Interest Paid: An Investment Activity?

Interest and dividends received are generally considered investing activities, as they are connected with the investments made by the entity. However, there is some debate on the topic, with some accountants arguing that interest paid should be disclosed as a financing activity, as interest is paid on loans, which are classified under financing activity. It is ultimately up to the entity to decide how to disclose interest paid or received.

Interest and dividends received should be disclosed under investing activities

There is some debate on the topic, with some accountants suggesting that interest is paid on loans and loans are classified under financing activity, so any interest paid should be disclosed as a financing activity. However, an equally large number of accountants believe that interest and dividends received should be classified as investing activities as they are connected with the investments made by the entity.

The International Accounting Standard (IAS) 7 Statement of Cash Flows requires that cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. However, the entity is given the option to make its own decision on what activity the interest paid/received and dividends paid/received are disclosed under.

Interest paid on loans is a financing activity

However, there is some debate among accountants as to whether interest paid should be disclosed as a financing activity or an operating activity. Interest is paid on loans, and loans are classified under financing activity. However, interest received is considered in the computation of profit and loss figures, and is applied in entity operations, so some accountants believe that interest received should be disclosed as an operating activity.

The International Accounting Standard (IAS) 7 Statement of Cash Flows requires that cash flows from interest and dividends received and paid shall be disclosed separately and classified in a consistent manner from period to period as either operating, investing or financing activities.

Ultimately, it is up to the entity to decide how to classify interest paid and received in its Statement of Cash Flows. This decision should be made based on what is appropriate in the given circumstances, and the entity's chosen classification should be followed consistently from period to period as an accounting policy.

Interest and dividends received are considered in profit or loss determination

Some accountants suggest that interest and dividends received should be disclosed as part of operating activity, as they are considered in the computation of profit and loss figures. Interest received on a term deposit, for example, may be used to pay salaries or other operating expenses.

However, an equally large number of accountants believe that interest and dividends received should be classified as investing activities. This is because they are connected with the investments made by the entity, and as investments are disclosed under investing activity, any return on investment should also be disclosed as an investing activity.

The common practice for interest and dividends received is to disclose them under the investing activities heading of a statement of cash flows. This is because return on investment is not applied for meeting operating expenses and even if it is applied by the entity, no specifications are usually made.

Ultimately, it is up to the entity to decide how to disclose interest and dividends received. The entity can choose to disclose them under the heading of operating activity or investing activity, and this choice should be followed consistently from period to period as an accounting policy.

Interest and dividends received are connected with the investments made by the entity

Interest and dividends received are considered in profit or loss determination and are therefore disclosed under investing activities as a return on investment. This is because return on investment is not applied for meeting operating expenses and even if it is applied by the entity, no specifications are usually made. It is therefore better to disclose interest and dividends received under the same heading where relevant investments are disclosed in a statement of cash flows, i.e. investing activities.

However, another group of accountants suggests that as interest is paid on loans and loans are classified under financing activity, any interest paid should be disclosed as a financing activity. Interest and dividends received, in the eyes of some accountants, should be disclosed as part of operating activity as such incomes are considered in the computation of profit and loss figures and are applied in entity operations. For example, interest received on a term deposit is used to pay salaries or other operating expenses.

Ultimately, it is left to the entity to decide what is appropriate in a given circumstance. The entity is given the option to make its own decision as to under what activity in the Statement of Cash Flows the interest paid/received and dividends paid/received are disclosed.

Interest and dividends received are classified as operating, investing or financing activities

Interest and dividends received are considered in profit or loss determination, but they are not applied for meeting operating expenses. Therefore, it is common practice to disclose them under investing activities. This is because they are connected with the investments made by the entity, and as investments are disclosed under investing activity, any return on investment should also be disclosed as an investing activity.

However, another group of accountants suggests that as interest is paid on loans and loans are classified under financing activity, any interest paid should be disclosed as a financing activity. Interest and dividends received can also be disclosed as part of operating activity as such incomes are considered in the computation of profit and loss figures and are applied in entity operations.

Ultimately, it is left to the entity to decide under what activity interest and dividends are disclosed. This decision should be followed consistently from period to period as an accounting policy.

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