Chapter 7 — Common Issues Related to Cash Flows

7.2 Constructive Receipt and Disbursement

An entity may enter into arrangements in which cash is received by or disbursed to another party on behalf of the entity. Although these arrangements may not result in a direct exchange of cash to or from the entity, the same economic result is achieved if cash is received by or disbursed to the entity directly (i.e., constructive receipt and constructive disbursement, respectively). Consequently, it is often difficult to determine whether the entity should report these cash flows in its statement of cash flows.

In some industries, the entity (e.g., an automobile dealer) may finance its purchases of inventory through the supplier and, in many cases, the finance entity is a subsidiary of the supplier. The finance subsidiary pays the supplier directly on behalf of the automobile dealer and no cash is disbursed by the dealer until the inventory is sold. As discussed in the nonauthoritative guidance in AICPA Technical Q&As Section 1300.16, the dealer reports purchases as increases in inventory and trade loans (a noncash transaction), with repayments of the trade loans presented within operating activities in the statement of cash flows.

However, when the finance entity is not a subsidiary of a supplier (i.e., a third party), the amounts financed are not trade loans; rather, they are third-party loans.1 As a result, they should be reflected as cash transactions in the dealer’s statement of cash flows as follows:

Unrelated finance entity remits proceeds to the supplier (on behalf of the dealer) — The dealer should present this transaction as a financing cash inflow (to reflect the amount “received” from the third-party loan) and an operating cash outflow (to reflect the amount “paid” to purchase inventory).
Dealer repays loan to finance company — The dealer should present this transaction as a financing cash outflow.

This principle is applicable in other industries that may not have inventory financing arrangements. For example, a company may purchase real estate by taking out a mortgage with a third-party financing entity. At the closing of the purchase transaction, the third-party lender electronically wires cash directly to an escrow account, which in turn is wired directly to the seller. The cash from the mortgage does not get deposited into the company’s bank account (or get paid out of the company’s bank accounts) since it is paid directly from the lender to the seller as part of closing escrow. Since the third-party lender is acting as the buyer’s agent and transfers the proceeds of the mortgage directly to the escrow agent on behalf of the buyer, the substance of the transaction is that the buyer received the proceeds of the mortgage as a financing cash inflow and disbursed the purchase price of the real estate as an investing cash outflow. Accordingly, the transaction should be presented in such a manner in the company’s statement of cash flows.

Footnotes

This issue was discussed by an SEC staff member at the 2005 AICPA Conference on Current SEC and PCAOB Developments.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.