Cash flow statement classification

High-volume cash businesses like restaurants and hotels, combined with IFRS 16 lease payments that must be split between financing (principal) and operating or financing (interest), are a recurring source of cash flow misclassification that can distort operating cash flow -- a metric lenders and investors rely on heavily to assess liquidity and covenant compliance.

Is the principal portion of lease payments classified within financing activities and the interest portion within operating (or financing, per a consistently applied accounting policy) activities, rather than the entire payment being shown as operating? Are outlet renovation and major capex payments correctly classified as investing activities and clearly split from routine repair and maintenance cash outflows, which remain operating? Is cash paid for variable lease payments not included in the lease liability (e.g., pure turnover rent) presented within operating activities?

1. Classify every cash flow into one of three categories based on its nature: operating (cash receipts from customers, aggregator remittances net of the aggregator's own fee where the entity is principal, payments to suppliers and employees, short-term/low-value lease payments), investing (outlet construction/renovation capex, equipment purchases, proceeds from asset disposals), or financing (lease liability principal repayments, new borrowings and repayments, dividends paid, owner contributions).
2. For IFRS 16 lease payments specifically: split each payment into principal (always financing) and interest (per the entity's consistent accounting policy choice -- operating or financing, both permitted).
3. Confirm the policy choice for interest classification is documented and applied consistently period to period; disclose the choice.
4. Identify significant non-cash transactions (e.g., initial recognition of a new right-of-use asset and lease liability, or a leasehold improvement funded through a landlord contribution) and disclose separately rather than including in the cash flow statement.
5. Reconcile the movement in cash and cash equivalents per the statement to the balance sheet, and reconcile operating cash flow to profit before tax (indirect method), adjusting for non-cash items (depreciation, amortization, ECL provisions, unrealized FX) and working capital movements (including perishable inventory swings typical of F&B).
6. Review classification of delivery aggregator remittances: gross versus net presentation should follow the entity's principal/agent conclusion under IFRS 15, and the cash flow classification should be consistent with that revenue presentation.

Cash flows are measured at the actual cash amounts paid/received, not accrual-basis amounts; the indirect method reconciliation starts from accrual-basis profit before tax and removes non-cash items and working capital timing differences to arrive at operating cash. For lease payments, the split between principal and interest must be measured consistently with the amortized-cost schedule of the lease liability under IFRS 16 (the same split used for balance sheet/P&L purposes), not recalculated separately for the cash flow statement. Foreign-currency cash flows are translated at the exchange rate at the date of the cash flow (or an appropriate average rate).

Disclose: components of cash and cash equivalents reconciled to the balance sheet; the accounting policy for classifying interest paid on lease liabilities (operating or financing) and consistency of application; the total cash paid for leases split between principal and interest; significant non-cash investing/financing transactions (new right-of-use assets/lease liabilities recognized, non-cash capex funded by landlord incentives); a reconciliation of liabilities arising from financing activities (including lease liabilities) showing cash and non-cash movements; restrictions on the use of cash balances, if any (e.g., aggregator escrow or franchise reserve accounts).

1. Presenting the entire lease payment as an operating cash outflow instead of splitting principal (financing) from interest (operating or financing per policy).
2. Classifying outlet renovation or major refurbishment capex as an operating expense/cash outflow rather than investing activity.
3. Netting delivery aggregator remittances against gross sales in the cash flow statement inconsistently with the gross/net revenue presentation conclusion.
4. Failing to disclose significant non-cash transactions such as new right-of-use assets recognized on lease commencement.
5. Applying an undocumented or inconsistent policy choice for lease interest classification from year to year.