Ind AS 7: Presentation of late payment interest fees as cash flow from investing activity
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Ind AS 7: Presentation of late payment interest fees as cash flow from investing activity
Query
A Company say, X Ltd. is engaged in the business of generation and distribution of power. X Ltd. follows the financial year as its accounting year and sales are billed monthly to commercial customers and bi-monthly to domestic customers. The amount is charged according to the tariff rates as provided by the electricity department. The customers are required to pay the bill amount within a period of 30 days. A late payment fees (interest fees) is charged from the customers who have not paid the bill amount within the specified period.
Since X Ltd. is not a financial institution, it presented the late payment interest fees under the head investing activities in the Cash Flow Statement. Moreover, X Ltd. has also considered that the interest fees is being received on the account of time value of money and therefore adopted the above treatment. Whether the accounting treatment adopted by X Ltd. in respect of presentation of late payment interest fees in the Cash Flow Statement is correct as per the relevant Ind AS?
Answer
Yes, the accounting treatment adopted by X Ltd. is correct.
Interest income and dividend income are the amounts that are normally classified as financing activity, according to the provisions included in Ind AS 7 Statement of Cash Flows. However, in the case of a financial institution, it is recognized as a type of operating activity.
X Ltd. is not a financial institution in this case, and the late payment fees (interest fees) is received as a result of the late payment of the bill, i.e. owing to the time value of money. X Ltd. should also analyze the numerous facts and circumstances to determine whether the late payment fees is a penalty or a compensation for the time value of money. Thus, in accordance with above the guidance, late payment fees should be presented as cash flows from investing activities if it is certain that it represents time value of money.
However, if the late payment fees is fixed, irrespective of the delay in number of days, it should be classified as cash flow under operating activities.
References
– EAC opinion Query 18, Volume 39
– Opinion finalized on 21 November 2019
– Ind AS 7
Relevant para of Ind AS 7
31. Cash flows from interest and dividends received and paid shall each be disclosed separately. Cash flows arising from interest paid and interest and dividends received in the case of a financial institution should be classified as cash flows arising from operating activities. In the case of other entities, cash flows arising from interest paid should be classified as cash flows from financing activities while interest and dividends received should be classified as cash flows from investing activities. Dividends paid should be classified as cash flows from financing activities.
33. Interest paid and interest and dividends received are usually classified as operating cash flows for a financial institution. However, there is no consensus on the classification of these cash flows for other entities. Some argue that interest paid and interest and dividends received may be classified as operating cash flows because they enter into the determination of profit or loss. However, it is more appropriate that interest paid and interest and dividends received are classified as financing cash flows and investing cash flows respectively, because they are costs of obtaining finance/al resources or returns on investments.
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