Choose once, stay consistent; ASPE does not let you choose

Four items, and a choice

Interest and dividends sit awkwardly between the three activities. Interest paid is a cost of borrowing — is that operating (a cost of doing business) or financing (a cost of the capital)? Dividends received on shares held as an investment — operating income, or a return on an investing asset? IFRS (IAS 7) lets each company decide, within limits:

• Interest paid — operating or financing.
• Interest received — operating or investing.
• Dividends received — operating or investing.
• Dividends paid — financing or operating.

Three conditions attach to the choice. Each item is disclosed separately, whichever section it is in. The policy is applied consistently from period to period — a company cannot move interest paid into financing in a year when operating cash flow looks weak and back again the year after. And the choice is a stated accounting policy, so an analyst can find it.

ASPE fixes the answer

A private company reporting under ASPE (Section 1540) has no choice. Interest paid, interest received and dividends received — the items that run through net income — are operating. Dividends paid, which are charged to retained earnings rather than to income, are financing. The logic is simple: whatever is in net income stays in the section that starts from net income.

The course’s default

For every computation in this course, use the ASPE placement — interest paid, interest received and dividends received in operating; dividends paid in financing. It is also the most common Canadian choice under IFRS, so one set of expected values serves both frameworks. When a question states a different policy, follow the question.

The same company, four ways

Tamarack paid 80 of interest and 80 of dividends in 2025. Its operating cash flow on the default is 460 and its financing section is +20 (borrowed 100, paid dividends of 80). Under IFRS the company could have reported:

Policy                                    Operating   Financing
Interest → operating, dividends → financing   460         +20   (default)
Interest → financing, dividends → financing   540         −60
Interest → operating, dividends → operating   380        +100
Interest → financing, dividends → operating   460         +20

Investing is −440 in every row and the net change in cash is +40 in every row — the policy moves cash between sections, never in or out of the statement. But a reader comparing Tamarack’s 460 with a competitor’s 540 is comparing two policies, not two businesses, unless one of them is restated. That restatement is the analyst’s first job (this lesson’s exam question).

The direct method, at awareness level

The direct method presents the operating section as receipts and payments — cash collected from customers, cash paid to suppliers, to employees, for interest, for taxes — rather than as a reconciliation from net income. IAS 7 encourages it; almost no Canadian company uses it, because the indirect reconciliation is what readers are used to and the direct figures take more work to assemble. Two things do not change between the methods: the investing and financing sections are identical, and the operating total is the same 460. Only the presentation of how the 460 was reached differs. An indirect-method company still discloses interest and taxes paid so the reader gets the two direct-method figures that matter most.