3.2 Gross and Net Cash Flows
Generally, cash payments should not be presented net of cash receipts in the statement of cash flows. ASC 230-10-45 provides guidance on presenting gross and net cash flows in the statement of cash flows.
ASC 230-10
45-7 Generally, information
about the gross amounts of cash receipts and cash payments
during a period is more relevant than information about the
net amounts of cash receipts and payments. However, the net
amount of related receipts and payments provides sufficient
information not only for cash equivalents, as noted in
paragraph 230-10-45-5, but also for certain other classes of
cash flows specified in paragraphs 230-10-45-8 through 45-9
and paragraph 230-10-45-28.
45-8 For certain items, the turnover is quick, the amounts are large, and the maturities are short. For certain other items, such as demand deposits of a bank and customer accounts payable of a broker-dealer, the entity is substantively holding or disbursing cash on behalf of its customers. Only the net changes during the period in assets and liabilities with those characteristics need be reported because knowledge of the gross cash receipts and payments related to them may not be necessary to understand the entity’s operating, investing, and financing activities.
45-9 Providing that the original maturity of the asset or liability is three months or less, cash receipts and payments pertaining to any of the following qualify for net reporting for the reasons stated in the preceding paragraph:
- Investments (other than cash equivalents)
- Loans receivable
- Debt.
For purposes of this paragraph, amounts due on demand are considered to have maturities of three months or less. For convenience, credit card receivables of financial services operations — generally, receivables resulting from cardholder charges that may, at the cardholder’s option, be paid in full when first billed, usually within one month, without incurring interest charges and that do not stem from the entity’s sale of goods or services — also are considered to be loans with original maturities of three months or less.
The netting criteria in ASC 230-10-45-8 (turnover is quick, the amounts are
large, and the maturities are short) must be met for an entity to present investing
and financing activity on a net basis, regardless of the classification of the asset
or liability in the balance sheet (i.e., current or noncurrent). For example, in
some cases, provided that certain conditions are met, it may be appropriate to
present debt-related activity (e.g., withdrawals and repayments) on a net basis in
the statement of cash flows even though the debt is presented as noncurrent in the
balance sheet. This could be the case, for example, if debt (1) meets all of the
conditions for net presentation in ASC 230-10-45-8 and 45-9 and (2) is appropriately
presented as noncurrent in the balance sheet because it meets the criteria in ASC
470-10-45-14.
3.2.1 Situations in Which Net Presentation May Be Appropriate
ASC 942-230-45-1 and 45-2 state:
45-1 Banks, savings
institutions, and credit unions are not required to report gross amounts
of cash receipts and cash payments for any of the following:
-
Deposits placed with other financial institutions and withdrawals of deposits
-
Time deposits accepted and repayments of deposits
-
Loans made to customers and principal collections of loans.
45-2 When those entities
constitute part of a consolidated entity, net amounts of cash receipts
and cash payments for deposit or lending activities of those entities
shall be reported separate from gross amounts of cash receipts and cash
payments for other investing and financing activities of the
consolidated entity, including those of a subsidiary of a bank, savings
institution, or credit union that is not itself a bank, savings
institution, or credit union.
Example 3-1
On January 1, 20X1, Entity A enters into a three-year revolving line of credit with a maximum borrowing capacity of $300 million. Under the terms of the line of credit, each borrowing or draw is considered due on demand. On June 30, 20X1, A borrows $150 million against the line of credit. On August 1, 20X1, A draws against the line of credit again, borrowing an additional $120 million. On August 31, 20X1, A borrows another $30 million from the line of credit. On September 30, 20X1, A pays $200 million of the outstanding balance. Assume that the turnover of borrowings and payments is quick and that the amounts borrowed and paid are large. Because the original (contractual) maturity of the borrowings is due on demand (i.e., three months or less), A may present the borrowings and payment on a net basis ($100 million) as a financing cash inflow in its statement of cash flows for the period ended December 31, 20X1.
Example 3-2
On January 1, 20X1, Entity A enters into a three-year revolving line of credit with a maximum borrowing capacity of $300 million. On June 30, 20X1, A borrows (1) $200 million from the line of credit and signs a note to pay the amount borrowed in three months and (2) $100 million from the line of credit and signs a note to pay the amount borrowed in four months. On September 30, 20X1, A pays $200 million related to the first note. On October 31, 20X1, A pays $100 million related to the second note. Assume that the turnover of borrowings and payments is quick and that the amounts borrowed and paid are large. In A’s statement of cash flows for the period ended December 31, 20X1, only the borrowing and payment related to the first note may be presented on a net basis within financing activities because the original (contractual) maturity of this note is three months or less. The borrowing and payment related to the second note should be presented on a gross basis (i.e., borrowing of $100 million as a financing cash inflow and payment of $100 million as a financing cash outflow).
Example 3-3
On January 1, 20X1, Entity A enters into a three-year revolving line of credit with a maximum borrowing capacity of $300 million. The agreement does not set maturity dates for each borrowing other than the expiration of the line of credit at the end of December 31, 20X3. In this case, all borrowings and repayments made before October 1, 20X3, should be presented on a gross basis because the original (contractual) maturity of each borrowing is not three months or less. Provided that the turnover of borrowings and payments is quick and that the amounts borrowed and paid are large, amounts borrowed or paid after October 1, 20X3, may be presented on a net basis because the original (contractual) maturity is within three months. It may, however, be impractical to separate the borrowings and repayments into those that must be presented on a gross basis and those that may be presented on a net basis. Accordingly, A could present all borrowings and repayments on a gross basis.