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Hi Deviant. I had the same confusion. However upon reading IAS 7 it became clear to me. IAS 7 says that interests and dividends paid/received can be included in ANY of the 3 sections, as long as the entity is consistent in its practice. So the standard is flexible when it comes to dividends and interests paid and received.
In one sense, interest paid could come under financing as it is the cost of the finance. However, IAS 7 clearly states that the financing section is for cash flows that ALTER THE CAPITAL STRUCTURE OF THE ENTITY, which obviously paying interest doesn’t. Therefore it makes sense to include it in the operating section instead.
However, by this same argument, I believe dividends paid should also be included in the operating section and not the financing section. Only Shares sold/bought back and loan taken/paid back should form the financing section.
So basically if there is a change in the useful life of the asset in the course of revaluation, then we must use the new useful life to calculate the cost method depreciation as well, and then determine the difference between the cost method depreciation and the revaluation method depreciation to get the excess depreciation, which is then transferred from the revaluation reserve to the retained earnings.
Thanks for the quick response. Just a follow up. Why is the ‘interest paid’ included in the ‘cash flow from operating income’ to give us Net cash generated from operations. Shouldn’t it be included in the ‘cash flow from financing activities’ section. However, looking at the template on page 17 of the FR Notes, it’s not mentioned in the financing activity section and only mentioned in the operating activities section.
Kindly clarify,
Thanks.
