Chapter 3 — Format and Presentation
Chapter 3 — Format and Presentation
This chapter provides guidance on the format and
presentation of changes in cash and cash equivalents, focusing on
actual cash flows during the period.
3.1 Form and Content of the Statement of Cash Flows
The statement of cash flows should report the cash effects of operations,
investing transactions, and financing transactions during a period. An entity can
use the indirect method1 or the direct method2 to present the operating section of the statement of cash flows. ASC 230
contains examples illustrating the preparation of the statement of cash flows under
both methods. ASC 230-10-45-25 encourages entities to use the direct method in
presenting the operating section of the statement of cash flows and to report major
classes of gross cash receipts and gross cash payments for operating cash flows.
Further, entities are encouraged to use the direct method to include a detailed
breakdown of operating cash receipts and payments to the extent that providing such
detail is feasible and financial statement users find it helpful.
Although use of the direct method is encouraged, many entities apply the indirect method to present operating cash flows. However, entities employing the indirect method should consider the direct method when evaluating proper classification of operating cash flows.
ASC 230-10
45-28 Entities that choose not
to provide information about major classes of operating cash
receipts and payments by the direct method as encouraged in
paragraph 230-10-45-25 shall determine and report the same
amount for net cash flow from operating activities
indirectly by adjusting net income of a business entity or
change in net assets of a not-for-profit entity (NFP) to
reconcile it to net cash flow from operating activities (the
indirect or reconciliation method). That requires adjusting
net income of a business entity or change in net assets of
an NFP to remove both of the following:
-
The effects of all deferrals of past operating cash receipts and payments, such as changes during the period in inventory, deferred income, and the like, and all accruals of expected future operating cash receipts and payments, such as changes during the period in receivables and payables. Adjustments to net income of a business entity or change in net assets of an NFP to determine net cash flow from operating activities shall reflect accruals for interest earned but not received and interest incurred but not paid. Those accruals may be reflected in the statement of financial position in changes in assets and liabilities that relate to investing or financing activities, such as loans or deposits. However, interest credited directly to a deposit account that has the general characteristics of cash is a cash outflow of the payor and a cash inflow of the payee when the entry is made.
-
All items that are included in net income of a business entity or change in net assets of an NFP that do not affect net cash provided from, or used for, operating activities such as depreciation of property, plant, and equipment and amortization of finite-life intangible assets. This includes all items whose cash effects are related to investing or financing cash flows, such as gains or losses on sales of property, plant, and equipment and discontinued operations (which relate to investing activities), and gains or losses on extinguishment of debt (which relate to financing activities).
Regardless of which method is used, an entity must present a reconciliation of net income (or changes in net assets for NFPs) to net cash flows from operating activities. All major classes of reconciling items must be separately reported; further breakdowns of categories are encouraged if doing so would result in more meaningful information for users.
ASC 230-10
45-29 The reconciliation of net
income of a business entity to net cash flow from operating
activities described in paragraph 230-10-45-28 shall be
provided regardless of whether the direct or indirect method
of reporting net cash flow from operating activities is
used. However, NFPs that use the direct method of reporting
net cash flows from operations are not required to provide a
reconciliation of change in net assets to net cash flow from
operating activities. Additional guidance for NFPs is found
in Subtopic 958-230. The reconciliation shall separately
report all major classes of reconciling items. For example,
major classes of deferrals of past operating cash receipts
and payments and accruals of expected future operating cash
receipts and payments, including, at a minimum, changes
during the period in receivables pertaining to operating
activities, in inventory, and in payables pertaining to
operating activities, shall be separately reported. Entities
are encouraged to provide further breakdowns of those
categories that they consider meaningful. For example,
changes in receivables from customers for an entity’s sale
of goods or services might be reported separately from
changes in other operating receivables.
45-30 If an entity other than an
NFP uses the direct method of reporting net cash flow from
operating activities, the reconciliation of net income to
net cash flow from operating activities shall be provided in
a separate schedule.
45-31 If the indirect method is used, the reconciliation may be either reported within the statement of cash flows or provided in a separate schedule, with the statement of cash flows reporting only the net cash flow from operating activities.
45-32 If the reconciliation is presented in the statement of cash flows, all adjustments to net income of a business entity or change in net assets of an NFP to determine net cash flow from operating activities shall be clearly identified as reconciling items.
At the 2005 AICPA Conference on Current SEC and PCAOB Developments (the 2005
AICPA Conference), SEC Associate Chief Accountant Joel Levine suggested that it is
not appropriate to reconcile an amount other than net income (e.g., income from
continuing operations) to net cash flows from operating activities in the statement
of cash flows.
ASC 230-10-55-7 through 55-21 contain examples illustrating the presentation of
the statement of cash flows under both the direct method and the indirect
method.
NFPs have the option of presenting their statement of cash flows by using either
the direct method or the indirect method. However, an NFP that chooses to use the
direct method of cash flow reporting is not required to present or disclose (e.g.,
in a separate schedule) the indirect method reconciliation.
3.1.1 Supplemental Disclosure of Interest and Income Taxes Paid
The FASB requires an entity to provide supplemental disclosure of interest and income taxes paid. This is to ensure that entities provide operating cash flow information similarly regardless of whether they used the indirect method to present it. Paragraph 121 of the Basis for Conclusions of FASB Statement 95
states, in part:
To provide information about the gross amounts of at least
those operating cash flows that are likely to be readily available, this
Statement requires enterprises that use the indirect method of reporting net
cash flow from operating activities to disclose amounts of interest and
income taxes paid. The Board believes that that information usually will be
readily available.
Accordingly, if an entity uses the indirect method to present the operating
section of its statement of cash flows, ASC 230 requires it to disclose
supplemental information regarding the payments made for interest and income
taxes during the period. Specifically, ASC 230-10-50-2 states as follows:
If
the indirect method is used, amounts of interest paid (net of amounts
capitalized), including the portion of the payments made to settle
zero-coupon debt instruments that is attributable to accreted interest
related to the debt discount or the portion of the payments made to settle
other debt instruments with coupon interest rates that are insignificant in
relation to the effective interest rate of the borrowing that is
attributable to accreted interest related to the debt discount, and income
taxes paid during the period shall be disclosed.
Although ASC 230-10-50-2 does not explicitly state whether an entity should
provide this supplemental information on the face of the statement of cash flows
or in the footnotes to the financial statements, we believe that either
presentation is acceptable.
3.1.1.1 Interest Paid
While ASC 230-10-50-2 provides guidance on certain amounts
related to interest paid (e.g., payments for the settlement of zero-coupon
debt instruments), it does not explicitly address whether an entity should
include, in the interest paid amount, the cash flows associated with
derivative contracts in a cash flow hedge of forecasted interest payments.
We believe that if an entity classifies the cash flows resulting from
derivative contracts in operating cash flows consistently with the cash flow
classification of the item being hedged, it would be acceptable for the
entity to include the cash flows resulting from those derivative contracts
as part of its supplemental disclosure of interest paid. If an entity
presents operating interest paid in this manner, we believe that the entity
should explain that fact in its supplemental disclosure of interest
paid.
3.1.1.2 Income Taxes Paid
3.1.1.2.1 Scope of Disclosures
ASC 230 requires entities to present income taxes paid
as operating cash flows, other than remittances of minimum statutory
withholding on share-based payment awards (see Section 7.3.5). However, the guidance
does not directly address whether the supplemental disclosure of income
taxes paid should include only cash outflows associated with current
income taxes paid or if it should also include other items related to
income taxes. For example, it is unclear whether the supplemental
disclosure of income taxes paid should include (1) interest and
penalties paid that an entity presents as income tax expense under ASC
740, (2) refunds received from relevant income tax authorities, or (3)
proceeds received from the disposal to third parties of transferable
income tax credits (see Section 3.1.1.2.2). Given the lack
of explicit guidance on what information to provide, we believe that it
would be acceptable for an entity to choose which amounts related to
income taxes to include in its supplemental disclosure of income taxes
paid. If the entity chooses to present cash flows in the manner
described above, the entity should specify which amounts comprise the
income taxes paid.
3.1.1.2.2 Transferable Income Tax Credits
An entity may elect to account for transferable income tax credits
(including the gains or losses from the sale or purchase of such
credits) within the scope of ASC 740. We believe that such an entity may
reflect the cash flows that result from the sale or purchase of
transferable income tax credits within cash flows from operating
activities in a manner consistent with the presentation of the cash
flows that result from the settlement of other balances related to
income taxes. Further, subject to any additional forthcoming guidance
issued by the FASB in connection with its project on income tax
disclosure,3 we believe that it would be acceptable for an entity to present
the cash flows that result from the sale or purchase of transferable
income tax credits within the amount specified in its supplemental
disclosure of income taxes paid during the period. If an entity presents
these cash flows within its supplemental disclosure of income taxes paid
during the period, we believe that the entity should disclose that fact,
as described in Section
3.1.1.1.
Footnotes
1
Under the indirect method, net cash provided or used by
operating activities is determined by adding back or deducting from net
income those items that do not affect cash (e.g., noncash transactions).
2
Under the direct method, major classes of gross cash
receipts and payments and their arithmetic sum are reported to determine net
cash provided or used by operating activities.
3
In March 2023, the FASB issued a proposed ASU that would
modify or eliminate certain existing income tax disclosure
requirements in addition to establishing new requirements. For
more information on the FASB’s proposed ASU, see Deloitte’s
March 22, 2023, Heads Up.
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.
3.3 Presentation of Discontinued Operations
A disposal of a component or group of components of an entity must be reported in discontinued operations if the disposal meets the criteria in ASC 205-20. ASU 2014-08 changed the requirements for reporting a discontinued operation under ASC 205-20 and introduced new disclosure requirements for discontinued operations, including certain cash flow disclosure requirements.
ASC 205-20
50-5B An entity shall disclose, to the extent not presented on the face of the financial statements as part of discontinued operations, all of the following in the notes to financial statements: . . .
c. Either of the following:
1. The total operating and investing cash flows of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity)
2. The depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operation for the periods in which the results of operations of the discontinued operation are presented in the statement where net income is reported (or statement of activities for a not-for-profit entity). . . .
During deliberations of the guidance in ASU 2014-08, some Board members noted that disclosure of investing and operating cash flows is more meaningful than disclosure of depreciation and amortization, capital expenditures, and significant noncash items. However, the cash flow disclosures could present a significant challenge for entities that have a centralized cash management process (since these entities do not typically segregate their invoices or purchase orders at the business unit or operating unit level) and may be difficult to provide in a timely manner and without undue effort. Therefore, the Board decided to give entities the option of providing the above alternative disclosure in the notes to the financial statements. The Board also decided not to require entities to disclose the financing cash flows of a discontinued operation because financing transactions are often conducted at the parent level rather than within each subsidiary.
Before the adoption of ASU 2014-08, entities were not required to separately
disclose — in the statement of cash flows or in the notes to the financial
statements — cash flows pertaining to discontinued operations reflected in
operating, investing, and financing activities. However, in his 2005 AICPA
Conference speech, Mr. Levine stated that if an entity chooses to separately present
cash flows pertaining to discontinued operations in the statement of cash flows,
such presentation should be in line with the basic principle of ASC 230 (i.e., all
cash flows must be reported as operating, investing, or financing activities, as
applicable). Therefore, although they are not required to do so, some entities have
chosen to separately present the cash flows pertaining to discontinued operations on
the face of the cash flow statement or to disclose such information in the notes to
the financial statements, classifying cash flows pertaining to discontinued
operations within operating, investing, and financing activities.
Under ASU 2014-08, if an entity chooses to separately disclose cash flows
pertaining to discontinued operations in the notes
to the financial statements, the entity is only
required to provide the minimum disclosures
described in ASC 205-20-50-5B(c), including either
(1) total operating and investing cash flows of
the discontinued operation or (2) depreciation,
amortization, capital expenditures, and
significant operating and investing noncash items
of the discontinued operation.
However, ASU 2014-08 states that “[a]n entity shall disclose, to the extent not
presented on the face of the financial statements as part of discontinued
operations, all of the following in the notes to financial statements.” From this
wording, it is not clear whether, (1) if an entity elects to provide these minimum
disclosures on the face of the statement of cash flows (in particular the option to
only disclose depreciation, amortization, capital expenditures, and significant
operating and investing noncash items), such disclosures would represent the
required minimum cash flow information about the discontinued operation to present
in the statement of cash flows or (2) an entity would nonetheless be required to
comply with the principles of ASC 230 and provide total operating, investing, and
financing information for the discontinued operation to the extent applicable. On
the basis of informal discussions with the FASB staff, we do not believe that ASU
2014-08 amended the principles of ASC 230, specifically those related to providing
total operating and investing cash flows for a discontinued operation. We therefore
believe that if an entity elects to provide the ASU 2014-08 cash flow disclosures
pertaining to a discontinued operation on the face of the statement of cash flows,
the entity would need to comply with the principles of ASC 230. Given the lack of
clarity discussed above, entities are encouraged to consult with their accounting
advisers if they are considering an alternative presentation of cash flows related
to discontinued operations on the face of the cash flow statement.
The following table illustrates one acceptable
presentation for reporting cash flows from
discontinued operations on the face of the cash
flow statement:
|
Categories Related to the
Statement of Cash Flows
|
Presentation
|
|---|---|
|
Operating
|
Continuing
|
|
Discontinued (in detail or
net)
| |
|
Total operating cash flows
| |
|
Investing
|
Continuing
|
|
Discontinued (in detail or
net)
| |
|
Total investing cash flows
| |
|
Financing
|
Continuing
Discontinued (in detail or
net)
Total financing cash flows
|
An alternative to the above presentation is to
disclose cash flows pertaining to discontinued
operations for each of the categories (either in
detail or net) below the section for cash flows
from financing activities pertaining to continuing
operations:
Categories Related to the
Statement of Cash Flows | Presentation |
|---|---|
Operating | Continuing |
Investing | Continuing |
Financing | Continuing |
Operating | Discontinued (in detail or net) |
Investing | Discontinued (in detail or net) |
Financing | Discontinued (in detail or net) |
When using this presentation, preparers should be aware that the approach does not provide a total for
each of the three categories (although a user could compute these totals by adding the net cash flow
for continuing operations and discontinued operations for each category). Accordingly, when using this
alternative approach, captions related to any totals presented must clearly reflect the category to which
the total is related (continuing vs. discontinued).
Entities should provide separate disclosures consistently for cash flows pertaining to discontinued operations for all periods affected and should continue to do so until there are no longer material cash flows related to the discontinued operation. In addition, ASU 2014-08 requires entities that have significant continuing involvement with a discontinued operation after the disposal date to disclose the amount of any cash inflows or outflows to or from the discontinued operation and any revenues and expenses with the discontinued operation presented in continuing operations after the disposal transaction that were eliminated in the consolidated financial statements before the disposal. SEC registrants should also consider discussing in MD&A the impact of the discontinued operations on future cash flows.
The proceeds from the sale of discontinued operations should be presented as cash associated with investing activities of discontinued operations. Although neither ASC 230 nor ASC 360-10 provides explicit guidance on the presentation of proceeds from the sale of discontinued operations in the statement of cash flows, this presentation is consistent with the concepts in those standards.
ASC 230-10-10-1 states that “[t]he primary objective of a statement of cash
flows is to provide relevant information about the
cash receipts and cash payments of an entity
during a period.” Some preparers have included the
proceeds from the sale of a discontinued operation
in cash flows from continuing operations since
these proceeds will be used to fund outflows of
continuing operations. However, in commenting on
the proper classification of insurance proceeds in
the statement of cash flows at the 2005 AICPA
Conference, Mr. Levine clarified that the SEC
staff does not believe that the classification
should be affected by how an entity intends to
spend such proceeds. Further, the SEC staff’s view
is consistent with ASC 230-10-45-21B, under which
entities are required to classify proceeds from
insurance settlements on the basis of the
underlying loss (see Section 6.3.2 for
additional information). This view would also
apply to reporting the proceeds from the sale of a
discontinued operation.
Although ASC 360-10 does not provide explicit guidance on the presentation of
discontinued operations in the statement of cash
flows, ASC 205-20-45-3A and 45-3B require that
gains or losses from discontinued operations be
presented separately from gains or losses from
continuing operations in the income statement.
Likewise, in the statement of cash flows, proceeds
from the sale of assets that are associated with
discontinued operations should be presented
separately as cash related to investing activities
of discontinued operations.
However, the allocation of taxes associated with the sale of a discontinued
operation to investing activities would not be
appropriate. ASC 230-10-45-17(c) requires that
cash flows associated with cash payments to
governments for taxes be included as a component
of operating cash flows. Further, in the background information in paragraph 92 of FASB Statement 95, the Board indicates the
following:
On the basis of this wording and the
guidance in ASC 230-10-45-17(c), the Board decided
not to permit the allocation of income taxes to
the various cash flow components.
[A]llocation of income taxes
paid to operating, investing, and financing
activities would be so complex and arbitrary that
the benefits, if any, would not justify the costs
involved. This Statement requires that the total
amount of income taxes paid be disclosed for
reasons discussed in paragraph 121.
Example 3-4
Company P sold its international business to Company J for $12 billion and will be required to pay
approximately $3 billion in taxes related to the gain on the sale. Company P has appropriately decided
to report the sale of the international business as a discontinued operation in its income statement. In addition, P has elected to present the discontinued operation separately in its statement of cash flows. The
proceeds from the sale of the business should be presented separately as cash related to investing activities
of discontinued operations. The taxes related to the gain on the sale of the international business should be
presented in operating activities in P’s statement of cash flows.