Interest and dividends

Learning objectives

• Identify the classification options for interest and dividends (wording before IFRS 18) and the consistency requirement.L1, L2
• Calculate interest paid (including interest capitalised in the cost of an asset) and dividends paid from opening and closing balances.L2, L3
• Justify a classification method and its consistent application, and the disclosure of the total amount of interest paid.L2, L3
• Relate the journal entries for payments of interest, dividends and capitalised interest to the cash flows presented.L1, L2
• Determine, according to the period and any early application of IFRS 18, the applicable version of IAS 7 and classify interest and dividends under the version applicable from 1 January 2027.L1, L2, L3

Normative references

• IAS 7 §12One transaction can give rise to cash flows in different classes: for a loan instalment that repays both principal and interest, the principal portion belongs to financing, while the interest portion may be presented within operating activities (wording before IFRS 18).
• IAS 7 §31Cash flows from interest and dividends received and paid are each disclosed separately and classified in a consistent manner from period to period as operating, investing or financing activities.
• IAS 7 §32The total amount of interest paid during the period is disclosed in the statement of cash flows, whether it has been recognised as an expense or capitalised in the cost of an asset under IAS 23.
• IAS 7 §33In a financial institution, interest paid and interest and dividends received are usually classified as operating cash flows. For other entities, in the absence of consensus, they may be classified as operating, because they enter into the determination of profit or loss, or else as financing (interest paid, a cost of obtaining financial resources) and investing (interest and dividends received, a return on investments) respectively (wording before IFRS 18).
• IAS 7 §34Dividends paid may be classified as financing, because they are a cost of obtaining financial resources, or as operating, to help users judge whether the entity can fund dividends from its operating cash flows (wording before IFRS 18).
• IAS 7 §33AVersion applicable with IFRS 18: dividends paid are always classified as financing activities.
• IAS 7 §34AVersion applicable with IFRS 18: an entity other than those in para. 34B classifies interest paid (including that described in para. 32) as financing, and interest and dividends received as investing.
• IAS 7 §34BVersion applicable with IFRS 18: an entity whose main business activity is investing in assets or providing financing to customers (as defined in IFRS 18) classifies dividends received, interest received and interest paid by reference to the classification of the related income and expenses in the statement of profit or loss; the total of each of these cash flows goes into a single activity.
• IAS 7 §34CVersion applicable with IFRS 18: if each of these income or expense items is classified entirely in a single category of the statement of profit or loss, the related cash flow is classified in the activity associated with that category.
• IAS 7 §34DVersion applicable with IFRS 18: if one of these income or expense items falls within more than one category of the statement of profit or loss, the entity makes an accounting policy choice to classify the related cash flow in one of the associated activities.
• IAS 7 §64The amendments to IAS 7 made by IFRS 18 (April 2024) — paras. 6, 10, 12, 14, 16 to 18, 20, 31, 32, 35, 46 and 47 amended, paras. 33A and 34A to 34D added, paras. 33 and 34 deleted — apply when the entity applies IFRS 18; IAS 7 sets no date of its own.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

31 questions

• Interest and dividends received and paid are each disclosed separately and classified consistently from period to period.L1
• For an entity that is not a financial institution, dividends paid must be classified as financing activities.L1
• The total amount of interest paid disclosed in the statement excludes interest capitalised into the cost of an asset under IAS 23.L2
• For an entity that is not a financial institution, how may interest paid be classified?L1
• A trading company receives interest on its investments and dividends from its shareholdings. Between which activities may it choose for these receipts?L1
• What rationale does the standard give for classifying dividends paid as financing?L2
• Tormane used to classify interest paid as operating. This year, to improve operating cash flows, it classifies it as financing, with no other reason. What should be said?L2
• Lirmane pays a loan instalment (capital 60,000, interest 9,000). It classifies interest paid as financing (case data). How should the instalment be presented?L2
• Which of these classifications are permitted for a manufacturing entity?L1
• Which of these disclosures about interest are required?L2
• For its financial year beginning on 1 January 2026, Osttine is considering the following positions. Which comply with the applicable wording?L3
• Calnore's interest expense amounts to {interest_expense}. Interest payable moves from {opening_payable} to {closing_payable}. Compute interest paid.L2
• During the year Delrane recognised {interest_expense} of interest on its borrowings. It owed {opening_payable} of accrued unpaid interest at the start of the year and owes only {closing_payable} at the end. How much interest did it pay out?L2
• Halbane recognised {interest_expense} of interest as an expense and capitalised {capitalised_interest} of interest into the cost of a plant under construction, paid during the year. Accrued expensed interest moves from {opening_payable} to {closing_payable}. Compute the total interest paid to disclose.L3
• Kervelle declared {dividends_declared} of dividends during the year. Dividends payable move from {opening_payable} to {closing_payable}. Compute dividends paid.L2
• Galbris's retained earnings move from {opening_retained} to {closing_retained}; profit for the year is {profit} and only dividends reduced reserves. Dividends payable move from {opening_payable} to {closing_payable}. Compute dividends declared and paid.L3
• Pirzane recognised {interest_income} of interest income on its investments. Interest receivable moves from {opening_receivable} to {closing_receivable}. It classifies interest received as investing (case data). Compute interest received.L3
• Ostvelle discloses “interest paid of 300,000” in the notes, although it also paid 80,000 of interest capitalised into the cost of a warehouse under construction. What is the error?L2
• Salrane presents interest paid of 175,000, the amount of its interest expense, although interest payable increased by 35,000. What is the error?L3
• Halmira presents a single line “net interest” of −40,000, offsetting 120,000 of interest paid and 80,000 of interest received. What is the error?L2
• Pirrel pays {amount} of accrued interest recognised in the previous year (case data). Record the payment entry.L1
• Fendis pays the dividend of {amount} declared and recognised as a liability before the previous year-end (case data). Record the entry and state the possible classification of the flow.L2
• Sorlis pays {amount} of interest on a loan dedicated to building a warehouse; this interest is capitalised into the cost of the asset under IAS 23 (case data). Record the payment entry.L2
• Calnis, a manufacturer, wants its operating cash flow to reflect the cost of its debt, and chooses for the first time a policy for classifying interest paid (case data). Which choice is compliant?L2
• Ralmira, a holding company with no industrial activity, earns most of its income as dividends from unconsolidated investments (case data). Which classification of dividends received is most defensible?L3
• Kalbris classifies interest paid as financing (case data). It paid 150,000 of expensed interest and 40,000 of interest capitalised into an asset under construction. Which presentation is most appropriate?L3
• Velquine used to classify dividends paid as financing. It is acquired by a group that classifies dividends as operating and wishes to harmonise policies in its consolidated accounts (case data). How should the issue be handled in Velquine's own accounts?L3
• Tirquine's CFO asks you for a memo on choosing the classification of interest paid, interest received, dividends received and dividends paid, for the group's first IFRS publication (year beginning in 2026). Write the memo.L3
• Melvora's auditor notes: interest paid presented at the amount of the expense; interest capitalised into a warehouse omitted from the total; loan instalments presented in full in financing although the entity's policy places interest in operating. Write the correction memo.L3
• Under the version of IAS 7 applicable with IFRS 18 (periods beginning on or after 1 January 2027), where does an entity classify the dividends it pays to its shareholders?L1
• Case data: Doranne, a distributor with no main business activity of investing or providing financing to customers, applies IFRS 18 early for its period beginning 1 January 2026 and discloses this in its notes. It received 40,000 of interest on its investments. How does it present this cash flow for that period?L2