Chapter 7 — Common Issues Related to Cash Flows

7.7 Deferred Costs

ASC 230 does not explicitly address the presentation of deferred costs (i.e., incurred costs that are deferred on the balance sheet). However, when determining the appropriate presentation in the statement of cash flows, an entity should consider the underlying principle described in ASC 230-10-10-1, which states that the “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.” Accordingly, the cash flow presentation should generally be in line with the balance sheet treatment. That is, cash outflows related to current assets or inventory that are recognized as a period expense in an entity’s income statement should generally be classified as an operating activity in the statement of cash flows. Cash outflows related to noncurrent productive assets that are capitalized in an entity’s balance sheet should generally be classified as an investing activity in the statement of cash flows.

Example 7-15

Company E is a provider of software services to the health care industry. Recently, E has developed new software to market to new and existing customers. In accordance with ASC 985-20, E capitalizes the costs of developing the new software and therefore classifies the software development costs as an investing activity in its statement of cash flows. The software development costs are costs of developing a productive asset for E.

In this example, the software development costs paid by E are similar to construction costs paid by a manufacturing company to construct a manufacturing facility. That is, E’s payments of costs incurred to develop new software create an asset that is used to generate future revenue in a manner similar to how a manufacturing facility generates future revenue for a manufacturer. In both cases, the cash outflows for costs of generating future revenue are presented as investing activities in the statement of cash flows.

See Section 7.12 for discussion of deferred costs associated with cloud computing arrangements (CCAs).

Connecting the Dots

While the cash flow presentation of deferred costs should generally be in line with the balance sheet treatment, an entity should also consider the rationale supporting the capitalization of the noncurrent productive asset. In other words, an entity should not automatically conclude that cash outflows related to a nonproductive asset should be presented as investing simply because the costs have been deferred. For example, there may be situations in which an entity is permitted by U.S. GAAP to capitalize certain operating costs incurred in the period that are related to a noncurrent productive asset (e.g., planned major maintenance, as discussed in Section 6.3.3). In those situations, although the deferred costs are related to a noncurrent productive asset, the entity would present the cash outflows as an operating activity because the costs represent an expense that can be deferred under U.S. GAAP rather than an investment in a noncurrent productive asset.

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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.