Buying a business rarely involves one clean payment.
There may be cash paid to the seller, debt that needs settling, professional fees, deferred consideration and an earn-out linked to future performance.
Several years after the acquisition, more cash may still be leaving the business because of the original deal.
The accounting question is where those payments belong in the statement of cash flows.
IAS 7 requires cash flows arising from obtaining control of a subsidiary or another business to be presented as investing activities. That principle sounds straightforward until management tries to decide which payments actually arise from obtaining control.
This has created inconsistent practice, which is why the International Accounting Standards Board is now examining acquisition-related payments as part of its wider Statement of Cash Flows and Related Matters project.
For candidates preparing with an ACCA SBR tutor, it is an excellent current issues topic because the difficult part is not remembering that acquisitions are investing activities. It is deciding where the acquisition stops and another economic activity begins.
The purchase price is only the beginning
Imagine a company buys a competitor for £100 million.
The headline transaction value may suggest a £100 million investing cash outflow.
Reality could look very different.
The buyer might pay £70 million immediately and agree to pay another £20 million in two years.
There may also be a £10 million earn-out if the acquired company achieves a profit target.
The acquiree could have £25 million of bank debt that becomes repayable when control changes.
The buyer may spend £3 million on legal, financial and due diligence advisers.
Suddenly the cash consequences of the acquisition extend far beyond the amount initially transferred to the former owners.
The central question is whether every payment connected in some way with the deal should appear as an investing cash flow.
Current IFRS requirements do not always make that answer as clear as users or preparers would like.
IAS 7 and IFRS 3 need to tell the same story
IAS 7 says that aggregate cash flows arising from obtaining or losing control of subsidiaries or other businesses are investing activities.
IFRS 3 determines what is included in consideration transferred for a business combination.
Those two standards therefore need to work together.
The IASB staff’s September 2026 analysis argues that the cash flow classification should be more closely aligned with the way IFRS 3 identifies consideration.
That creates a useful principle.
If a payment forms part of the consideration transferred to obtain control, an investing classification makes sense.
If it represents something economically different, another classification may provide better information.
This sounds simple, but the difficult cases sit exactly at that boundary.
Repaying the acquiree’s debt is the first problem
Suppose the company being acquired has a £25 million bank loan.
The loan agreement states that the debt must be repaid immediately if control changes.
The buyer acquires the company and repays the bank on the same day.
Was that £25 million part of the acquisition?
Commercially, the buyer may think so.
It may have included the debt when calculating the total amount of capital needed for the transaction. Without settling the borrowing, the deal could not have completed in its planned form.
However, IFRS 3 takes a narrower view of consideration transferred.
The payment to the bank is not consideration paid to the former owners for control of the business.
Once the acquisition occurs, the debt is a liability of the group.
Repaying it looks economically like repayment of borrowing.
The September IASB staff recommendation is therefore that payments settling pre-existing debt of the acquiree should be classified as financing cash flows.
That would produce consistency with the treatment of an ordinary debt repayment made after an acquisition.
Timing should not change the economic substance
The debt example exposes an important accounting principle.
A payment should not become investing merely because it happens on acquisition day.
Imagine the same loan is repaid one week after completion.
Most accountants would probably see the payment as financing because the group is settling a borrowing.
Making the payment ten minutes after control passes should not necessarily transform its economic character.
The staff analysis therefore focuses on what the payment represents rather than how close it is to the acquisition date.
For SBR candidates, this is a useful habit.
When a scenario contains several simultaneous cash payments, separate them.
Ask who received each payment.
Ask what liability or asset it settled.
Ask whether it formed part of the consideration for control.
Do not assume the entire transaction belongs in one cash flow category simply because management describes it as “the acquisition”.
Deferred consideration creates a harder problem
Deferred consideration is different.
Suppose the buyer agrees to pay the former owners £20 million two years after the acquisition.
The obligation forms part of the deal.
Unlike the acquiree’s bank debt, the liability exists because the buyer agreed to pay the sellers for the business.
That supports an investing classification.
But time creates another issue.
The longer the payment is deferred, the more it begins to resemble financing.
The buyer has effectively received time before paying part of the purchase price.
The liability may also increase through the unwinding of a discount.
This has led to different approaches in practice.
Some companies classify the later payment as investing.
Others classify it as financing.
Some divide the payment into separate components.
The IASB is therefore considering how to make the treatment more consistent.
Not every deferred payment is economically identical
The September staff recommendation would generally classify deferred consideration as investing because it relates to consideration for the business.
However, there is an important exception.
Where the deferred liability is considered a borrowing under IAS 7, the payment would be classified as financing.
That distinction recognises economic substance.
A short payment delay that forms part of normal acquisition terms may look very different from a substantial financing arrangement extending for many years.
This is precisely why a simple rule saying “all acquisition payments are investing” can become misleading.
The statement of cash flows should help users understand both investment in businesses and financing decisions.
If a deal contains a genuine borrowing element, hiding that amount inside acquisition investing cash flows may make the group’s financing activity harder to understand.
Contingent consideration creates another layer
An earn-out is a common example of contingent consideration.
The buyer might agree to pay an additional £10 million if the acquired company reaches a revenue or profit target over the following two years.
At the acquisition date, IFRS 3 includes the fair value of qualifying contingent consideration within the consideration transferred.
The final cash payment may be different from that initial fair value.
Perhaps the liability was initially measured at £7 million but the acquired company performs better than expected and £10 million is eventually paid.
What category should contain the £10 million cash outflow?
One approach would place the whole amount within investing activities because it is payment to the former owner arising from the acquisition.
Another would split the payment.
The original acquisition-date amount could be investing, while later remeasurement could be treated differently.
That may appear conceptually neat, but it makes the cash flow statement more complicated.
Sometimes simplicity is useful information
Feedback considered during the IASB project has highlighted a desire for consistent and understandable classifications.
A technically precise split is not automatically the most useful answer if users struggle to follow it or companies cannot apply it consistently.
The September staff analysis recommends classifying payments of contingent consideration as investing activities.
The argument is largely practical.
The payment relates to consideration transferred for the business and a single classification creates a clearer connection with the acquisition.
This is not yet a new final IAS 7 requirement.
That distinction matters.
Candidates discussing the project should describe the direction being considered rather than presenting it as mandatory current accounting.
Transaction costs tell a different story
Acquisitions also generate fees.
Lawyers may review contracts.
Accountants may perform financial due diligence.
Corporate finance advisers may negotiate the transaction.
Consultants may evaluate commercial risks.
These costs may be essential to completing the acquisition, but IFRS 3 generally does not treat acquisition-related costs as consideration transferred for the business.
They are normally recognised as expenses as incurred, subject to separate accounting for costs associated with issuing debt or equity instruments.
This creates another cash flow classification question.
Should a professional fee paid because of an acquisition still be investing?
The IASB staff recommendation is that transaction costs should generally be classified as operating cash flows.
The logic is again consistency with IFRS 3.
If the expenditure does not form part of the consideration paid to acquire the business, treating it automatically as acquisition investment could blur the distinction established in the financial statements.
The cash flow statement should not redefine the acquisition
This is perhaps the most important principle in the project.
The statement of cash flows should not create a completely different definition of what management paid for the business.
If IFRS 3 says a particular amount is not consideration transferred, IAS 7 should have a good reason before presenting the cash flow as though it were part of that consideration.
Aligning the two standards could make acquisition reporting easier to understand.
The purchase price disclosed under IFRS 3 would connect more directly with the investing cash flows associated with obtaining control.
Debt repayments could be seen as financing.
Transaction costs could be seen as operating.
That produces a clearer economic story.
Investors may still want the wider acquisition cost
There is a counterargument.
Investors may care about the total cash committed to completing an acquisition, not merely the technical IFRS 3 consideration.
If a buyer spends £100 million on shares, repays £40 million of acquired debt and incurs £5 million of fees, an investor may reasonably view £145 million as relevant to understanding the transaction.
Classifying those amounts across investing, financing and operating activities can make that wider total less obvious.
This is why disclosure remains important.
The answer does not have to be forcing every payment into one cash flow category.
A company can classify cash flows according to their economic nature while providing users with enough information elsewhere to understand the overall capital committed to the transaction.
Clear classification and useful disclosure can work together.
Acquisition cash flows need to connect with the balance sheet
Business combinations create significant changes in assets and liabilities.
Cash decreases.
Goodwill may appear.
Identifiable assets and liabilities are recognised.
Existing debt enters the consolidated balance sheet.
Contingent consideration liabilities may arise.
The statement of cash flows should help users understand which of these movements involved cash and which did not.
For example, assuming £25 million of an acquiree’s debt does not itself mean the group paid £25 million of cash.
Repaying that debt does.
Likewise, recognising contingent consideration at acquisition may create a liability before any related cash payment occurs.
Users need to distinguish those events.
That is one reason the IASB’s wider cash flow project also considers non-cash transactions and changes in asset and liability balances.
Financial statements become more useful when the pieces connect.
A simple acquisition example
Imagine a group acquires a subsidiary.
It pays £60 million cash to the sellers.
Another £15 million is deferred.
A possible £10 million earn-out is recognised initially at a fair value of £6 million.
The acquiree has £20 million of bank debt that the group immediately repays.
The buyer also pays £2 million of acquisition advisory fees.
The instinctive answer might be to describe £98 million as acquisition cash flows.
That hides several different activities.
The £60 million immediate consideration is clearly connected with obtaining control.
Future payments of the deferred and contingent consideration require consideration of the developing IAS 7 proposals.
The £20 million debt repayment represents settlement of borrowing.
The £2 million professional fees are not part of consideration under IFRS 3.
Breaking down the transaction gives users far more information than attaching one label to everything.
How this could appear in SBR
An SBR scenario does not need to ask directly about the IASB cash flow project.
It could simply describe an acquisition containing several payments.
Management may have classified all of them as investing activities because they “relate to the acquisition”.
That should immediately trigger analysis.
A good answer would identify each cash flow separately.
It would explain why cash consideration paid to obtain control belongs within investing activities.
It would question whether repayment of acquired debt should instead be financing.
It would consider the treatment of deferred or contingent consideration.
It would challenge the classification of acquisition-related professional fees.
The candidate could then explain that the IASB is currently considering amendments designed to reduce diversity in these areas.
That is far stronger than repeating the definition of investing activities.
Current issues answers need careful wording
This topic is also a useful reminder about writing current issues answers accurately.
The IASB is considering changes.
Staff have made recommendations.
That is not the same as a final amendment to IAS 7.
Candidates should therefore avoid writing phrases such as “IAS 7 now requires” when discussing proposals that have not become mandatory.
Better wording would be:
“The IASB is considering clarifying the classification…”
Or:
“The September 2026 staff recommendation would result in…”
This may seem like a small distinction, but it demonstrates professional care.
In financial reporting, the status of a proposal matters.
What management should be doing
Finance teams involved in acquisitions should already understand where cash connected with a deal appears.
A sensible review should identify the immediate consideration, deferred payments, contingent amounts, acquired debt, transaction costs and any financing specifically raised for the acquisition.
Management should then make sure the classification policy is supported by current IFRS requirements and applied consistently.
Where judgement exists, the basis should be documented.
Large payments should also be easy to reconcile with business combination disclosures and movements in relevant liabilities.
The aim is not simply to produce three totals labelled operating, investing and financing.
The aim is to let users understand what the business did with its cash.
Do not confuse deal vocabulary with accounting substance
Corporate finance language can make this topic harder.
Deal teams may refer to enterprise value, equity value, debt-free cash-free pricing, completion accounts and total transaction cost.
Those concepts can all be useful commercially.
They do not determine IAS 7 classification.
The accountant still has to identify the underlying cash flow.
Paying a bank is not automatically investing because the repayment appeared in the acquisition funding model.
Paying an adviser is not automatically acquisition consideration because the fee would not have arisen without the deal.
Commercial connection is not enough.
The accounting follows the economic nature of the payment and the relevant IFRS requirements.
What candidates should remember
The easiest way to revise this topic is not to memorise every possible acquisition payment.
Start with one question:
What is this cash actually paying for?
If it is consideration for obtaining control, investing is the natural starting point.
If it settles borrowing, think about financing.
If it pays an acquisition adviser and the cost is expensed under IFRS 3, operating may better reflect its nature.
If the amount is deferred or contingent, recognise that this is one of the areas the IASB is actively trying to clarify.
Candidates developing current issues technique through an ACCA SBR course should practise separating these payments within scenarios rather than describing an acquisition as one single cash transaction.
The purchase price does not tell the whole cash story
Business combinations are complicated because they combine several economic activities at once.
The group invests in another business.
It may take on and repay financing.
It incurs professional costs.
It may postpone part of the purchase price.
It may promise additional payments dependent on future results.
Putting all of that cash into investing activities may look simple, but simplicity is not useful if it hides what actually happened.
The IASB’s current work is trying to create clearer boundaries.
For SBR candidates, the principle is already valuable.
Do not classify cash because it happened near an acquisition.
Identify what the payment represents.
Then let the accounting follow the substance.