Business Combinations in a Cash Flow Statement
When a group obtains or loses control of a subsidiary, IAS 7.39 and 7.42 require the cash effect to be presented as a single line in investing activities:
- Acquisition: cash consideration paid, less the subsidiary's cash and cash equivalents acquired.
- Disposal: cash consideration received, less the subsidiary's cash and cash equivalents disposed of.
Three rules follow:
- Acquisitions and disposals are presented separately. They are never offset against each other (IAS 7.41).
- Nothing acquired or disposed of appears anywhere else. The subsidiary's assets and liabilities are already inside the line, so they must be removed from every other reconciliation.
- Only cash settled in the period counts. Deferred and contingent consideration, shares issued as consideration and the fair value of a retained interest are not cash flows of the period.
The same applies to acquiring or disposing of an unincorporated business. The wider mechanics of group cash flows are covered in our guide to consolidated cash flow statements.
Acquiring a Subsidiary
| Acquisition line | Amount |
|---|---|
| Consideration settled in cash in the period | (xxx) |
| Add: cash and cash equivalents of the subsidiary at acquisition date | xxx |
| Less: bank overdrafts forming part of cash and cash equivalents | (xxx) |
| Acquisition of subsidiary, net of cash acquired | (xxx) |
The following are excluded from the acquisition line:
| Item | Treatment |
|---|---|
| Deferred and contingent consideration | Excluded until paid. Unwinding of the discount and remeasurements through profit or loss are non-cash and reversed. |
| Shares issued as consideration | Non-cash transaction disclosed under IAS 7.43, not included in proceeds from shares issued. If all consideration is in shares, the line is a net inflow equal to the cash acquired. |
| Acquisition-related costs | Expensed under IFRS 3.53. IAS 7.16 only permits investing classification for expenditure that results in a recognised asset, so these are operating cash flows. |
| Fair value adjustments, goodwill and related deferred tax | Created by consolidation and part of the net assets acquired. |
| Borrowings and lease liabilities assumed | Non-cash additions, shown as changes from obtaining control in the financing liabilities reconciliation. See leases in a business combination. |
Consideration paid in a later period
IAS 7 does not specify how deferred or contingent consideration is classified when paid. In practice:
- Up to the acquisition-date fair value: investing activities, or financing activities where the deferral is in substance financing provided by the seller.
- Any excess on contingent consideration: operating activities, as the remeasurement was recognised in profit or loss.
The policy chosen should be applied consistently and disclosed.
Disposing of a Subsidiary
The disposal line is the cash consideration received, less the subsidiary's cash and cash equivalents, plus any overdraft forming part of cash and cash equivalents. Alongside it:
- Gain or loss on disposal is non-cash and reversed in the operating reconciliation, so the proceeds are not presented twice.
- Foreign currency translation reserve reclassified to profit or loss on disposal of a foreign operation is non-cash. See consolidating foreign operations.
- Deferred proceeds are presented in investing activities when received.
- Non-controlling interest derecognised is removed before dividends paid to non-controlling shareholders are derived.
- Balances disposed of are removed from each reconciliation, including current and deferred tax.
Where the subsidiary was a discontinued operation, IFRS 5.33(c) also requires its operating, investing and financing cash flows to be disclosed.
Step Acquisitions and Retained Interests
Presentation depends on whether control changed. A movement from 30% to 60% is a business combination (investing). A movement from 60% to 90% is a transaction between owners (financing, IAS 7.42A).
| Transaction | Cash flow presented | Non-cash items to remove |
|---|---|---|
| Associate becomes a subsidiary | Investing: cash paid for the additional interest, net of the subsidiary's cash | Remeasurement of the previously held interest; carrying amount of the associate derecognised |
| Subsidiary becomes an associate or financial asset | Investing: cash received for the interest sold, net of the subsidiary's cash | Gain or loss on loss of control; retained interest recognised at fair value |
| Additional interest acquired, control unchanged | Financing: cash paid to non-controlling shareholders | Reduction in non-controlling interest |
| Partial disposal, control retained | Financing: cash received from non-controlling shareholders | Increase in non-controlling interest |
Practical Example
Marula Holdings Ltd has a 31 December 2026 year end.
Acquisition. On 1 April 2026, Marula acquired 80% of Kiepersol Ltd for 1,000,000 in cash plus 300,000 payable on 1 April 2027 (present value 270,000). Legal fees of 45,000 were paid and expensed. Non-controlling interest is measured at its share of identifiable net assets.
| Kiepersol Ltd at 1 April 2026 | Fair value |
|---|---|
| Property, plant and equipment | 900,000 |
| Inventory | 250,000 |
| Trade receivables | 310,000 |
| Cash and cash equivalents | 85,000 |
| Trade payables | (180,000) |
| Borrowings | (215,000) |
| Deferred tax on fair value adjustments | (50,000) |
| Identifiable net assets | 1,100,000 |
| Non-controlling interest (20% × 1,100,000) | (220,000) |
| Goodwill | 390,000 |
| Total consideration (1,000,000 cash + 270,000 deferred) | 1,270,000 |
Disposal. On 30 September 2026, Marula sold 60% of its wholly owned subsidiary Tambotie Ltd for 1,200,000 in cash. The retained 40% gives significant influence and had a fair value of 800,000.
| Tambotie Ltd at 30 September 2026 | Carrying amount |
|---|---|
| Property, plant and equipment | 1,300,000 |
| Inventory | 400,000 |
| Trade receivables | 350,000 |
| Trade payables | (260,000) |
| Bank overdraft (part of cash and cash equivalents) | (90,000) |
| Goodwill | 200,000 |
| Net assets derecognised | 1,900,000 |
| Cash consideration received | 1,200,000 |
| Fair value of retained 40% interest | 800,000 |
| Gain on loss of control | 100,000 |
Investing activities
| Calculation | Kiepersol | Tambotie |
|---|---|---|
| Cash consideration paid or received | (1,000,000) | 1,200,000 |
| Cash acquired | 85,000 | - |
| Overdraft disposed of | - | 90,000 |
| Presented in investing activities | (915,000) | 1,290,000 |
Both lines are presented; a single net inflow of 375,000 would not comply with IAS 7.41. The overdraft leaving the group makes the Tambotie inflow 90,000 higher than the cash received. The 800,000 retained interest is a non-cash addition to investments in associates.
Other reconciliations
| Property, plant and equipment | Amount |
|---|---|
| Opening balance | 6,000,000 |
| Acquired with Kiepersol | 900,000 |
| Disposed of with Tambotie | (1,300,000) |
| Depreciation | (650,000) |
| Cash purchases (balancing figure) | 500,000 |
| Closing balance | 5,450,000 |
The balance fell by 550,000, yet 500,000 was spent on purchases. Likewise, trade receivables rose from 1,200,000 to 1,280,000, but after removing the 310,000 acquired and adding back the 350,000 disposed of, the operating increase is 120,000. Inventory, payables, borrowings and deferred tax need the same lines.
In the operating reconciliation, the 100,000 gain is deducted and the unwinding of the discount on deferred consideration is added back. The 45,000 legal fees need no adjustment: they are in profit and were paid in cash.
Disclosure Requirements
IAS 7.40 requires, in aggregate for acquisitions and separately for disposals:
| Disclosure | Kiepersol | Tambotie |
|---|---|---|
| (a) Total consideration paid or received | 1,270,000 | 1,200,000 |
| (b) Portion of consideration consisting of cash and cash equivalents | 1,000,000 | 1,200,000 |
| (c) Cash and cash equivalents in the subsidiary acquired or disposed of | 85,000 | (90,000) overdraft |
| (d) Other assets and liabilities, by major category | As per the fair value table | As per the carrying amount table |
An investment entity need not apply (c) and (d) to subsidiaries measured at fair value through profit or loss (IAS 7.40A). Related disclosures:
- IAS 7.43: non-cash transactions, such as shares issued as consideration.
- IAS 7.44A–44E: the 215,000 of borrowings assumed with Kiepersol is a change from obtaining control, not a financing cash flow.
- IFRS 5.33(c): cash flows of a discontinued operation.
If these do not agree to the face of the statement, a balance acquired or disposed of has usually been left in a reconciliation. Other causes are set out in why a cash flow statement does not balance.
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Conclusion
Obtaining or losing control of a subsidiary is presented as a single investing line, measured as the cash consideration net of the subsidiary's cash and cash equivalents, with acquisitions and disposals never offset. Every balance that came in or went out with the subsidiary is removed from its reconciliation, and the non-cash items the transaction creates are reversed. Changes in ownership that do not change control belong in financing activities.
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