Cash Flows From Investing Activities
The cash flows from investing activities section of a statement of cash flows lists cash flows from acquisition and disposal of long-term investments such as property, plant and equipment, investment in subsidiaries and associates, etc.
It is important to segregate cash flows from investing activities from other cash flows because it provides information about the extent of a company’s expenditure on assets expected to generate future growth in revenue and income. If net cash flows from investing activities are negative, it means that there is a net addition to long-term assets, and vice versa. Negative net cash flows from investing activities are financed out of positive cash flows from operating activities and/or cash flows from financing activities.
Generally, cash flows related to expenditures which qualify for capitalization in a statement of financial position are classified as investing activities. For example, cash flows related to expenditure incurred in the development phase of an intangible asset shall be classified as investing activities but not those related to research phase expenditure shall not be.
Specific examples of cash flows from investing activities include:
- Cash payments to acquire or construct long-term fixed assets, intangible assets, and other long-term assets.
- Cash receipts from sale of property, plant and equipment, and intangible assets.
- Cash payments to purchase bonds or shares of other companies (subsidiaries, associates and joint ventures) except those which are classified as cash equivalents.
- Cash receipts from sale of bonds and shares of other companies except those which are classified as cash equivalents.
- Cash payments or receipts related to advances and loans made to other parties.
- Cash payments for or receipts from derivative contracts (i.e. forwards, futures, swaps, etc.) unless they are for trading or dealing purposes or related to financing cash flows.
- Cash flows related to taxes which may be specifically identified with investing activities.
IFRS and US GAAP differences
In general, US GAAP and IFRS converge on classification of cash flows from investing activities. However, there are some exceptions: IFRS allows dividend income earned on investment in shares and interest earned on loans and advances to other parties to be classified as either an inflow from operating activities or an inflow from investing activities while US GAAP requires it to be reported under the cash flows from operating activities only.
CD Ltd. is engaged in manufacture of fertilizer. During the year ended 30 June 20X2, the company:
- Installed a new plant at a cost of US $800 million (50% of which is financed by issue of debt instruments).
- Disposed off the old plant is disposed of at a loss of $10 million. The closing written down value of the disposed plant was $150 million.
- Incurred an expenditure of $20 million on construction of new plant building and infrastructure (20% of which represents capitalized borrowing cost).
- Sold off its stake of $50 million in EF Ltd., a subsidiary that was engaged in food processing.
- Received US $10 million on account of repayment of principal and $2 million on account of interest income.
- Received dividends of $5 million during the year.
The company reports results in both US GAAP and IFRS.
Determine which cash flows would be classified as cash flows from investing activities.
|Cash flows from investing activities||$ in million|
|Cash paid to acquire new plant||(800)|
|Cash paid to construct new buildings||(18)|
|Cash receipt from sale of old plant||140|
|Cash receipt from sale of investment in EF Ltd.||50|
|Cash receipt from payback of loan principal||20|
|Net cash flows from investing activities||(608)|
- The whole $800 million spent on acquisition of the plant is classified as a cash flow from investing activities. The financing proportion only impacts receipts in financing activities
- Cash receipt from sale of plant equals written down value of the plant of $150 million minus the loss of $10 million.
- The borrowing cost component of the cost incurred on constructed asset is classified as cash flow from financing activities and the remaining i.e. $18 million is classified as a cash outflow from investing activities.
- Receipt of principal is reported as an investing cash inflow while dividend income and interest income are not included in cash flows from investing activities under US GAAP. It is reported as cash inflows from operating activities.