IAS 7 Statement of Cash Flows — Core Rule

IAS 7 requires every entity to present a statement of cash flows as an integral part of its financial statements. All cash flows must be classified into three mutually exclusive categories — operating, investing, and financing activities — and presented consistently from period to period. As stated in IAS 7.4, the statement of cash flows, used alongside the rest of the financial statements, enables users to evaluate changes in net assets, financial structure, liquidity, and solvency, and to assess an entity's ability to adapt to changing circumstances.

How IAS 7 Statement of Cash Flows Works

Operating activities are the primary revenue-generating activities of the entity. IAS 7.13 identifies operating cash flow as a key indicator of whether the entity generates sufficient cash to repay loans, maintain operating capacity, pay dividends, and fund new investments without external financing. Cash flows from operating activities can be presented using either the direct method — showing major classes of gross cash receipts and payments — or the indirect method, which adjusts operating profit or loss for non-cash items, deferrals, and accruals (IAS 7.18). Although both methods are permitted, IAS 7.19 encourages the direct method because it provides information useful in estimating future cash flows that the indirect method cannot deliver.

Investing activities capture expenditures made to acquire resources intended to generate future income. IAS 7.16 makes clear that only expenditures resulting in a recognised asset in the statement of financial position qualify for classification as investing activities — a point frequently missed in practice. Examples include payments for property, plant and equipment, acquisitions of equity instruments in other entities, and receipts from disposing of those assets.

Financing activities reflect changes in the size and composition of an entity's equity and borrowings. IAS 7.17 explains that separate presentation is important because it helps users predict future claims on cash flows by providers of capital. Examples include proceeds from issuing shares, cash repayments of borrowings, and lease liability repayments.

For gross vs. net reporting, IAS 7.21 requires investing and financing cash flows to be presented gross — that is, separately showing receipts and payments — except in limited circumstances. Net reporting is permitted under IAS 7.22 where cash flows reflect the activities of customers rather than the entity itself, or where turnover is rapid, amounts are large, and maturities short.

Interest and dividends require particular attention. IAS 7.33A requires dividends paid to be classified as financing activities. For most entities, IAS 7.34A requires interest paid to be classified as financing and interest and dividends received as investing. Entities whose main business activity involves investing in assets or providing financing to customers follow a different approach, linking cash flow classification to how income is classified in the statement of profit or loss under IFRS 18 (IAS 7.34B–34D).

Taxes on income must be separately disclosed and classified as operating unless they can be specifically identified with financing or investing activities (IAS 7.35).

Leases under IFRS 16 add another layer: IFRS 16.50 requires lessees to classify the principal portion of lease liability payments within financing activities, and the interest portion by reference to IAS 7's requirements for interest paid.

IAS 7 Statement of Cash Flows — Common Pitfalls

• Classifying capital expenditure as operating because the cash left the same bank account — IAS 7.16 is clear: if a recognised asset results, it is investing.
• Netting investing or financing cash flows without meeting the criteria in IAS 7.22, which is only available in narrow circumstances.
• Inconsistently classifying interest and dividends across periods, which IAS 7.31 expressly prohibits.
• Omitting disclosure of the accounting policy for determining the composition of cash and cash equivalents — required by IAS 7.46.
• Forgetting that interest capitalised under IAS 23 is still a cash outflow and must appear in the statement of cash flows (IAS 7.32).

IAS 7 Statement of Cash Flows — Key Paragraphs

• IAS 7.4 — Sets out the purpose of the statement: evaluating liquidity, solvency, and adaptability to changing circumstances.
• IAS 7.11 — Classification by activity (operating, investing, financing) allows users to assess impact on financial position and cash balances.
• IAS 7.16 — Only expenditures resulting in a recognised asset qualify as investing activities.
• IAS 7.19 — Entities are encouraged to use the direct method for operating activities; provides forward-looking information not available under the indirect method.
• IAS 7.35 — Income tax cash flows are classified as operating unless specifically identifiable with investing or financing activities.
• IAS 7.46 — Entities must disclose the policy used to determine the composition of cash and cash equivalents.