IAS 7 Statement of Cash Flows: Methods, Disclosures, and IFRS 18

The IAS 7 statement of cash flows must show how an entity’s cash and cash equivalents changed during the reporting period, split into three categories: operating, investing, and financing activities. The standard applies to every entity that prepares IFRS financial statements, regardless of industry or size, and requires the closing figure to reconcile to cash and cash equivalents on the balance sheet.¹

What Counts as Cash and Cash Equivalents

Cash means cash on hand and demand deposits: money you can withdraw at any time without penalty. Cash equivalents are short-term, highly liquid investments that convert easily into a known amount of cash and carry almost no risk of losing value.² Treasury bills and money market instruments are typical examples.

An investment generally qualifies as a cash equivalent only when it matures within three months from the date the entity acquired it. Equity investments are excluded unless they function as cash equivalents in substance, such as preferred shares bought shortly before a fixed redemption date. Bank overdrafts normally sit within financing activities, but in jurisdictions where on-demand overdrafts are part of everyday cash management, they can be treated as a component of cash and cash equivalents.²

Some balances meet the definition of cash but are not available for the group to use freely, such as escrow accounts, pledged bank balances, or amounts subject to foreign exchange controls. Paragraph 48 requires disclosure of the existence and amount of any significant restricted balances, with a narrative explanation. Many entities show restricted cash as a separate line item on the balance sheet with supporting detail in the notes.

The Three Categories of Cash Flows

The classification tells a reader whether cash came from everyday business, from buying or selling long-term assets, or from raising capital and repaying debt.

Operating Activities

Operating activities cover the entity’s principal revenue-producing transactions and anything that doesn’t belong in the other two categories.³ Cash collected from customers, payments to suppliers and employees, royalties, and commissions all sit here. This section shows whether the business can fund itself from its own operations without relying on outside money or asset sales.

Investing Activities

Investing activities involve buying and selling long-term assets and other investments that are not cash equivalents.³ Purchasing property, equipment, or intangible assets generates outflows here; disposing of those assets creates inflows.

Financing Activities

Financing activities change the size and mix of an entity’s equity and borrowings.³ Proceeds from issuing shares, share repurchases, loan drawdowns, and debt repayments all appear here.

Direct or Indirect Method for Operating Cash Flows

IAS 7 permits two approaches for presenting operating cash flows and explicitly encourages the direct method.²

The direct method lists major categories of gross cash receipts and payments: cash collected from customers, cash paid to suppliers, cash paid to employees, and so on. Readers get a line-by-line view of where operating cash came from and where it went. Most entities avoid it because the data collection is more demanding.

The indirect method starts with profit or loss and works backward. Adjustments strip out non-cash items like depreciation and provisions, remove gains or losses that belong in investing or financing, and account for changes in working capital: movements in inventory, receivables, and payables during the period.² Most IFRS reporters use this approach because the underlying data is already in the accounting system, and the reconciliation shows why profit and cash flow differ.

Investing and financing sections are always presented directly, category by category, regardless of the method chosen for operating activities.

Interest, Dividends, and Taxes

Interest received, interest paid, dividends received, and dividends paid must each appear as separate line items in the statement.² Under the current version of the standard, entities choose which category to assign these flows to, as long as the choice is applied consistently from period to period.

Financial institutions typically classify interest paid, interest received, and dividends received as operating activities because those flows relate directly to their core business. Other entities often treat interest paid and dividends paid as financing (costs of raising capital) and interest and dividends received as investing (returns on deployed capital). This flexibility will narrow under IFRS 18 from 2027.

Income tax cash flows are classified as operating activities by default. The only exception is where a specific tax payment can be directly linked to an investing or financing transaction, in which case that portion is reclassified accordingly.² Splitting tax payments by activity is difficult in practice, so most entities leave the full amount in operating.

Gross vs. Net Reporting

Cash flows are generally reported at their gross amounts, showing the full inflow and the full outflow rather than netting them. IAS 7 carves out two situations where net reporting is allowed.³

The first is when the cash flows reflect the customer’s activity rather than the entity’s own. A property manager collecting rent for a landlord, a bank accepting and repaying demand deposits, or an investment company holding funds for clients can report those flows net. The second is when items turn over quickly, are large in amount, and have short maturities. The standard’s own examples include credit card principal amounts, short-term investment purchases and sales, and borrowings maturing within three months.

Financial institutions have an additional allowance. They may net cash flows from fixed-maturity deposits placed with or withdrawn from other institutions, and advances and loans made to customers together with their repayments.³

Foreign Currency Cash Flows

Foreign currency transactions and the cash flows of consolidated foreign subsidiaries must be translated at the exchange rate in effect on the date each transaction occurred. A weighted average rate for the period is allowed if it approximates the actual rates.² Using the closing rate is not permitted.

Unrealised gains and losses from exchange rate movements are not cash flows, but they still affect the cash balance. The statement must include a separate reconciling line showing the effect of exchange rate changes on cash and cash equivalents held in foreign currencies. This line sits outside the three main categories and bridges the opening and closing cash balances.²

Acquisitions and Disposals of Subsidiaries

Cash flows from obtaining or losing control of a subsidiary or other business are classified as investing activities and must be presented as a separate line item.² The amount shown is the consideration paid or received, netted against any cash held inside the acquired or disposed business. Alongside that line item, the entity discloses in aggregate for all such transactions during the period:

The total consideration paid or received.
The portion of that consideration that was cash and cash equivalents.
The amount of cash held by the subsidiary at the date control changed.
A summary by major category of the non-cash assets and liabilities in the subsidiary at that date.

When an entity buys or sells additional shares in a subsidiary it already controls, without gaining or losing control, those cash flows are classified as financing rather than investing. Partial ownership changes within a controlled group are equity transactions.²

Required Disclosures

Reconciliation of Financing Liabilities

Paragraph 44A requires enough disclosure for investors to evaluate how liabilities from financing activities changed during the period, capturing both cash movements and non-cash changes.⁴ Most entities satisfy it with a table reconciling opening and closing balances of each financing liability, broken down into:

Cash changes: proceeds from new borrowings, repayments, and other financing cash flows.
Changes from obtaining or losing control of subsidiaries.
Foreign exchange effects on foreign-denominated debt.
Fair value changes that affect the carrying amount without cash moving.
Other non-cash changes, such as amortisation of debt issuance costs.

The reconciliation must be kept separate from changes in other assets and liabilities, and it must link clearly to the balance sheet and to the cash flow statement.⁴

Supplier Finance Arrangements

Paragraphs 44F–44H, effective for annual periods beginning on or after 1 January 2024, require disclosures about supplier finance arrangements: programs where a financial institution pays an entity’s suppliers, and the entity repays the institution on extended terms. Entities must disclose enough information for investors to assess the effect of these arrangements on liabilities and cash flows, and the extent of liquidity risk if the arrangements were terminated.³ This includes quantitative data on the carrying amounts of financial liabilities that are part of the programs and the line items in which those liabilities appear.

Non-Cash Investing and Financing Transactions

Transactions that affect an entity’s asset or capital structure without involving cash are excluded from the statement entirely. Converting debt into equity, acquiring assets by assuming the seller’s liabilities, and obtaining a business through an equity issue are common examples.² These transactions must be disclosed elsewhere in the financial statements, usually in the notes, so that readers still see the full picture of investing and financing activity.

What Changes Under IFRS 18 in 2027

IFRS 18, effective for annual reporting periods beginning on or after 1 January 2027, significantly changes how interest and dividend cash flows are classified.⁵ The current flexibility to pick a category for each type of flow is replaced with mandatory classifications for most entities. Early adoption is permitted.

For entities that do not have a main business activity of investing in assets or providing finance to customers, interest paid must be classified as financing, and interest received and dividends received must be classified as investing. Dividends paid are financing for all entities. Entities whose main business is investing or lending, such as banks and investment funds, follow the classification of the related income and expenses in profit or loss, which generally keeps those flows in operating.

The amended IAS 7 also requires that each type of cash flow (interest paid, interest received, dividends paid, dividends received) falls entirely within a single category rather than being split. Where IFRS 18 requires related income to be classified in more than one profit-or-loss category, the entity makes an accounting policy choice to assign the cash flows to one of those categories. The changes apply fully retrospectively, so prior-period comparatives will need to be restated on first adoption.¹

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IFRS. IAS 7 Statement of Cash Flows
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IFRS Foundation. IAS 7 Statement of Cash Flows
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IFRS Foundation. IAS 7 Statement of Cash Flows
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IFRS. IAS 7 Statement of Cash Flows – Disclosure of Changes in Liabilities Arising From Financing Activities
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IFRS. IFRS 18 Presentation and Disclosure in Financial Statements