The IASB is developing proposals to improve disclosure of non-cash investing and financing transactions. A single tabular note would show these transactions alongside the equivalent cash flows reported in the cash flow statement.
We support the proposals. Non-cash transactions are, in effect, pairs of offsetting cash flows, and omitting them can materially distort free cash flow. The proposed disclosure would give investors the data needed to make adjustments we have long advocated, although the need for careful analysis, and potentially further adjustment, remains.
The three transactions used as illustrations of disclosable non-cash transactions in the IASB board papers have also featured heavily in Footnotes Analyst articles: leasing, stock-based compensation, and supply chain finance. We recently demonstrated the free cash flow impact of stock-based compensation in ‘Stock-based compensation: The cash flow question’ and analysed both the leasing and stock-based compensation effects for Amazon in ‘AI Hyperscalers – Capital expenditure and free cash flow’.
The same effective flows also feature in some of our downloadable DCF valuation models, notably those dealing with lease and pension liabilities, and in a model in which we analyse the leverage and cash flow effects of supply chain finance.
Better disclosure of non-cash transactions is a live discussion for the IASB as part of its project to reform the cash flow statement. In due course, the proposals1For a full list of the decisions taken by the IASB regarding the disclosure of non-cash transactions, see its July board meeting update available here. are expected to be included in an exposure draft of a modified IAS 7 Statement of Cash Flows.
Effective cash flows revisited
Some transactions involve no exchange of cash and yet, in our view, are an essential component of cash flow analysis. The common feature is that a single transaction combines two components that would each have been reported in the cash flow statement had they been settled in cash, with the two ‘effective’ cash flows exactly offsetting. Because no cash moves, IAS 7 excludes the transaction from the cash flow statement entirely. The economics, however, are equivalent to the gross cash flows occurring; it is only the netting that makes them invisible.
The key issue for investors is that each of the effective flow legs of a net non-cash transaction can have very different characteristics, such as one being an operating flow and the other a financing flow. This has important implications for metrics such as free cash flow.
Non-cash transactions are pairs of offsetting effective cash flows
A new lease is the purchase of a right-of-use asset funded by borrowing: effective capital expenditure and an effective financing inflow. Equity-settled stock-based compensation is the remuneration of employees funded by an issue of shares: an effective operating outflow and an effective equity financing inflow. A supplier finance arrangement that results in trade payables being reclassified as borrowings converts what was an operating liability into debt, with the subsequent settlement being a debt repayment rather than a payment to suppliers.
In each case, one or both legs of the transaction (the effective cash flows) affect assets or liabilities for which actual cash flows would be reported as investing or financing. The other leg could affect any item, including those for which cash flows are classified as operating.
Omitting the effective flows can produce free cash flow measures that are incomplete and potentially misleading. For companies with extensive lease portfolios or high stock-based compensation the effect is material. Our recent analysis showed that including the stock-based compensation effective flow reduces the free cash flow of some technology companies by billions of dollars. Amazon itself has, in the past, presented three versions of free cash flow that progressively incorporate effective lease effects, which is evidence that some preparers recognise the same problem.
Existing disclosures made visible
The disclosures under discussion by the IASB are not actually new. IAS 7 already requires non-cash investing and financing transactions to be excluded from the cash flow statement, but disclosed elsewhere in the financial statements in a way that provides “all the relevant information” about them. The standard itself gives examples: assets acquired by assuming directly related liabilities or by means of a lease, an entity acquired through an equity issue, and the conversion of debt to equity. These requirements have been in place, substantially unchanged, since 1992.
Extract from IAS 7
43 Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.
44 Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an entity. The exclusion of non-cash transactions from the statement of cash flows is consistent with the objective of a statement of cash flows as these items do not involve cash flows in the current period. Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabilities or by means of a lease;
(b) the acquisition of an entity by means of an equity issue; and
(c) the conversion of debt to equity
IAS 7 Statement of Cash Flows
The IASB is simply now proposing is to make these existing disclosures more visible and easier for investors to use. At present, the relevant information tends to be scattered across the annual report, in the leases note, the share-based payments note, the borrowings note and elsewhere; each prepared to varying standards of clarity. The board has previously concluded that the scope of the current requirements is adequate; what is missing is specificity about what to disclose and where.
The package supported by the board in July 2026 addresses this directly. Application guidance would clarify that disclosable non-cash transactions are non-cash additions and disposals of assets (and non-cash issuances and redemptions of liabilities and equity items) for which cash flows would be classified as investing or financing activities. The board also approved a disclosure objective that companies must apply: “information that enables investors to understand changes in the entity’s net assets and its ability to generate future cash flows”. Both changes should improve the quality of information available to investors..
All non-cash transaction information would be brought together in a single note, comprising a list of the transactions with cross-references to other related notes, the transaction amounts together with the cash flow activities from which each transaction arises. Most importantly for investors, it would include a structured table showing the effects of non-cash transactions alongside similar cash flows, with the two added together to show their combined effect.
Illustration of a possible tabular disclosure format
Based on an illustrative example in IASB staff paper AP20A (July 2026)
The proposed table mirrors adjustments investors should already make
The combined column is precisely the calculation we have long advocated, arguing that only by aggregating cash and effective non-cash flows will operating cash flow and free cash flow metrics be useful in equity analysis. The IASB staff paper notes that some investors already perform this calculation, and that a structured, machine-readable format in a single location was strongly supported in the IASB’s investor consultations. In our view, this table (if it survives into a final standard) would be one of the more useful disclosure innovations in recent years.
However, the proposals were not without challenge. The principal concern raised by board members was cost, and whether the benefits to investors justify the effort of preparing and auditing the new note. Preparers consulted during outreach also cautioned that a combined cash plus non-cash column might be mistaken for a complete summary of all transactions affecting each activity. These are fair points, but the information involved is already required to be disclosed and largely already exists; which leads us to believe that the incremental cost of assembling it coherently in one place should be modest.
Business combinations and enterprise value
One specific question discussed by the board concerns business combinations. Where the consideration for an acquisition includes newly issued equity or debt securities, the non-cash component of the consideration would be disclosed and included in the summary table above; it is an effective financing inflow and an effective investing outflow. However, the treatment of the acquired entity’s own debt is less clear. The staff recommendation is that debt liabilities assumed in a business combination are excluded from the disclosure, partly because IAS 7 already contains separate disclosure requirements for assets and liabilities acquired in a business combination.
We think there is a case for going further. If assumed debt were also treated as a non-cash transaction (and therefore as a further effective financing inflow and an effective investing outflow), the total investment in the acquired entity, aggregating cash and non-cash flows, would equal its enterprise value. Acquisitions would then be presented in the cash flow statement and related disclosure on the same enterprise value basis that investors use to evaluate them. This is a point we hope respondents will raise when the exposure draft is published.
Measuring the stock-based compensation flow
For stock-based compensation, the proposals leave open an important measurement question: which amount should be disclosed? The illustrations in the staff paper are not yet settled, in places referring to the amount expensed in the period and, elsewhere, to the value of shares issued under the arrangement. There are in fact three candidate figures: the IFRS 2 expense recognised in profit or loss, the grant-date value of awards granted during the period, and the value of shares issued on vesting or exercise. All three differ, and for a growing company the differences can be substantial.
Which stock-based compensation amount belongs in the table?
For equity analysis, we explained in ‘Stock-based compensation: The cash flow question’ why we think the grant-date value of awards granted in the period, adjusted for expected vesting, is the relevant effective cash flow for free cash flow and DCF purposes. The expense in profit and loss is an amortisation of past grants, together with adjustments to true-up for the effects of forfeitures and vesting conditions. We would encourage the IASB to clearly specify which measure is disclosed, and ideally to include the grant-date value of new awards, so that investors are not left to attempt reconstruction from the IFRS 2 note.
More complete, but still not performance
Simply adjusting for these non-cash items, or effective cash flows, does not guarantee that free cash flow is meaningful, particularly as a measure of performance. The aggregated cash plus non-cash flow components of free cash flow still includes a deduction for investment in growth, still reflects working capital timing, including the effects of most receivable factoring and supplier financing, and still says little about value creation in a discrete period.
We explained many of these limitations in ‘Cash is king? But not when analysing performance’, and nothing in the IASB’s proposals changes that conclusion. The proposed enhanced disclosures would give investors a more complete picture, so that cash flow based metrics can be constructed on a more consistent and comparable basis. Nevertheless, investors still need to think carefully about how they use and adjust cash flow data. The disclosure removes an information gap, not the need for judgement.
Some important transactions that matter when interpreting cash flow metrics will remain outside the proposed disclosures because they do not impact items classified as investing or financing – these need to be identified and analysed by investors themselves. Several of these, including defined benefit pensions, long-term environmental and decommissioning provisions, receivables factoring, and some supplier finance arrangements, produce operating cash flow effects that are, in substance, partly or wholly financing in nature. How investors should interpret and adjust operating cash flow for these items is the subject of a forthcoming article.
Insights for investors
- Free cash flow that omits the effective flows arising from leases, stock-based compensation and supply chain finance is (generally) overstated and unsuitable for valuation.
- The IASB’s proposed single-note, tabular disclosure would show non-cash transactions alongside equivalent cash flows, greatly simplifying the adjustments we advocate.
- Check which stock-based compensation amount is disclosed. In our view, it is the grant-date value of awards granted in the period, not the amortised expense, that belongs in forecast free cash flow.
- A combined cash plus non-cash figure is more complete, but completeness does not make free cash flow a reliable performance measure.
- The proposals exclude non-cash changes that only impact operating items, so some economically similar transactions, notably pension accruals, would remain outside the disclosure.