6 Statement of Cash Flows and Related Matters

30 October 2025 Agenda Paper 6

Executive Summary

Project Scope

Moderate

Purpose of the paper

This paper provides the [draft] written response to the IASB (Appendix A) in relation to questions asked of ASAF members on inconsistent classification of cash flows for 16 examples. Feedback will help the IASB find potential ways to improve the consistent application of the classification requirements in IAS 7 Statement of Cash Flows.

Summary of the Issue

Feedback received by the IASB during outreach with stakeholders on the Statement of Cash Flows, indicated that for some cash flows there is either

1. inconsistent application of the requirements in IAS 7, leading to diversity in practice, or
2. stakeholder disagreement with the classification, even though there is no diversity in practice.

The IASB asked for feedback at the October 2025 Accounting Standards Advisory Forum (ASAF) on items where they believe they have sufficient information to determine the underlying factors that might lead to inconsistent classification of cash flows. In addition, they requested written feedback on the underlying fact patterns for items¹ where feedback was unclear about the underlying issues.

The IASB will use the feedback to assess whether any of the issues raised during outreach require action. Specifically, they will determine whether:

1. no action is needed, meaning preparers should be able to classify cash flows consistently by applying IAS 7; or
2. further action might be needed, such as limited standard setting, referring the issue to the IFRS Interpretations Committee; or providing illustrative examples to support consistent application.

Decisions for the Board

1. Do Board Members have any comments on:
2. the key points relating to transparency, principles, and consistency with IFRS 18 in the covering letter in Appendix A?
3. The level of detail included in the written response to the IASB examples?
4. The content of the detailed comments on the IASB examples?

2. Does the Board approve the submission of the response to the IASB, subject to any changes suggested at this meeting?

Recommendation

The Secretariat recommends that, subject to Board approval, it submits a written response to the IASB on the inconsistent classification of the 16 examples provided by the IASB.

Appendices

Appendix A Statement of Cash Flows and Related Matters: Classification issues – Written response to ASAF

30 October 2025 Agenda Paper 6

Background: Statement of Cash Flows and Related Matters

The IASB added a project on the Statement of Cash Flows and Related Matters to its research pipeline following feedback on its Request for Information: Third Agenda Consultation².

The IASB began work on this project in September 2024. The initial focus was research to gather evidence of the nature and extent of the perceived deficiencies and the likely benefits of developing new financial reporting requirements for IAS 7 Statement of Cash Flows. The IASB has now commenced its discussion of the project scope and direction.

At its May 2025 meeting, the IASB discussed the topics to include in the project plan, the project approach for topics related to financial institutions, and a draft timeline for work on the project. The IASB decided that it would assess potential ways to improve:

1. the transparency of information communicated about cash flow measures not specified in IFRS Accounting Standards (discussed at the joint CMAC-GPF meeting in June 2025 and the July 2025 IASB meeting);
2. the consistent application of requirements for classification of cash flows i.e. operating, investing or financing (on the October 2025 ASAF agenda);
3. the disaggregation of cash flow information in the financial statements (to be discussed at the September 2025 IASB meeting);
4. the reporting of information about non-cash transactions in the financial statements (to be discussed at future IASB meetings); and
5. the consistent application of the definition of ‘cash equivalents’ (to be discussed at future IASB meetings).

Based on feedback from the Third Agenda Consultation, the usefulness of the statement of cash flows for financial institutions was perceived to be a significant issue. However, based on subsequent feedback, the IASB decided to defer this element of the project until other matters are addressed.

IASB cash flow classification examples

1At the September 2025 Board meeting, the Board considered seven examples related to classification of items in the Statement of Cash Flows shared by the IASB ahead of the October 2025 Accounting Standards Advisory Forum (ASAF) meeting.

2These items related to cash flows where the IASB think they have sufficient information to determine underlying factors that might lead to their inconsistent classification in practice, and they believe that classification can generally be determined by applying IAS 7³.

3Overall, the Board was supportive of the draft response presented at the meeting, which informed the verbal feedback provided by the UKEB Chair at the ASAF meeting on 2 October 2025.

4In addition, ASAF members were requested to provide written feedback by 3 November 2025 on nine additional examples⁴ where the underlying issues leading to diversity were unclear.

5The Board agreed that that the Secretariat should consult with the appropriate advisory groups on these seven examples (see Appendix A – Annex 1) and on the further nine examples on which the IASB also requested written feedback (Appendix A – Annex 2).

October 2025 ASAF meeting

6At the October 2025 ASAF meeting most members supported the IASB staff assessment of the underlying fact patterns. However, many noted that whilst IAS 7 might provide guidance, the diversity seen in application suggests that clearer guidance is needed.

7At that meeting, the UKEB Chair highlighted that IFRS Accounting Standards, other than IAS 7, implicated in the examples, have little or no reference to the required disclosure of cash flows. If the importance of the cash flow statement is to be elevated, then referencing the disclosure of cash flows in the respective IFRS Accounting Standard would be a big step forward.

8This would assist preparers to give greater consideration to cash flows earlier in their reporting processes and directly address one of the fundamental problems highlighted by UKEB research, i.e. that the cash flow statement is produced last and less attention is dedicated to it. Moving towards more reconciliations and more cohesiveness between the cash flow statement and the rest of the primary financial statements and related notes, would help to encourage a very different dynamic in the preparation of the statements, and assist users in their understanding and confidence in the reporting.

Preparation of UKEB final response

9The response on the seven examples (see Appendix A – Annex 1) and on the further nine examples on which the IASB requested written feedback (Appendix A – Annex 2) incorporates both findings from the UKEB's previous research and detailed discussion with the Preparers Advisory Group (PAG) held in October 2025.

10UKEB research identified that most users consider classification of cash flows a lower priority than other concerns with the statement of cash flows, such as disaggregation and non-cash information.

11UK stakeholders identified areas where IFRS Accounting Standards are silent on the classification of certain items in the statement of cash flows⁵.

12UK stakeholders suggested new disclosures, such as the disaggregation of exceptional items and derivatives, including details of the extent of such cash flows included in each category i.e. operating, investing and financing.

13The Secretariat has included in the draft covering note in response to the IASB (Appendix A) concerns raised and potential solutions highlighted during the UKEB research to date.

14The PAG was able to provide significant additional detail about specific scenarios and underlying causes for many of the IASB's examples. This information has been incorporated into the written responses as appropriate.

15The response is deliberately detailed to provide a range of evidence to the IASB to support its consideration of these matters. It is noted however that introduces some repetition of text across multiple examples. The Secretariat will consider whether it is possible to reduce this repetition before final submission.

16As this does not constitute a formal response to a IASB due process document, we do not intend to include the template text relating to UKEB functions etc.

Questions for the Board

1. Do Board Members have any comments on:
2. The key points relating to transparency, principles, and consistency with IFRS 18 in the covering letter in Appendix A?
3. The level of detail included in the written response to the IASB examples?
4. The content of the detailed comments on the IASB examples?

2. Does the Board approve the submission of the response to the IASB, subject to any changes suggested at this meeting?

Next steps

17Subject to approval by the Board, a written response to the IASB will be submitted in time for the deadline.

18The UKEB will continue to engage with its UKEB Advisory Groups in November, specifically the UKEB Investor Advisory Group (IAG) on 3 November 2025 and the Accounting Firms and Institutes Advisory Group (AFIAG) on 11 November 2025 on this topic.

19Any further detailed fact patterns, that might be useful for the IASB will be shared with the IASB.

20The UKEB Secretariat will continue to monitor the IASB's redeliberation and tentative decisions and will provide the Board with further updates in due course.

30 October 2025 Agenda Paper 6: Appendix A

Appendix A: Statement of Cash Flows and Related Matters: Classification issues – Written response to the IASB staff questions

To whom it may concern,

A1The UK Endorsement Board (UKEB) is very pleased to provide feedback on the classification issues presented to ASAF on 2 October 2025. Detailed responses are set out below [Annex 1 and Annex 2].

A2The answers are informed by research undertaken by the UKEB over the past few months with both users and preparers, which was published as four research papers⁶. The UKEB has further consulted, on the 16 examples provided by the IASB, with its Preparer Advisory Group, which consists of representatives from a range of UK listed companies. The tables below reflect the feedback provided.

A3We would like to take this opportunity to highlight some high-level observations from the UKEB’s previous research on this matter.

Users prefer transparency to classification

A4Throughout our research, whilst the UKEB received a number of suggestions from UK stakeholders on areas where classification requirements could be improved to reduce diversity in practice, the UKEB heard that classification of cash flows in the financial statements is NOT a primary concern for users.

A5Users' focus is on whether the statement of cash flows, along with other primary financial statements and accompanying notes, provide enough clarity, detail, and disaggregation. Users desire greater transparency to support more effective analysis and interpretation of the financial information.

A6For example, as noted in our UKEB research, supplementary disclosures of exceptional or non-recurring items, that show:

1. the related impact on the income statement, and
2. the category in which the cash flows are included (operating, investing, and financing),

would give users clarity and make it easier for investors and analysts to assess a company's financial health.

Cohesiveness

A7Therefore, the UKEB recommends that the IASB, prioritise introducing a broader principle of cohesiveness, as this would:

1. require companies to break down their financial information in a way that helps users clearly see how the pieces fit together across all the primary financial statements.
2. improve cross-referencing between the main financial statements and the accompanying notes, making the overall picture more transparent and easier to follow.
3. help shift the focus to enhancing connectivity between primary financial statements, regardless of what category the information is included and whether it appears on the face of the primary financial statement or in the notes.
4. cater to the needs of users for clarity and accessibility of information, enabling them to easily observe these interconnections and perform their own analyses.

A8The UKEB notes that IFRS Accounting Standards that are implicated in the examples, other than IAS 7 Statement of Cash Flows, have little or no reference to the disclosure requirements for cash flows. Moving towards more reconciliations and more cohesiveness between the cash flow statement and the rest of the primary financial statements and related notes would help to encourage greater focus on the preparation of the cash flow statement and assist users in their understanding and confidence in the reporting.

Focus on principles

A9The UKEB does understand that some preparers seek greater clarity to enable cash flows to be more consistently classified where circumstances and fact patterns are similar. However, the UKEB encourages the IASB to establish clear principles or objectives when accounting for cash flows before any specific guidance or examples are developed.

Possible Consistency with IFRS 18

A10Finally, we acknowledge that the IASB does not intend to include the alignment of the definitions of operating, investing, and financing in IAS 7 and IFRS 18 Presentation and Disclosure in Financial Statements, as an objective for this project. However, during our outreach, some preparers and users have emphasised the importance of aligning the definitions to avoid confusion and enhance the overall comparability and transparency of financial reporting, or to consider changing the terms in the statement of cash flows. Alignment of IAS 7 and IFRS 18 classification terms, if appropriate, would support clearer analysis and improve the usefulness of financial statements for decision-making.

A11If you would like to discuss this response further, please don't hesitate to reach out.

Yours sincerely,

30 October 2025 Agenda Paper 6: Appendix A

Annex 1: Classification of cash flows – ASAF questions on examples 1-7

A12The table below provide the UKEB's response for each of the seven examples, on the IASB staff's initial assessment, including their assessment of the underlying factor that might lead to inconsistent classification of cash flows.

UNDERLYING FACTOR 1: Cash flows do not meet the definitions of ‘investing' or 'financing' activities (resulting in a default classification as 'operating')

EXAMPLE 1: Payments related to business combinations that do not form part of the consideration that leads to the recognition of the acquiree's net assets

IASB staff assessment - Initial view

The classification of these payments can generally be determined applying IAS 7.

UKEB view of IASB staff initial assessment

Agree that cash flows do not meet the definitions of ‘investing' or 'financing’⁷, and that activities that are not ‘investing' or 'financing' should be classified as 'operating'. However, due to the lack of guidance on such payments, companies make judgements, which lead to diversity in application. UKEB research suggests that judgement is used to determine the classification of these payments, which can lead to diversity in categorisation of cash flows: Per paragraph C153 of the UKEB third research paper, IAS 7 is silent on how transaction costs should be treated in the statement of cash flows and one preparer suggested more guidance and illustrative examples would be useful on whether classification is operating or investing.

However, as noted in the Financial Reporting Council (FRC)'s Annual Corporate Reporting review 2024/25, classification of cash flows was one of the top three items where the FRC asked companies substantive questions, and continues to be one of the most common reasons for companies making a prior year restatement as a result of its enquiries; in particular, it lists the settlement of borrowings of an acquiree on or shortly after acquisition classified as an investing cash flow.

IAS 7 might benefit from introducing clearer principles in the main body of the standard on how such costs might be classified.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

IFRS 3 Business Combinations makes no reference to the statement of cash flows.

Divestments might pose more challenges in terms of consistent classification, due to timing and complexity i.e. related advisory cost payments cannot be disclosed as part of the divestment that might occur in the following year, and would likely be classified as operating, when they relate to investing. No restatement would occur in the cash flow statement the following year.

EXAMPLE 2: Payments to unfunded defined benefit pension schemes

IASB staff assessment - Initial view

The classification of these payments can generally be determined applying IAS 7.

UKEB view of IASB staff initial assessment

Whilst most defined benefit schemes are now legacy schemes, that are diminishing overtime, feedback suggested that some companies feel uncomfortable classifying cash flows, as operating cash flows; there was a suggestion for a new category.

IAS 7 might benefit from introducing clearer principles in the main body of the standard on how such costs might be classified.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

IAS 19 Employee Benefits makes no reference to the statement of cash flows.

EXAMPLE 3: Variable consideration

IASB staff assessment - Initial view

The classification of these payments can generally be determined applying IAS 7.

UKEB view of IASB staff initial assessment

Agree that cash flows may not meet the definitions of investing, or financing, so may lead to diversity in application. However, preparers generally classify these as operating, unless clearly linked to investing/financing.

However, feedback from UKEB research, suggests that guidance could be helpful – per paragraph A48 of the first UKEB research paper, there are a range of transactions where no specific guidance exists, leading to diversity in practice, including payment of variable consideration in a business combination, lease incentives.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

IFRS 3 Business Combinations makes no reference to the statement of cash flows, despite references to contingent consideration (not variable consideration).

IFRS 15 Revenue from Contracts with Customers makes no reference to the statement of cash flows, despite the objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

UNDERLYING FACTOR 2: Classification of cash flows is linked to cash flow classification of related items

EXAMPLE 4: Payments related to derivatives and hedges

IASB staff assessment - Initial view

The classification of these payments can generally be determined by applying IAS 7 (i.e., their classification should follow the classification of the cash flows of the underlying asset, liability or expense).

UKEB view of IASB staff initial assessment

Agree that classification of cash flows related to derivatives and hedges is linked to cash flow classification of related items.

Per paragraph 170–172 of the UKEB fourth research paper, IAS 7 paragraph 16 states that "when a contract is accounted for as a hedge of an identifiable position, the cash flows of the contract are classified in the same manner as the cash flows of the position being hedged". However, IAS 7 does not specify whether such cash flows should be separately identifiable.

In addition, IAS 7 does not provide guidance on economic hedges or derivatives where hedge accounting is not applied.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

IAS 7 does not specify whether such cash flows should be separately identifiable.

UKEB research highlighted that UK listed companies typically provide limited information on the cash effects of derivatives in the statement of cash flows.

• Some UK listed companies provide transparency by describing their accounting policies for classification of derivative cash flows. It would be useful for companies to explain in an accounting policy note, the classification of derivative cash flows in circumstances where hedge accounting is applied, and those circumstance where hedge accounting is not applied.
• Where companies enter into hedges relating to operating activities, it would be useful for companies to disclose the impact of those derivatives in the operating activities section of the statement of cash flows.
• Some UK listed companies sampled disclosed derivative cash flows relating to investing and financing activities on the face of the statement of cash flows.

Preparers raised concerns about offsetting and netting complexities.

Preparers also noted that some diversity arises from hedging divestments and timing mismatches.

We note in the FRC's Annual Corporate Reporting Review 2024/25, classification of cash flows was one of the top three items where the FRC asked companies substantive questions. In particular, it lists non-cash movement on derivatives incorrectly included as a financing cash outflow, and the movement in derivatives in the year not reconciling to the settlement of derivatives shown in the cash flow statement.

EXAMPLE 5: Receipt of government grants

IASB staff assessment - Initial view

The classification of these payments can generally be determined by applying IAS 7 (i.e., their classification should follow the classification of the cash flows of the underlying asset, liability or expense).

UKEB view of IASB staff initial assessment

Agree that classification of cash flows is linked to classification of related items.

However:

• Per paragraphs C155 of the UKEB third research paper, one preparer specifically noted that IAS 7 is silent on how to account for 'grants and contributions received from customers' and noted diversity in practice in their industry. While IAS 7 paragraph 16 states that "only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities", no mention is made of contributions received that are intended to fund such expenditure. Given the linkage of contributions to the PP&E created, and in the absence of specific IFRS requirements to the contrary, the preparer interviewed noted they classify grants and contributions within investing activities, as they believe it provides the most meaningful and relevant information to users.
• As noted in paragraphs C30 of the UKEB third research paper, one user suggested that they needed more disaggregation, providing an example of 'cash from customers' broken down between 'grants or customer contributions' and ‘other cash from customers'.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

• Receipts of government grants can be non-cash. There is lack of guidance on how such transactions should be disclosed.
• Per paragraphs C154–C155 of the UKEB third research paper, under the heading of 'Presentation of grants related to assets' paragraph 28 of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance states that "the purchase of assets and the receipt of related grants can cause major movements in the cash flow of an entity. For this reason and in order to show the gross investment in assets, such movements are often disclosed as separate items in the statement of cash flows regardless of whether or not the grant is deducted from the related asset for presentation purposes in the statement of financial position". However, IAS 20 is silent on how cash flows should be treated under the heading of ‘Presentation of grants related to income'.
• Further consultation with preparers suggested that change in government regimes may lead to different treatment of government grants, i.e. a government might reimburse R&D costs, as a tax incentive, which then would generally be classified into tax cash flows. It was questioned whether there should be more consistent treatment of the cash flows to assist comparability.

UNDERLYING FACTOR 3: Initial transaction is a non-cash transaction

EXAMPLE 6: Payments related to the purchase of an asset on deferred payment terms

IASB staff assessment - Initial view

Purchase of an asset on deferred payment terms is initially a non-cash transaction.

When a payment is made it might not always be clear whether payment relates to acquisition of an asset or repayment of a liability.

UKEB view of IASB staff initial assessment

Agree that initial transaction is a non-cash transaction. However, guidance is needed – per paragraph A48 of the first UKEB research paper, there are a range of transactions where no specific guidance exists, leading to diversity in practice, including cash payments related to the purchase of an asset on deferred payment terms from the supplier.

The substance of a transaction matters, and judgement required.

Diversity may be acceptable due to varying fact patterns.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

Although paragraph 6 of IAS 7 states that "investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents", and paragraph 14 states "cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale as described in paragraph 68A of IAS 16 Property, Plant and Equipment are cash flows from operating activities".

However, IAS 7 is not explicit on whether a deferred payment should be similarly categorised.

Determining what constitutes a deferred payment term, which varies from negotiating later payment terms with a supplier (accounts payable) to a lease (debt) may be another factor that leads to diversity in practice.

UNDERLYING FACTOR 4: Classification of cash flows depends on the principal revenue-producing activities

EXAMPLE 7: Acquisition of a long-term asset if lessor's principal revenue-producing activities are not leasing

IASB staff assessment - Initial view

It would generally be clear whether an activity is part of the 'principal revenue-producing activities' of an entity

UKEB view of IASB staff initial assessment

Agree that the classification of cash flows depends on the principal revenue-producing activities.

As per IAS 7 paragraph 6 cash flows classified as "operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities".

Diversity is acceptable if well-explained, so disclosure is key.

UKEB view of other factors that might contribute to inconsistent classification of cash flows

n/a

30 October 2025 Agenda Paper 6: Appendix A

Annex 2: Classification of cash flows – ASAF questions on examples 8-16

A13The table below provides the UKEB's response to each of the IASB's four questions, in relation to the nine examples of possible inconsistent classification of cash flows provided by the IASB.

Nine examples for which the IASB staff do not have sufficient information to determine the underlying factors that might lead to the inconsistent classification of cash flows

EXAMPLE 8: Cash flows related to supply chain financing arrangements (ASAF Agenda Paper 3A paragraphs 6-9).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

Preparers suggested that inconsistent application is likely to relate to the principles that the December 2020 IFRIC Agenda decision – Supply Chain Financing Arrangements–Reverse Factoring highlighted. The Agenda Decision concluded that IFRS Standards provide an adequate basis to determine the presentation of liabilities and the associated cash flows in reverse factoring arrangements. The Agenda Decision provided some clarity i.e. a transaction that results in the liability being transferred to the financier (settled on behalf of entity) leads to cash flows that are purely financing cash flows, and higher operating cash flows. The liability to the financier is not a trade payable, it is financing (they are lending money to pay trade payables). However, that decision not to provide further guidance may not have effectively reduced diversity; some companies may not have changed their practices.

Some preparers consider the lack of an operating cash flow is compensated by disclosure of non-cash items and a description of the nature of the transaction elsewhere in the financial statements.

In practice, reverse factoring arrangements could become relatively complicated, where a large supplier may have their own internal company that they contract with to provide the financing.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No. The 2023 Supplier Finance Arrangements amendments to IAS 7 (adding paragraph 44F–44H) requires disclosure of the carrying amount of financial liabilities that are part of supplier finance arrangements. However, there is no requirement to disclose the amount of related cash flows, nor the line items in the statement of cash flows, in which those cash flows are presented.

Preparers consulted suggested that the underlying factor contributing to inconsistent application was availability of information from their finance systems. In practical terms, accounting systems often are designed to produce the balance sheet and income statement and not the cash flow statement. Preparers do not necessarily have the level of detail in their finance systems to provide effectively 'direct cash flows' for such transactions. Information may be available from other sources/systems, but likely be costly to extract.

Materiality also plays a factor in the preparers' commitment to spend time analysing data. Preparers are concerned that such manual exercises would also incur significant additional audit costs.

How pervasive is the issue in the UK?

We received related feedback from stakeholders during our initial research, as reported in paragraph C96 of the UKEB third research paper Statement of Cash Flows: UK User and Preparer Perspectives. However, we have not assessed how pervasive either supplier finance arrangements, or inconsistent classification of related cash flows, might be in the UK.

Per page 16 of the UKEB Endorsement Criteria Assessment: Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7), a review of industry reports on the topic as well as stakeholder engagement (including with users of financial statements and financial institutions) led to the conclusion that there is no recent and/or reliable data on the prevalence of supplier finance arrangements in the UK.

How could inconsistent application be reduced?

The IASB could consider providing additional guidance in IAS 7, to add clarity to the standard itself, that was provided by the 2020 Agenda Decision, as preparers found this useful.

We discuss supply chain financing (reverse factoring) and factoring in paragraph 77–83 of the UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward. The illustrative example of a possible working capital movements note in paragraph 83, and the illustrative example of a possible Net Debt Reconciliation in paragraph 45 of the same paper, include factoring receivables and payables, as this level of disaggregation was requested by users, as summarised in Paragraph 8a) of that paper.

Users are concerned about the lack of adequate disclosure of the cash flows related to supplier finance, and we recommended in paragraphs 2 and A6(c) of the UKEB Comment Letter in response to : Exposure Draft ED/2021/10 Supplier Finance Arrangements:

Proposed amendments to IAS 7 and IFRS 7, adding a specific requirement to disclose: an entity's accounting policy for the presentation of cash flows that are part of supplier finance arrangements; the amounts of those cash flows; and the line item(s) in the statement of cash flows where they are presented. This information would enable users to understand the magnitude of the entity's supplier finance arrangements throughout the period and their effect on reported cash flows.

Diversity may be acceptable, where such supplementary disclosures are provided.

Other disclosures suggested by our stakeholders during research, as noted in paragraph C108d) of the UKEB third research paper Statement of Cash Flows: UK User and Preparer Perspectives%20of%20the%20UKEB%20third%20research%20paper%20Statement%20of%20Cash%20Flows%3A%20UK%20User%20and%20Preparer%20Perspectives) is a single note disclosure for non-cash items, which might include the deemed cash flows in some factoring and reverse factoring (supply chain finance) arrangements.

It is important to understand what information users actually need, and why, and then assess the cost-benefit analysis and operational feasibility of providing that information in a consistent way.

EXAMPLE 9: Receipts and payments related to factoring (ASAF Agenda Paper 3A paragraphs 10-12).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

There is no guidance in IFRS Accounting Standards about factoring cash flows. Companies determine their own treatment from first principles, based on the transactions, which could result in different classifications.

For example,

1. When Accounts Receivable are derecognised, is the cash receipt from the factor a cash flow from operations?
2. When Accounts Receivable are not derecognised, the cash flow from the factor is a financing flow (receipt of deemed loan). In this case, payments from customers often go straight to the factor – is there a deemed cash flow from customers and a deemed payment to reduce the deemed loan?

Many companies recognise this imputed cash flow. If they do not, a significant operating inflow could be missing, leading to a lower operating cash flow.

Accounting firm guidance suggests that recognising deemed cash flows is acceptable, however, the December 2020 IFRIC Agenda decision – Supply Chain Financing Arrangements–Reverse Factoring suggests not (although this was dealing with reverse factoring).

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No. Firstly, there are no requirements in IFRS Accounting Standards regarding factoring cash flows. The diversity might be due to different methodologies used and analysis on a transaction-by-transaction basis.

Similar to the supply chain finance example, preparers we consulted suggested that the underlying factor contributing to inconsistent application was availability of information in their finance systems. It was suggested that finance systems are designed to produce the balance sheet and income statement, not the cash flow statement. Preparers do not necessarily have cash flow information readily available in their systems to provide effectively 'direct' cash flows for such transactions.

Materiality also plays a role in the preparers' commitment to spend time analysing data. Whilst information can be sought from factoring statements provided by the third-party factor, the statements do not provide a split between those assets derecognised or those not derecognised (this information is internal to the company).

How pervasive is the issue in the UK?

We have not assessed how pervasive factoring, or inconsistent classification of factoring cash flows, is in the UK, but we understand that factoring is prevalent, given that we received feedback from stakeholders during our initial research. However, users were not necessarily concerned about inconsistent classification, but rather disaggregated information on factoring and reverse factoring arrangements. We covered factoring in paragraph 77–83 of our UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward. Better disclosure of the impact of factoring receivables and payables is important to users. Factoring can help a company maintain an optimal level of working capital by converting invoices into cash, ensuring it has enough funds to cover expenses, pay suppliers, and invest in growth. By understanding how a company uses factoring, investors can gauge its ability to manage its short-term financial needs.

How could inconsistent application be reduced?

Additional guidance on factoring cash flows, incorporating the December 2020 IFRIC Agenda decision – Supply Chain Financing Arrangements–Reverse Factoring into the Standard, might eliminate some diversity in practice, particularly if accounting firm guidance suggests it is acceptable to disclose a deemed cash flow from customers and a deemed payment to the factor to reduce the deemed loan.

Similar to supply chain finance (reverse factoring) in Example 8, we cover factoring in paragraph 77–83 of our UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward. The illustrative example of a possible working capital movements note in paragraph 83, and the illustrative example of a possible Net Debt Reconciliation in paragraph 45 of the same paper, include factoring receivables and payables, as this level of disaggregation was requested by users, as summarised in Paragraph 8a) of that paper. As also noted in paragraph 81 and 118 of that research paper, there is no requirements for such disclosures in IFRS 7 Financial Instruments: Disclosures.

Other disclosures suggested by our stakeholders during research, as noted in paragraph 121 of the UKEB fourth research paper and paragraph C108d) of the UKEB third research paper Statement of Cash Flows: UK User and Preparer Perspectives%20of%20the%20UKEB%20third%20research%20paper%20Statement%20of%20Cash%20Flows%3A%20UK%20User%20and%20Preparer%20Perspectives), is a single note disclosure for non-cash items, which might include the deemed cash flows in some factoring and reverse factoring (supply chain finance) arrangements.

EXAMPLE 10: Foreign exchange differences (ASAF Agenda Paper 3A paragraphs 13-14).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

Preparers consulted were confused by the suggestion that there was diversity in application of IAS 7 classifications for foreign exchange differences. Foreign exchange differences are not cash flows, but rather movements in the value of an asset or liability.

Existing guidance in IAS 7.20 requires, when presenting the indirect method, the net cash flow from operating activities to be determined by adjusting profit or loss for the effects of unrealised foreign currency gains or losses.

IAS7.25–28 requires foreign exchange cash flows to be recorded in functional currency by converting the foreign currency amount at the exchange rate on the date of the cash flow, or an approximation. The cash flows of a foreign subsidiary shall be translated at the exchange rates between the functional currency and the foreign currency at the dates of the cash flows.

Companies possibly allocate forex to approximate to spot rate in different ways – for example to approximate cash flows for assets purchased on credit. These are approximations based on materiality and subject to audit.

IAS 7.28 requires the effect of exchange rate changes on cash and cash equivalents held or due in a foreign currency to be reported separately from operating, investing or financing, in the statement of cash flows in order to reconcile cash and cash equivalents at the beginning and the end of the period, and includes the differences, if any, had those cash flows been reported at end of period exchange rates.

There is no requirement in IAS 7 to disclose in the accounting policy note for foreign exchange, how such foreign exchange differences affect the cash flow statement.

What might not be transparent is how the movement in the balance sheet items, and the amount shown in the income statement reconcile to the cash flows, due to the different exchange rates used for each statement. This would only be transparent if an entity provides a full reconciliation for balance sheet items, however they might then classify such differences in an 'other' category, unless those foreign exchange differences are considered material.

Companies possibly allocate forex to approximate to spot rate in different ways – for example to approximate cash flows for assets purchased on credit. These are approximations based on materiality and subject to audit.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

Yes, related items. Preparers consulted suggested disaggregation of foreign exchange translation on a transaction-by-transaction is difficult in practice. There is likely diversity with how companies deal with translation on consolidation.

It is not clear if the underlying foreign exchange translation difference is required to be recognised with the related item.

Foreign currency bank accounts, foreign currency ledgers and foreign currency hedges, might also play a factor.

How pervasive is the issues in the UK?

Foreign exchange translation differences are pervasive in international groups. However, we have not assessed how pervasive the potential inconsistent classification of foreign exchange difference is in the UK, as we are not certain that this is a classification issue.

Diversity stems from consolidation methods, so this may be more a measurement issue than presentation, but also one of disclosure of non-cash items, disaggregation and cohesiveness.

As noted in paragraph 8d) of our UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward%20of%20our%20UKEB%20fourth%20research%20paper%20Statement%20of%20Cash%20Flows%3A%20UK%20Users'%20views%20on%20potential%20ways%20forward) users need more transparent non-cash information, such as foreign exchange and fair value movements, that will enable them to link information in the statement of financial position with information in the statement of cash flows, providing comfort to users that they have a complete understanding of the drivers for movements in the balance sheet items.

Similarly, in paragraph 70 of that paper, most users suggested they need to be able to assess the impact of specific types of changes on each category of working capital, when material, such as such as foreign exchange.

How could inconsistent application be reduced?

We are not certain that this is a classification issue, and we would suggest that the issue of foreign exchange differences be investigated when looking at the topic of non-cash items. For example, per paragraph 42 of our UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward, users suggested that net debt disclosure should separately list movements that are different in nature, such as significant foreign currency movements and fair value changes.

From UKEB research to date, we understand that this might be an issue of cohesiveness between the primary financial statements. Users find it difficult to reconcile between the balance sheet and statement of cash flow, part of the difference being conversion of assets/liabilities at different rates to the conversion of cash flow, hence a foreign exchange translation difference. As we concluded on paragraph 147 of our UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward, users need Information about non-cash items (such as foreign exchange and fair value movements) to enable them to link information in the statement of cash flows and information in the statement of financial position.

Preparers did suggest that companies might take differing approaches to translation of foreign currencies, so providing additional guidance, might help clarify what is expected.

Requiring companies to describe in an accounting policy, how cash flows in foreign currencies have been translated, might assist users.

Material foreign exchange translation differences should be disclosed.

EXAMPLE 11: Receipts from a sale and lease back arrangement where the transaction qualifies as a sale (ASAF Agenda Paper 3A paragraphs 15-16).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

The feedback received by the IASB states that it is not clear what the concern is.

Sale and leaseback transactions are normally a series of linked transactions in contemplation of each other – one preparer we consulted suggested that users might think there should be a single cash flow.

IAS 7.16(b) says that investing cash flows include cash receipts from sales of property, plant and equipment, intangibles and other long-term assets. However, preparers noted that the substance of the transaction is to generate cash to finance the operation of the business, so it could be considered a financing cash flow.

Whilst not specifically sale and leaseback arrangements, as noted in paragraph 155–160 of the UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward, users said they generally need more information on leases, including the initial non-cash element of the purchase. Requiring companies to cross-reference the leases note to other notes in the financial statements and being able to link to the primary financial statements is key for users.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No. IAS 7 does not specifically address the disclosure of cash inflows from a sale and lease back arrangements.

Paragraph B52 of IFRS 18 Presentation and Disclosure in Financial Statements says that "additional information relating to sale and leaseback transactions that, depending on the circumstances, may be needed to satisfy the disclosure objective in paragraph 51 (of IFRS 18) and could include information that helps users of financial statements to assess (d) the cash flow effect of sale and leaseback transactions in the reporting period". This may address user needs going forward, but the requirement is vague.

IFRS 16 Leases does not provide specific guidance on cash flows, other than the repayments of the lessee in IFRS 16.50, although IFRS 16.B52(d) suggests additional information may be needed to meet the disclosure objective and includes 'the cash flow effect of sale and leaseback transactions in the reporting period'.

IFRS 16.52 requires a lessee to disclose information about its leases for which it is a lessee in a single note or separate section in its financial statements. However, a lessee need not duplicate information that is already presented elsewhere in the financial statements, provided that the information is incorporated by cross-reference in the single note or separate section about leases, including (g) total cash outflow for leases and... (i) gains or losses arising from sale and leaseback transactions. There is no requirement for the leases note to disclose where in the cash flow a sale and leaseback transaction has been presented.

As per IAS 7.16(a) cash payments to acquire property, plant and equipment, intangibles and other long-term assets are classified as investing. It could be assumed that the cash inflow from the subsequent sale of the asset be classified as investing, to offset the original cash inflow. However, the substance of the transaction is no different to borrowing money, to then purchase an asset, and then make repayments. This would be recorded as a financing cash inflow on obtaining the borrowed funds, an investing cash outflow on purchasing the asset. (There would be subsequent repayments of the finance, as financing cash flows). Thus, the investing cash flow is never offset. Preparers may be confused as to why these seemingly similar transactions would be treated differently in the cash flow statement.

How pervasive is the issue in the UK?

We have not assessed how pervasive sale and leaseback arrangements are in the UK, nor the potential pervasiveness of inconsistent classification. We are not certain that this is a classification issue, but rather an issue relating to non-cash information and improving the cohesiveness between the notes in the financial statements and the primary financial statements.

How could inconsistent application be reduced?

We suggest the IASB consider this topic when it looks at non-cash transactions. Improving the requirements in IFRS 16 or in IAS 7 to require the existing leases note disclosure to show where such cash flows are recorded in the statement of cash flows might be useful information for users. Requiring cross-referencing between the leases note and the statement of cash flows, the right-of-use asset note and capital expenditure disclosures, would enhance the cohesiveness for users of the financial statements.

Improving accessibility of information is more important to users than classification. However, to reduce diversity in classification, IAS 7 could specifically include classification requirements to disclose 'cash flows related to sale and leaseback arrangements' and include in the standard, or Basis for Conclusions, the rationale for the expected classification of those cash flows.

EXAMPLE 12: Receipts and payments related to derivatives structured as collateralised-to-market (ASAF Agenda Paper 3A paragraphs 17-18).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

We believe that rather than a classification issue, the concern is a lack of information and cross-referencing.

As noted in paragraph C103 of the UKEB third research paper Statement of Cash Flows: UK User and Preparer Perspectives, derivatives (both economic and hedge accounting) were mentioned by most users during interviews. One credit rating analyst noted that they have to make sweeping assumptions when doing their credit analysis, since it is not easy to break out the impact of unrealised gains or losses, the change in fair value and FX movements.

As noted in paragraph C121 of the UKEB third research paper Statement of Cash Flows: UK User and Preparer Perspectives, derivative information is important for understanding net debt, depending on whether analysts include or exclude certain items, such as debt-related derivatives, and other derivatives not related to debt. As per our concluding paragraph C182 in that paper, improving cohesiveness of the financial statements, might lead to more transparent disclosure in the notes about how the information for specific items, such as derivatives, link to all the primary financial statements.

Per paragraph B50–B54 of the UKEB second research paper Statement of Cash Flows: Non-mandatory and Voluntary Cash Flow Disclosures Provided by UK Listed Companies, and paragraphs 170–172 of the UKEB fourth research paper Statement of Cash Flows: UK Users' views on potential ways forward, understanding the cash flows from derivatives help users evaluate the potential financial impact of a derivative strategy, considering factors like the timing and amount of future payments, which is crucial for deciding whether to enter into a derivative position. The cash flows may also help users to assess whether there is sufficient liquidity to meet future obligations arising from derivative contracts.

Our research highlighted that UK listed companies typically provide limited information on the cash effects of derivatives in the statement of cash flows. Some UK listed companies provide transparency by describing their accounting policies for classification of derivative cash flows.

No companies in the sample we analysed, voluntarily provided an accounting policy, explaining the classification of derivative cash flows in circumstances where hedge accounting is applied and those where hedge accounting is not applied.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No. IAS 7.16 states that where a contract is accounted for as a hedge, its cash flows should be classified in the same manner as the hedged item. It does not, however, specify whether such cash flows should be separately identifiable. In addition, the Standard does not provide guidance on economic hedges or derivatives where hedge accounting is not applied.

How pervasive is the issue in the UK?

We have not undertaken a review of the pervasiveness of inconsistent classification. We believe that rather than a classification issue, the concern is a lack of information and cross-referencing.

How could inconsistent application be reduced?

Per paragraph B54c) of the UKEB second research paper Statement of Cash Flows: Non-mandatory and Voluntary Cash Flow Disclosures Provided by UK Listed Companies%20of%20the%20UKEB%20second%20research%20paper%20Statement%20of%20Cash%20Flows%3A%20Non-mandatory%20and%20Voluntary%20Cash%20Flow%20Disclosures%20Provided%20by%20UK%20Listed%20Companies), seven UK companies we sampled, disclosed derivative cash flows relating to investing and financing activities on the face of the statement of cash flows, and we provided an illustrative example. Requiring a similar disclosure for all companies would improve the usefulness of information for users.

Requiring companies to provide an accounting policy, explaining the classification of derivative cash flows in circumstances where hedge accounting is applied and those where hedge accounting is not applied, would also assist users.

As noted in paragraph 6 and concluding paragraph C182 of the UKEB third research paper Statement of Cash Flows: UK User and Preparer Perspectives, improving cohesiveness of the financial statements, might lead to more transparent disclosure in the notes about how the information for specific items, such as derivatives, link to all the primary financial statements.

EXAMPLE 13: Cash flows related to the in-substance purchase of an asset vs. a lease (right-of-use asset) (ASAF Agenda Paper 3A paragraphs 20-22).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

Preparers consulted raised the question of what constitutes an 'in-substance purchase of an asset' vs. 'lease items', given there is no longer a distinction in IFRS between operating leases and finance leased assets; all lease payments are treated the same as reductions of financing liabilities.

Inconsistent classification could arise from the determination of whether it is an in-substance purchase of an asset vs. a lease under IFRS 16. In the basis for conclusions in IFRS 16 (paragraphs 138–139), the IASB decided not to provide requirements in IFRS 16 to distinguish a lease from a sale or purchase of an asset⁸.

There may be inconsistency in how companies are determining an ‘in-substance purchase of an asset' that is contractually a leasing arrangement, and as a result the respective cash flows are categorised differently in the cashflow statement.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No. Cash flow treatment of such lease payments is clear in IAS 7.16(a) and IAS 7.17(e) and in IFRS 16.

Per IFRS 16.50(c) payments of short-term leases and low value leases are not a repayment of a financing and should be included in operating.

How pervasive is the issue in the UK?

We have not assessed how pervasive sale and leaseback arrangements are in the UK, nor the potential pervasiveness of inconsistent classification. We are not certain that this is a classification issue, but rather an issue relating to non-cash information and improving the cohesiveness between the notes in the financial statements and the primary financial statements.

How could inconsistent application be reduced?

We suggest the IASB consider this topic when it looks at non-cash transactions. Improving the requirements in IFRS 16 or in IAS 7 to require the existing leases note disclosure to show where such cash flows are recorded in the statement of cash flows might be useful information for users. Requiring cross-referencing between the leases note and the statement of cash flows, the right-of-use asset note and capital expenditure disclosures, would enhance the cohesiveness for users of the financial statements.

Improving accessibility of information is more important to users than classification. However, to reduce diversity in classification, IAS 7 could specifically include classification requirements to disclose 'cash flows related to sale and leaseback arrangements' and include in the standard, or Basis for Conclusions, the rationale for the expected classification of those cash flows.

EXAMPLE 14: Cash flows related to shares withheld on employee share options (ASAF Agenda Paper 3A paragraphs 23-25).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

Applying IAS 7, preparers should be able to appropriately classify cash flows related to cash-settled share-based payment transactions as cash flows from financing activities. However, there is no specific guidance in IAS 7 on how to classify cash flows related to shares withheld on employee share options. That said, IAS 7.17(b) says that payments to owners to acquire shares or redeem the entity's shares are financing cash flows.

The issue may arise where no cash is received or paid by the entity, but the related cash flows occur in third parties' books. For example: Shares awarded to an employee could be at gross value (say 100), and that employee has to sell some of those shares (say worth 40, if a 40% taxpayer), to settle the tax liability on those shares. The employee sells the shares and passes the funds back to trustee, who passes the funds to the treasury company to settle a tax liability with the tax authorities. No cash touches the books of the entity awarding the shares. In this instance, how should a company reflect this transaction in the cash flow statement? Should it show the deemed cash flows, or is it not expected to affect the cash flow statements, given it is a non-cash transaction? How else might the transaction best be disclosed to provide transparency to users?

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No. It is not aligned to one of the four underlying factors identified by the IASB, since the third factor where the 'initial transaction is a non-cash transaction', is not similar, as that suggests there is a subsequent cash transaction.

The transaction in this Example 14 is a non-cash transaction.

How pervasive is the issue in the UK?

We have not assessed the pervasiveness in the UK of shares withheld on employee share options, nor the potential inconsistent classification of such cash flows.

How could inconsistent application be reduced?

IFRS 2 Share-based Payment does not specifically include disclosure requirements for cash flows.

That said, we are not certain that this is a classification issue, and we would suggest that the issue of such non-cash transactions be investigated when looking at the topic of non-cash transactions.

In the UKEB research, we suggested potential ways that the IASB could consider requiring companies to disclose significant non-cash transactions.

EXAMPLE 15: Cash flows related to providing financing to customers (ASAF Agenda Paper 3A paragraphs 26-30).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

No feedback was received from stakeholders we consulted on providing finance to customers.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

Applying IAS 7.6, 7.14, 7.16(e) and 7.16(f) preparers should generally be able to classify cash flows as investing or operating activities, depending on the principal revenue-producing activities of the business.

Inconsistencies with classification of interest paid and received may have arisen in the past, due to the options available prior to the introduction of IFRS 18, but the option has been removed with IFRS 18.

How pervasive is the issue in the UK?

We have not assessed the pervasiveness in the UK of providing finance to customers, nor the pervasiveness of potential inconsistent classification of such cash flows.

How could inconsistent application be reduced?

IFRS 8 removes the option for classifying interest received or paid as operating (unless the entities principal-revenue-producing activities relate to providing finance). This should reduce any existing diversity in practice in the classification of such cash flows.

EXAMPLE 16: Cash flows related to assets held for rental (ASAF Agenda Paper 3A paragraphs 31-32).

Which fact patterns are giving rise to inconsistent application in the UK, and how the requirements in IAS 7 are being applied to those fact patterns?

No fact patterns giving rise to inconsistent classification of cash flows related to assets held for rental were provided by UK stakeholders we consulted. However, as noted in the FRC's Annual Corporate Reporting Review 2024/25, classification of cash flows was one of the top three items where the FRC asked companies substantive questions. In particular, it lists payments to acquire assets held for rental to others and subsequently held for sale being classified as investing, rather than operating activities.

Does the item correspond to any of the four underlying scenarios that might contribute to inconsistent application of the requirements in IAS 7?

No.

Clear guidance provided: IAS 7.14 states: “cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale as described in paragraph 68A of IAS 16 Property, Plant and Equipment are cash flows from operating activities. The cash receipts from rents and subsequent sales of such assets are also cash flows from operating activities".

How pervasive is the issue in the UK?

We have not assessed the pervasiveness in the UK of asset held for rental, nor the pervasiveness of potential inconsistent classification of such cash flows.

How could inconsistent application be reduced?

N/A

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Footnotes