IAS 7
Active
Statement of Cash Flows
Prescribes the presentation of information about historical changes in cash and cash equivalents through a statement of cash flows classified into operating, investing and financing activities.
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Conceptual Framework Linkage
Why cash flow information matters to the Framework's objective
The Conceptual Framework states users need information about an entity's cash-generating ability, the timing and certainty of cash flows, and how the entity uses cash. Accrual-based profit alone cannot answer these questions – IAS 7 exists to complete the picture by showing what actually happened to cash.
HOW CASH FLOW INFORMATION MAPS TO THE FRAMEWORK
Assessing liquidity and solvency – cash flow information helps users evaluate the entity's ability to generate cash and meet obligations as they fall due Assessing quality of earnings – comparing profit to operating cash flow reveals how much reported profit is backed by actual cash generation Eliminating the effects of differing accounting treatments – cash flows are comparable across entities even when accrual policies differ (e.g. depreciation methods)
The statement of cash flows is the ONLY primary financial statement prepared on a CASH basis rather than the accrual basis IAS 1 otherwise mandates – a deliberate Framework-level design choice to give users a distinct, complementary lens.
Measurement basis – cash, not accrual
IAS 7 measures actual cash and cash equivalent movements – a departure from every other primary statement's accrual/fair-value/cost bases.
Framework basisUsed by IAS 7 for…
Cash basis (not accrual)The entire statement – actual receipts and payments of cash and cash equivalents
Reconciliation to accrual profit (indirect method)Bridges the accrual-based SOPL to actual cash generated by operations
Qualitative characteristics in action: cash flow information adds verifiability that accrual-based figures alone cannot provide – cash movements are objectively observable and far less subject to estimation or management judgement than accrual profit.
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Scope & Applicability
What IAS 7 covers
IAS 7 requires ALL entities to present a statement of cash flows as an integral part of their financial statements for each period presented – there are no scope exemptions by entity type or size within IFRS.
CASH AND CASH EQUIVALENTS – THE STARTING POINT
Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash, and subject to an insignificant risk of changes in value.
CASH EQUIVALENT – TYPICAL TEST
Held for the purpose of meeting short-term cash commitments, rather than for investment Normally, only investments with a short maturity of, say, three months or less from the date of acquisition qualify Bank overdrafts repayable on demand and forming an integral part of cash management are included as a component of cash and cash equivalents (a negative balance)
Equity investments are generally EXCLUDED from cash equivalents (their value is not "known" and can fluctuate significantly) – unless they are, in substance, a cash equivalent, e.g. preferred shares acquired shortly before maturity with a specified redemption date.
Key definitions you must know
Operating activities
The principal revenue-producing activities of the entity, and other activities that are not investing or financing activities.
Investing activities
The acquisition and disposal of long-term assets and other investments not included in cash equivalents.
Financing activities
Activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.
Cash equivalents
Short-term, highly liquid investments readily convertible to known amounts of cash and subject to an insignificant risk of changes in value – held for meeting short-term cash commitments, not for investment.
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The Three Activity Classifications – Overview
Why classification matters – and the core test for each
Separately classifying cash flows into operating, investing, and financing activities provides information that allows users to assess the effects of these activities on the entity's financial position, and the amount, timing, and certainty of future cash flows.
Operating
Generally derived from transactions that enter into the determination of profit or loss – the PRIMARY indicator of whether operations generate sufficient cash without external financing.
Investing
Represents the extent to which expenditures have been made for resources intended to generate FUTURE income and cash flows.
Financing
Useful in predicting claims on future cash flows by providers of capital (both debt and equity).
A single transaction may include cash flows classified DIFFERENTLY – e.g. repayment of a loan including both principal (financing) and interest (operating or financing, per policy choice) requires separate classification of each component.
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Operating Activities – Direct vs Indirect Method
Direct method
Major classes of gross cash receipts and gross cash payments are disclosed (e.g. cash received from customers, cash paid to suppliers/employees)
IAS 7 ENCOURAGES the direct method, as it provides information useful in estimating future cash flows that the indirect method does not.
Indirect method – by far the most common in practice
Profit or loss is adjusted for: non-cash items, deferrals/accruals, and items of income/expense associated with investing/financing cash flows
Both methods produce the IDENTICAL net cash flow from operating activities – only the presentation of the operating section differs; investing and financing sections are unaffected by the choice.
Worked example – indirect method reconciliation
Example 1: Profit to operating cash flow reconciliation
Profit before tax: $150,000. Depreciation: $30,000. Loss on disposal of equipment: $5,000. Increase in trade receivables: $12,000. Decrease in inventory: $8,000. Increase in trade payables: $6,000. Interest expense (financing, per policy): $10,000. Income tax paid: $28,000.
Profit before tax: 150,000
+ Depreciation (non-cash): +30,000
+ Loss on disposal (non-cash, reallocate to investing): +5,000
− Increase in receivables (cash tied up): −12,000
+ Decrease in inventory (cash released): +8,000
+ Increase in payables (cash retained): +6,000
+ Interest expense (reclassify to financing): +10,000
= Cash generated from operations: 197,000
− Income tax paid: −28,000
= Net cash from operating activities: $169,000
+ Depreciation (non-cash): +30,000
+ Loss on disposal (non-cash, reallocate to investing): +5,000
− Increase in receivables (cash tied up): −12,000
+ Decrease in inventory (cash released): +8,000
+ Increase in payables (cash retained): +6,000
+ Interest expense (reclassify to financing): +10,000
= Cash generated from operations: 197,000
− Income tax paid: −28,000
= Net cash from operating activities: $169,000
Interest and tax paid are shown as SEPARATE line items within operating activities (or interest may be classified as financing per the entity's consistent policy – see Section 7) – they are never left buried inside "profit before tax" in the reconciliation.
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Investing Activities
Typical investing cash flows
Cash payments to acquire PPE, intangibles, and other long-term assets, INCLUDING those relating to capitalised development costs and self-constructed PPE Cash receipts from sales of PPE, intangibles, and other long-term assets Cash payments/receipts for acquisition/disposal of equity or debt instruments of other entities and interests in joint ventures (excluding cash equivalents and instruments held for trading) Cash advances and loans made to other parties (other than by a financial institution), and receipts from their repayment Cash payments/receipts for derivative contracts, EXCEPT when held for trading, or when the payments/receipts are classified as financing activities
Worked example – gross vs net presentation
Example 2: Equipment sale – gross proceeds, not net gain
A company sells equipment with a carrying amount of $40,000 for cash proceeds of $52,000, resulting in a $12,000 gain recognised in profit or loss.
Investing activities: cash inflow from sale of equipment = $52,000 (the GROSS proceeds, not the net gain)
Operating activities (indirect method): the $12,000 gain is DEDUCTED from profit before tax, since it is a non-cash reallocation already fully captured in the investing section.
Operating activities (indirect method): the $12,000 gain is DEDUCTED from profit before tax, since it is a non-cash reallocation already fully captured in the investing section.
Never report investing/financing cash flows on a net basis (inflow less outflow) – gross cash receipts and payments are required, EXCEPT for a few specific permitted exceptions (Section 7).
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Financing Activities
Typical financing cash flows & worked example
Cash proceeds from issuing shares or other equity instruments Cash payments to owners to acquire or redeem the entity's shares (e.g. share buybacks) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short/long-term borrowings, and repayments of amounts borrowed Cash payments by a lessee for the reduction of the outstanding lease liability (IFRS 16) – principal portion only Dividends PAID (a policy choice: operating or financing – see Section 7)
Example 3: Loan issuance and share buyback
A company issues a $500,000 bank loan and uses part of the proceeds to buy back $150,000 of its own shares during the year; it also pays $60,000 in dividends (classified as financing per its stated policy).
Financing activities: +500,000 (loan proceeds) − 150,000 (share buyback) − 60,000 (dividends paid) = Net cash from financing activities: $290,000
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Special Items – Interest, Dividends, Tax & Net Reporting
Interest and dividends – classification policy choice
ItemPermitted classification(s)
Interest paidOperating OR financing
Interest receivedOperating OR investing
Dividends receivedOperating OR investing
Dividends paidOperating OR financing
Whichever classification is chosen must be applied CONSISTENTLY from period to period and disclosed as an accounting policy – a genuinely free choice, similar to IAS 20's grant presentation options.
Income tax and permitted net reporting exceptions
Income tax paid is classified as OPERATING unless it can be specifically identified with financing or investing activities.
RARE PERMITTED EXCEPTIONS TO GROSS REPORTING
Cash receipts/payments on behalf of customers when cash flows reflect the ACTIVITY of the customer, not the entity (e.g. rent collected on behalf of, and paid over to, property owners) Items with quick turnover, large amounts, and short maturities (e.g. purchase/sale of investments, other short-term borrowings with maturity of 3 months or less) Cash flows relating to deposits with fixed maturity dates, advances and loans made to customers, by a financial institution
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Foreign Currency Cash Flows & Non-Cash Transactions
Foreign currency translation for cash flow purposes
Cash flows arising from transactions in a foreign currency are recorded using the exchange rate at the DATE OF THE CASH FLOW (or a rate that approximates it, e.g. a weighted average rate). Unrealised gains/losses on foreign currency cash and cash equivalents held are NOT cash flows.
The effect of exchange rate changes on cash/cash equivalents held in foreign currency is presented SEPARATELY from operating, investing, and financing activities, as a reconciling item between opening and closing cash balances.
Non-cash transactions – excluded entirely
Investing and financing transactions that do NOT require the use of cash or cash equivalents are EXCLUDED from the statement of cash flows entirely – but disclosed separately elsewhere in the financial statements (typically the notes) if they provide relevant information.
Acquisition of assets by assuming directly related liabilities, or by means of a finance lease Acquisition of an entity by means of an equity issue Conversion of debt to equity
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Disclosure Requirements
Required disclosures
CORE DISCLOSURES
The components of cash and cash equivalents, and a reconciliation of the amounts in the statement of cash flows to the equivalent items in the SOFP The accounting policy adopted in determining the composition of cash and cash equivalents Classification policy for interest, dividends, and tax where alternatives are permitted
ADDITIONAL / ENCOURAGED DISCLOSURES
Significant non-cash investing and financing transactions Amount of significant cash and cash equivalent balances held that are NOT available for use by the group (e.g. subject to exchange controls) A reconciliation of liabilities arising from financing activities, showing changes from cash flows AND non-cash changes (e.g. FX movements, fair value changes, new leases) – mandatory since a 2016 amendment
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT JUDGEMENTS
Which short-term investments genuinely meet the "cash equivalent" definition (the 3-month guideline is illustrative, not an absolute rule) Classification of interest, dividends, and tax between operating/investing/financing where policy choice exists Whether a bank overdraft is an "integral part of cash management" (included in cash equivalents) or a genuine financing borrowing (excluded)
SIGNIFICANT ESTIMATES
Appropriate exchange rate to use for foreign currency cash flow translation when a single transaction-date rate is impracticable Allocating mixed cash receipts/payments between operating, investing, and financing components of a single transaction
Classifying a cash flow in the WRONG activity category (e.g. treating a capital expenditure as an operating outflow) does not change total cash movement, but materially distorts users' analysis of the entity's underlying cash-generating ability – a frequent source of exam marks on classification questions.
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IFRS vs US GAAP – Key Differences
Comparison – IAS 7 vs US GAAP (ASC 230)
FeatureIFRS (IAS 7)US GAAP
Interest paidPolicy choice: operating OR financingAlways operating – no choice
Interest receivedPolicy choice: operating OR investingAlways operating – no choice
Dividends receivedPolicy choice: operating OR investingAlways operating – no choice
Dividends paidPolicy choice: operating OR financingAlways financing – no choice
Bank overdraftsMay be included within cash equivalents if integral to cash managementGenerally classified as financing activities (borrowings), not cash equivalents
Direct vs indirect methodBoth permitted; direct method ENCOURAGEDBoth permitted; indirect method dominant in practice, direct method not specially encouraged
The rigid, single-classification US GAAP approach to interest and dividends is the single most heavily tested IFRS/US GAAP difference for this standard – IFRS's flexibility here directly affects reported operating cash flow, a key metric analysts scrutinise.
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Statement Mapping – Where Every Cash Flow Event Lands
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Cash received from customersCash Flow StatementOperating activities inflow (direct method) or embedded in the receivables adjustment (indirect)
Depreciation and amortisationSOPL Cash Flow StatementNon-cash expense in SOPL; added back in operating activities (indirect method)
Purchase of PPE / intangiblesSOFP Cash Flow StatementInvesting activities outflow, gross amount
Sale proceeds of PPE / investmentsCash Flow StatementInvesting inflow at GROSS proceeds, not net gain/loss
Gain/loss on disposalSOPL Cash Flow StatementReversed out of the operating reconciliation (indirect method) since it's non-cash/already in investing
Issue of share capital for cashEquity Cash Flow StatementFinancing activities inflow
Repayment of loan principalSOFP Cash Flow StatementFinancing activities outflow
Dividends paidEquity Cash Flow StatementOperating OR financing, per policy choice
Working capital movements (receivables, payables, inventory)Cash Flow StatementAdjustments within operating activities (indirect method)
Non-cash investing/financing transactions (e.g. debt-for-equity swap)–EXCLUDED from the statement; disclosed separately in notes
FX effect on foreign cash balances heldCash Flow StatementSeparate reconciling line, not within any of the three activities
Cash/cash equivalents composition, financing liabilities reconciliationNotesMandatory disclosures supporting the primary statement
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Related Standards – Cross-Reference Map
How IAS 7 connects across the IFRS body of literature
StandardNature of the connection
IAS 1Establishes that the statement of cash flows is one of the mandatory components of a complete set of financial statements
IAS 21Governs the exchange rates used to translate foreign currency cash flows and the presentation of related FX effects on cash balances
IFRS 16Lease liability principal repayments are classified as financing activities; the interest portion follows the entity's interest classification policy
IFRS 10Cash flows relating to obtaining or losing control of subsidiaries are presented separately, classified as investing activities and disclosed net of cash/cash equivalents acquired or disposed of
IAS 12Determines the income tax expense reconciled back to actual cash tax paid, classified within operating activities unless specifically identifiable elsewhere
IFRS 9Governs classification and measurement of financial assets/liabilities whose cash flows (purchases, disposals, interest, principal) IAS 7 then classifies into the appropriate activity
IAS 16 / IAS 38Supply the cost figures for PPE/intangible asset purchases and disposal proceeds that flow into the investing activities section
IAS 8Governs how a change in the classification policy for interest/dividends (a change in accounting policy) is applied retrospectively
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Quick-Reference Glossary
Direct method
Discloses major classes of gross cash receipts and payments – encouraged by IAS 7 but rarely used in practice due to cost of gathering the data.
Indirect method
Starts from profit or loss and adjusts for non-cash items and working capital changes – the dominant method used in practice.
Cash generated from operations
The subtotal in the indirect method before deducting interest paid and income tax paid – a key intermediate figure often quoted by analysts.
Free cash flow
A non-GAAP/non-IFRS metric (not defined by IAS 7 itself) commonly calculated as operating cash flow less capital expenditure, used by analysts to assess discretionary cash available.
Net debt reconciliation
A reconciliation of liabilities arising from financing activities, distinguishing cash flow movements from non-cash movements (FX, fair value, new leases) – mandatory since the 2016 amendment.
Restricted cash
Cash balances not available for use by the group (e.g. subject to exchange controls or legal restrictions) – separately disclosed, though still included in the cash total unless truly not a cash equivalent.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Jun-1976
Exposure Draft E7 Statement of Source and Application of Funds
Oct-1977
IAS 7 Statement of Changes in Financial Position
Jul-1991
Exposure Draft E36 Cash Flow Statements
Dec-1992
IAS 7 (1992) Cash Flow Statements
Effective for annual periods beginning on or after 1 January 1994
06-Sep-2007
Retitled from Cash Flow Statements to Statement of Cash Flows as a consequential amendment resulting from revisions to IAS 1
10-Jan-2008
Amended by IAS 27(2008) relating to changes in ownership of a subsidiary
Effective for annual periods beginning on or after 1 July 2009
16-Apr-2009
IAS 7 amended by Annual Improvements to IFRSs 2009 with respect to expenditures that do not result in a recognised asset.
Effective for annual periods beginning on or after 1 January 2010
01-Jul-2009
Effective date for amendments from IAS 27(2008) relating to changes in ownership of a subsidiary
29-Jan-2016
Amended by Disclosure Initiative (Amendments to IAS 7)
Effective for annual periods beginning on or after 1 January 2017
25-May-2023
Amended by Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7)
Effective for annual periods beginning on or after 1 January 2024
09-Apr-2024
Amended by IFRS 18 Presentation and Disclosure in Financial Statements
The amendments require all companies to use the operating profit subtotal as defined in IFRS 18 as the starting point for the indirect method of reporting cash flows from operating activities. Additionally, the presentation alternatives for cash flows related to interest and dividends paid and received will be removed. The amendments need to be applied when IFRS 18 is applied which is effective for annual periods beginning on or after 1 January 2027.
18-Jul-2024
Amended by Annual Improvements to IFRS Accounting Standards - Volume 11
The amendments are effective for annual reporting periods beginning on or after 1 January 2026