Last reviewed: July 2026.
IAS 7 Cash Flow Reporting Standard: Classification Guide is a practical guide designed to connect current accounting requirements with clear preparation steps, calculations and review controls.
IAS 7’s reporting objective
IAS 7 requires information about historical changes in cash and cash equivalents through a statement that classifies cash flows as operating, investing and financing. The classification helps users assess the entity’s ability to generate cash, meet obligations, fund investment and obtain financing. It also improves comparability between entities that use different accounting policies for non-cash transactions.
Cash and cash equivalents
Cash includes cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. They are held to meet short-term commitments rather than for investment return. An entity discloses its policy and reconciles statement amounts to the statement of financial position.
Operating classification
Operating activities are the principal revenue-producing activities and other activities not classified as investing or financing. Customer receipts, supplier payments and employee payments are common operating flows. Operating cash flows may be reported directly or indirectly. Classification should reflect the nature of the activity and be applied consistently.
Investing classification
Investing activities relate to acquiring and disposing of long-term assets and investments not included in cash equivalents. Purchases of property, plant and equipment, development assets that qualify for recognition, long-term investments and business acquisitions are typical outflows. Disposal proceeds, loan collections and sales of long-term investments are typical inflows.
Financing classification
Financing activities change the size and composition of contributed equity and borrowings. Share issues, borrowing proceeds and some capital contributions are inflows. Repayment of borrowing principal, purchases of own shares and payments to owners are outflows. Lease principal payments are generally financing, while interest classification follows the applicable IAS 7 requirements and policy.
Interest and dividend cash flows
Interest and dividends require specific attention because their classification may depend on the entity’s activities and the reporting requirements in force. IFRS 18 amended IAS 7, including requirements affecting interest and dividend classification. Preparers should update account mappings, policies, comparatives and disclosures for the transition date rather than relying on historic templates.
Income-tax cash flows
Income-tax payments are generally operating unless they can be specifically identified with investing or financing activities. When a transaction produces both current and deferred tax effects, the cash statement reflects only actual cash paid or received. Supporting schedules should reconcile tax paid to movements in tax balances.
Business combinations
Cash flows from obtaining or losing control of subsidiaries or other businesses are presented separately within investing activities. The amount is shown net of cash and cash equivalents acquired or disposed of. Related non-cash consideration and contingent consideration need separate analysis and disclosure.
Net versus gross presentation
Major classes of gross cash receipts and payments are usually presented separately. Net presentation is limited to circumstances such as cash flows collected on behalf of customers or items with quick turnover, short maturity and large amounts. Broad netting can conceal the scale of financing, investment or operating activity and should not be used merely to shorten the statement.
Foreign currency and exchange effects
Foreign-currency cash flows are translated at the exchange rate on the date of the flow, subject to practical approximations. The effect of exchange-rate changes on cash and cash equivalents is presented separately so the statement reconciles opening and closing balances. This line is not itself classified as operating, investing or financing cash flow.
Classification decision checklist
- Identify the underlying activity rather than relying on the ledger account label.
- Apply the same classification policy consistently.
- Separate cash and non-cash effects.
- Avoid unsupported net presentation.
- Document IFRS 18 transition effects on IAS 7 mappings.
Direct and indirect operating methods
The direct method classifies gross operating cash receipts and payments, while the indirect method explains the conversion of accrual profit into operating cash. Both should reach the same operating cash-flow total. The choice affects presentation and data requirements, not the underlying definition of operating activities. Systems should preserve transaction-level information even if the indirect method is used.
Restricted cash and cash management
Amounts that meet the definition of cash may be restricted from general use. Significant restrictions are disclosed so users understand available liquidity. Investments are cash equivalents only when held for short-term commitments and exposed to insignificant value risk. Equity investments normally do not qualify unless they are, in substance, cash equivalents.
Policy and controls
The classification policy should identify recurring transaction types, responsible reviewers and evidence requirements. New financing products, supplier-finance arrangements and business combinations should trigger technical review. Automated mappings should be tested against contracts and reconciled to the general ledger because account codes alone may not reflect the underlying activity.
Current developments
The IASB is considering improvements to cash-flow reporting, including disaggregation, non-cash transactions and classification consistency. Until amendments are issued and effective, entities continue applying current IAS 7 and IFRS 18 requirements. Technical teams should monitor developments without treating tentative decisions as mandatory rules.
Related Accounting Support guides
Use the cash-flow definitions guide, the cash-flow format guide and the indirect-method guide.
Authoritative references
Refer to IAS 7 Statement of Cash Flows and IFRS 18 Presentation and Disclosure in Financial Statements.