In plain words
A hospital collects from patients and insurers, buys scanners and pays rent on leased premises. The question is how each cash flow is classified. Collections and payments to suppliers and staff are operating; equipment and system purchases are investing, not netted. Lease principal repayments are financing, while lease interest follows the entity's consistent policy. For annual periods beginning on or after 1 January 2027, IFRS 18 removes this choice for most companies, and interest paid becomes financing. Assets acquired through a lease are disclosed as non-cash transactions, not shown as cash flows.
Why it matters
Cash flow classification directly shapes how lenders and investors read a provider's cash-generating ability; misclassifying IFRS 16 lease payments or netting significant capex against disposal proceeds can make operating cash flow look artificially strong or capex look artificially light, distorting covenant calculations and capital-allocation decisions.
Diagnostic questions
Following IFRS 16 adoption, are lease payments correctly split between the financing section (principal) and the relevant section for interest per the entity's chosen policy, rather than left entirely within operating cash flows? Is capital expenditure on major medical equipment and facility construction classified as investing activities rather than netted within operating cash flows? Are collection delays on insurer and government receivables reflected through working capital movements in operating activities rather than adjusted out of the cash flow statement?
Recognition
1) Classify cash receipts from patients and insurers, and payments to suppliers, employees and for short-term/low-value leases, as operating activities. 2) Classify purchases of property, plant, equipment and intangibles (MRI scanners, HIS systems, facility construction) as investing activities, not netted within operating cash flows. 3) Following IFRS 16, split lease payments into the financing component (principal repayment of the lease liability) and, per the entity's consistent policy, either operating or financing for the interest component. 4) Present the indirect-method reconciliation from profit before tax to operating cash flow, adjusting for all non-cash items (depreciation, amortization, ECL charges, provisions, unwinding of discount) and working capital movements. 5) Classify debt drawdowns and repayments, and dividend payments, as financing activities. 6) Disclose significant non-cash investing/financing transactions (e.g. equipment acquired under a lease, or a government grant received as a non-monetary asset) separately, since they do not appear in the cash flow statement itself.
Measurement
Reconcile profit before tax to operating cash flow under the indirect method, adjusting for non-cash items such as depreciation, amortization, ECL charges, provisions (including unwinding of discount) and working capital movements in insurer/patient receivables, contract assets and inventory; measure and present financing cash flows at the actual cash principal and interest amounts paid, not accrual-based expense figures.
Presentation & disclosure
Disclose significant non-cash investing and financing transactions (e.g. equipment acquired under a lease or in exchange for a non-cash grant); disclose a reconciliation of liabilities arising from financing activities (opening balance, cash flows, non-cash changes such as new leases or FX, closing balance); disclose the accounting policy choice for classifying interest paid (operating vs. financing) and interest/dividends received if applicable; present the indirect-method reconciliation with sufficient granularity for material working-capital movements (insurer receivables, inventory).
Common mistakes
- Presenting all lease payments as an operating outflow post-IFRS 16 instead of splitting principal (financing) from interest per policy
- netting significant equipment purchases against disposal proceeds inappropriately instead of presenting both gross amounts
- misclassifying government grant receipts related to capital equipment as operating rather than investing cash inflows
- failing to adjust for non-cash items like ECL charges and provisions in the indirect-method reconciliation, distorting operating cash flow
- inconsistently applying the interest classification policy period to period.
Simple example
A hospital's IFRS 16 lease liability principal repayments of SAR 1,800,000 for the year are presented within financing activities, while the SAR 220,000 interest expense component is presented within operating activities per the entity's consistently applied policy; equipment purchases of SAR 5,000,000 are presented within investing activities. The underlying cash entries during the year: Dr Lease liability 1,800,000 / Dr Interest expense 220,000 / Cr Cash 2,020,000 (total lease cash payment); and Dr Medical equipment 5,000,000 / Cr Cash 5,000,000. In the cash flow statement, the SAR 1,800,000 appears under financing activities, the SAR 220,000 under operating activities (added back to profit if not already excluded, then shown as a cash outflow within operating activities), and the SAR 5,000,000 appears under investing activities as capital expenditure.
Professional judgment
The classification of interest paid (operating vs. financing) is an accounting policy choice under IAS 7 that should be applied consistently and disclosed; a further grey area is how to classify cash flows related to government grants that fund both an asset purchase and related operating costs within the same program, which may require splitting a single receipt between investing and operating activities.
Source basis
IAS 7 · Statement of Cash Flows
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.