ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Karo Ltd, a lessee under IFRS 16, pays a total of $120,000 in a year for leases. This comprises $90,000 of principal repayments and $30,000 of interest on lease liabilities, with no short-term or low-value leases. How should these payments be classified in the statement of cash flows?
The principal portion of lease payments, $90,000, is shown in financing activities, while the $30,000 interest portion follows the entity's IAS 7 policy for interest paid, either operating or financing. Lease payments are not classified wholly as operating or investing cash flows.
- APrincipal within financing activities; interest classified in line with the entity's policy for other interest paid (operating or financing)Correct
- BAll $120,000 within investing activities
- CPrincipal within operating activities; interest within financing activities
- DAll $120,000 within operating activities because the leased asset is used in operations
Explanation
Under IFRS 16 the cash payments for the principal portion of the lease liability are financing activities. Interest is classified applying IAS 7 requirements, as for other interest paid, so operating or financing under the entity's policy. Treating all as operating ignores the principal rule.
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