptocurrencies with the following characteristics:

  • A cryptocurrency is a digital or virtual currency that is recorded on a distributed ledger and uses cryptography for security.
  • A cryptocurrency is not issued by a jurisdictional authority or other party.
  • A holding of a cryptocurrency does not give rise to a contract between the holder and another party.

As part of its analysis, the Interpretations Committee considered whether a cryptocurrency is cash. It noted that IAS 32.AG3 states that:

‘Currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favor of a creditor in payment of a financial liability.’

The description of cash in IAS 32.AG3 implies that cash is expected to be used as a medium of exchange (ie used in exchange for goods or services) and as the monetary unit in pricing goods and services to such an extent that it would be the basis on which all transaction are measured and recognised in financial statements.

Although some cryptocurrencies can be used in exchange for particular goods or services, the Interpretations Committee noted that it was not aware of any cryptocurrency that is used as a medium of exchange and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements.

Consequently, the Interpretations Committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash.

7.6 Short-term credit lending and cash and cash equivalent classification

In some circumstances, short-term loans and credit facilities may meet the definition of a cash and cash equivalent, and would therefore be presented within cash and cash equivalents, rather than financing cash flows.

At its June 2018 meeting, the IFRS Interpretations Committee (the Committee) discussed the circumstances in which short-term loans and credit facilities may be presented as a component of cash and cash equivalents.

In the fact pattern:

  1. The entity has short-term loans and credit facilities that have a short contractual notice period (e.g. 14 days);
  2. The entity says it uses the short-term arrangements for cash management; and
  3. The balance of the short-term arrangements does not often fluctuate from being negative to positive.

The Committee observed that an entity generally considers bank borrowings to be financing activities, not a component of cash and cash equivalents. The Committee observed that bank borrowings are a component of cash and cash equivalent only in the particular circumstances noted in IAS 7.8: the arrangement is a bank overdraft that is payable on demand and forms an integral part of the entity’s cash management.

Therefore, a short-term financing arrangement cannot form a component of cash and cash equivalents unless it is due on demand.

The Committee observed that for a facility to form an integral part of the entity’s cash management, it must use the facility in order to meet short-term cash commitments rather than for investing or other purposes.

The Committee also noted that if the balance of a banking arrangement does not often fluctuate from being negative to positive, then the arrangement would generally not form an integral part of the entity’s cash management. If the facility is consistently in a negative position, then it is a form of financing.

Therefore, based on the fact pattern provided, the Committee concluded that such an arrangement would not be a component of cash and cash equivalents because these facilities are not repayable on demand and the balance does not often fluctuate from being negative to positive (i.e. it is consistently in a negative position where the entity owes the lender). The facilities are a form of financing and their cash flows should be classified as financing cash flows.

Something else -   Disclosure of restrictions to cash and its equivalents

8. Restricted cash and cash equivalent balances – disclosure requirements

Restricted cash and cash equivalent balances are those which meet the definition of cash and cash equivalents but are not available for use by the group. In practice, these balances may arise when a subsidiary in a group operates in a jurisdiction where there are legal restrictions or foreign exchange controls that restrict the group’s access to, and use of, the subsidiary’s cash balances. They can also arise from ‘pledged’ bank balances and amounts placed in escrow accounts.

Although these types of restrictions do not affect the presentation of the statement of cash flows, IAS 7.48 requires an entity to disclose the existence of any significant restricted cash balances, together with narrative commentary. This is normally included as part of the notes to the financial statements, with a separate line item in the primary financial statements for ‘restricted cash and cash equivalents’.

8.1. Interaction with IAS 1

IAS 1.66(d) requires an entity to classify an asset as current when:

‘……the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.’

Although most cash and cash equivalents will be classified as current, it is important to understand the effects of any restrictions that are placed over the timing of use of those assets.

9. Leases in cash flows

9.1. Payments made on inception of a lease

IAS 7.44(a) notes that many investing and financing activities do not have a direct effect on cash flows, although they do affect the capital and asset structure of an entity. Among the examples listed is the acquisition of an asset by means of a lease. This is because, in many cases, the initial recognition of a right-of-use asset acquired under a lease, and the corresponding liability, arise from the signature of a lease contract without there being any exchange of cash.

In some cases, leases can involve the exchange of cash on inception because the terms of the lease may require a deposit to be paid and/or payments to be made prior to the commencement of the lease, which is prior to a lease liability and right-of-use asset being recognised. In those cases, amounts are included in the statement of cash flows and would often be classified as investing activities (because the lease gives rise to a recognised asset, the lease deposit).

This is because such cash flows do not meet the definition of ‘financing activities’ as the cash flow does not affect the ‘size and composition of the contributed equity and borrowings of the entity’, since a lease liability has yet to be recognised prior to the commencement date of the lease. The cash flow relates to the ‘acquisition… of long-term assets…’, therefore, it is an investing activity. This classification is required if all amounts due under a lease contract are contractually due on inception or on commencement of a lease.

However, in cases where there is a payment on inception or on commencement of a lease followed by periodic payments during the lease term, it could also be argued that, because the cash flows on inception arise from what, overall, is a financing arrangement, those cash flows should also be classified as arising from financing activities. Entities should apply a consistent policy for classification of such cash flows.

9.2. Disaggregation of lease payments

In the same way as repayments of a conventional loan, lease payments that settle a lease liability are comprised of two components:

  • Repayment of the principal amount, and
  • Payment of interest.

As a result, for the purposes of the statement of cash flows, lease payments are required to be split into each component with repayments of principal and payments of interest being presented separately. The repayments of principal are classified within financing activities (IAS 7.17(e)), with the interest portion being aggregated with other interest outflows (for other borrowings) and presented as arising from either operating, investing or financing activities (IAS 7.31).

However, to the extent that lease interest is capitalised in accordance with IAS 23 Borrowing Costs, an entity has an accounting policy choice relating to how the interest is classified (see classification of interest and dividends).

9.3. Lease payments not included in the measurement of the lease liability

Lessees may make lease payments that are not included in the measurement of lease liabilities, either because:

  • The leases meet recognition exemptions to not be recognised in the statement of financial position (i.e. short-term and low-value lease exemptions); or
  • They are variable lease payments that are not dependent on an index or rate (e.g. a percentage of turnover in a leased retail location), and are therefore excluded from the measurement of the lease liability.

These lease payments are excluded from financing activities, as they are not a component of the repayment of a liability recorded in the statement of financial position. Such payments are included in cash flows from operating activities, since they are included in the determination of profit or loss for the period.

Entities that elect to utilise the short-term and/or low-value lease exemptions will therefore have lower cash flows from operating activities and higher cash flows from financing activities than entities who elect to record such leases in the statement of financial position.

10. Revenue from Contracts with Customers

Cash flows arising from revenue within the scope of IFRS 15 Revenue from Contracts with Customers will be classified as an operating activity as it is clearly a ‘principal revenue-producing activity of the entity…’.

Cash flows other than those giving rise to revenue itself, which still relate to transactions in the scope of IFRS 15 may occur, however, such as cash flows relating to incremental costs of obtaining a contract. Such costs may be capitalised in certain circumstances and amortised on a systematic basis (see IFRS 15 Contract costs).

Cash flows related to capitalised costs in the scope of IFRS 15 (e.g. incremental costs of obtaining contracts) may be classified as operating activities, as they relate to the principle revenue-producing activities of the entity. They may also be classified as investing activities as they relate to acquisition of long-term assets, assuming the amortisation period of the costs is greater than one year.

If incremental costs of obtaining a contract have a particularly long life (i.e. significantly longer than one year), then it would be more appropriate to classify them as investing activities. Entities should consider if local regulatory requirements exist concerning the classification requirements of such cash flows.

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Something else -   Equity method

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