In connection with its deliberations on IAS 7 on the definitions of operating, investing and financing activities (refer to IFRIC Update of March 2013) the Interpretations Committee proposes the IASB to delete the guidance in paragraph 16 of IAS 7 that "only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities".
The Interpretations Committee noted that this guidance in paragraph 16 had originally been added to IAS 7 as an annual improvement ("Improvements to IFRS" April 2009) following a recommendation by the Interpretations Committee at that time.
During its deliberations in March 2013, the Interpretations Committee proposes the IASB to delete the guidance in paragraph 16 of IAS 7 that "only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities". This is because this guidance is:
- leading to the misinterpretation that expenditures that give rise to recognised assets are, by default, investing activities; and
- giving precedence to the second principle that the Committee had identified in previous meetings which is that "cash flows in IAS 7 should be classified consistently with the classification of the related or underlying item in the statement of financial position".
The Interpretations Committee had identified in previous meetings (refer to IFRIC Update of March 2013) that the primary principle behind the classification of cash flows in IAS 7 is that based on paragraph 11 of IAS 7, cash flows should be classified based on the nature of the activity in a manner that is most appropriate to the business of the entity, in accordance with the definitions of operating, investing and financing activities in paragraph 6 of IAS 7.
At the March 2013 meeting the Interpretations Committee concluded that:
- an expenditure that gives rise to a recognised asset should be classified as an investing activity when it meets the definition of an investing activity; and
- an expenditure that does not give rise to a recognisable asset can also meet the definition of investing activities to the extent that this expenditure has been made for resources that are intended to generate future income and cash flows.
At the April 2013 meeting, the IASB discussed the proposal made by the Interpretations Committee to delete the guidance in paragraph 16 of IAS 7 which makes explicit that “only expenditures that result in a recognised asset in the statement of financial position are eligible for classification as investing activities”.
At the July 2013 meeting the staff informed the Interpretations Committee that at the April 2013, the IASB decided not to remove the guidance from paragraph 16 of IAS 7 because it noted that this guidance has potentially reduced diversity in practice in the classification of cash flows relating to exploration and evaluation activities.