Non-cash investing and financing transactions
How to keep leases, assets bought for shares and converted loans out of a client's cash flow statement under IAS 7, and disclose them instead.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client signs a five-year lease for a new warehouse in the last quarter. No money changes hands on signing, apart from perhaps a deposit, yet the statement of financial position now shows a large right-of-use asset and an equally large lease liability. If the cash flow statement is built from movements in balances, the new asset appears as cash spent on investing and the new liability as cash raised from financing. Neither happened. The cash flow is wrong in two places, and because the errors offset, it still balances.
This is the classic non-cash transaction problem. IAS 7 deals with it directly, and a cash flow built from balance movements, which is how most small-company cash flows are prepared, will get it wrong unless the preparer intervenes. This article covers the rule, the usual suspects, how to find them and how to correct the statement in Achekam.
IAS 7: exclude non-cash investing and financing, disclose them separately
IAS 7 classifies cash flows during a period into operating, investing and financing activities. It defines operating activities as the principal revenue-producing activities of the entity and other activities that are not investing or financing.
For transactions that involve no cash at all, IAS 7 is clear: investing and financing transactions that do not require the use of cash or cash equivalents are excluded from the statement of cash flows, but separately disclosed. Two actions, then: take them out of the statement, and tell the reader about them elsewhere, usually in a note to the cash flow statement.
The disclosure matters because these transactions often change the client's position significantly. A reader who sees a large new lease liability in the statement of financial position and no corresponding financing inflow deserves to know where it came from.
Common examples: right-of-use assets, assets for shares, debt converted to equity
The non-cash transactions a small-company preparer meets most often are:
- New leases. ACCA explains that under IFRS 16 a lessee recognises a right-of-use asset and a lease liability at the commencement date, with the liability initially measured at the present value of the lease payments not yet paid. Both sides arise on commencement; no cash moves except any payment made at or before that date.
- Assets acquired for shares. A shareholder contributes a vehicle or property to the company in exchange for shares.
- Debt converted to equity. A shareholder's loan account is capitalised as share capital.
- Assets bought on extended credit. Equipment acquired from a supplier who finances the purchase; the asset is acquired without cash, and only the later repayments are cash flows.
- Settlements by offset. A receivable from a customer settled by taking over an asset from them.
Spotting them in a balance-movement cash flow
ACCA explains that investing cash flows relate to non-current assets, including investments, such as buying property, plant and equipment and the proceeds from disposals. A cash flow built from balance movements treats every increase in non-current assets as cash spent on investing. That is the trap: some of those increases were not bought with cash.
To find them, go through the movements in non-current assets and in borrowings, equity and lease liabilities, and ask for each addition: was it paid for in cash in this year?
- Reconcile additions to fixed assets with payments in the bank statements and the cash book.
- Compare new borrowings and lease liabilities with cash actually received.
- Read the share register and the board minutes for any issue of shares other than for cash.
- Check the shareholder and director loan accounts for amounts capitalised or set off.
Any addition with no matching cash is a candidate non-cash transaction.
Overriding derived lines in the Studio so the non-cash part is removed
In Achekam's Studio, the cash flow statement's current-year column is worked out from the change in balances. That is efficient for most lines and exactly the place where non-cash transactions creep in. Staff can type their own figure for any line, and the typed figure then takes priority over the calculated one.
A worked example in words. The warehouse lease above added a right-of-use asset and a lease liability. The calculated cash flow shows the asset's increase as an investing outflow and the liability's increase as a financing inflow. The preparer types over the investing line with the cash actually paid for property, plant and equipment in the year, excluding the right-of-use asset, and over the financing line with the cash actually received from borrowings, excluding the new lease liability. Lease payments made during the year are then presented according to the client's policy. The preparer records each typed figure and its reason in the working papers, and adds a note disclosing the new lease as a non-cash transaction.
Typed figures take priority over calculated ones, so revisit them whenever the trial balance changes late in the process. Finally, prove the statement: opening cash plus the net movement must equal closing cash. A broader guide to placing items in the right section is in classifying cash flows.
Using the lease register to find new leases in the year
New leases are the most common non-cash transaction, and the easiest to miss if the client signs agreements without telling the bookkeeper. Achekam lets staff keep a client's lease register under IFRS 16 or IFRS for SMEs Section 20. The register can read a lease from the contract and produce an AI draft of its terms, but that draft is not used until a person confirms it, and every number the AI reads must appear in the contract text.
At year end, list the leases that commenced during the year from the register. Each one is a candidate for the non-cash disclosure and for a typed correction in the cash flow. Ask the client, too, whether any agreements were signed that have not yet been added; the register can only show what it has been given. Maintaining it is covered in the IFRS 16 lease register.
The IFRS Foundation's IAS 7 page summarises how the standard requires changes in cash and cash equivalents to be presented. On the next file, before accepting the calculated investing and financing lines, ask one question of every new asset and every new liability: where was the cash?
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
