On the Radar
Because ASC 230 is largely principles-based,
financial statement preparers must exercise significant
judgment when classifying certain cash receipts and payments
in their statement of cash flows. Given the lack of
prescriptive rules, cash flow presentation continues to
challenge financial statement preparers, as noted in recent
statements made by regulators. As a result, the FASB has
continued to evaluate issues related to the presentation of
cash receipts and payments in the statement of cash
flows.
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Remarks Made by Regulators at the 2024 AICPA & CIMA Conference
Former SEC Chief Accountant Paul Munter discussed the statement of cash flows at
the 2024 AICPA & CIMA Conference on Current SEC and PCAOB Developments. In
his opening remarks, Mr. Munter reiterated his previous remarks regarding the statement of cash flows and
its importance for investors. He reminded both preparers
and auditors of their responsibility “to ensure that the statement of cash
flows and related cash and non-cash disclosures are provided the same
quality focus as other components of the financial statements.”
In addition, Deputy Chief Accountant Sarah Lowe noted that the
SEC staff has commented on cash flow classification. She observed that when
making changes to certain cash flows within the statement of cash flows,
registrants may need to exercise significant judgment to determine the
appropriate classification of such changes. She advised registrants to consider
the predominant source of the cash flows in their unique scenario when making
this determination in accordance with ASC 230. Further, Ms. Lowe noted that
registrants that use significant judgment should consider providing accounting
policy disclosures in their footnotes to explain the basis for such cash flow
presentation.
Connecting the Dots
Certain cash receipts and payments may have aspects of
more than one class of cash flows. Paragraph BC39 of ASU 2016-15 provides guidance on
“when an entity should separate cash receipts and cash payments and
classify them into more than one class of cash flows . . . and when an
entity should classify the aggregate of those cash receipts and payments
into one class of cash flows based on predominance.” The classification
of cash receipts and payments that have aspects of more than one class
of cash flows should be determined by first applying specific guidance
in U.S. GAAP. When such guidance is not available, financial statement
preparers should separate each identifiable source or use of cash flows
within the cash receipts and cash payments on the basis of the nature of
the underlying cash flows. Each separately identified source or use of
cash receipts or payments should then be classified on the basis of its
nature. Classification based on the activity that is most likely to be
the predominant source or use of cash flows is only appropriate when the
source or use of cash receipts and payments has multiple characteristics
and is not separately identifiable.
For further discussion of accounting and reporting considerations related to cash
receipts or payments that have aspects of more than one class of cash flows, see
Section 6.4.
Examples of SEC Comments
The extracts in this publication are specifically related to the statement of
cash flows and have been reproduced from comments published on the SEC’s Web
site. Dollar amounts and information identifying registrants or their businesses
have been redacted from the comments.
For a discussion of SEC comment letters to registrants on additional topics, see
Deloitte’s Roadmap SEC Comment Letter
Considerations, Including Industry Insights.
Category Classification
Examples of SEC Comments
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Please tell us your basis for classifying the capitalization of contract costs as an investing cash flow activity as opposed to an operating activity.
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We note that you present increases and decreases in book overdrafts as cash flows from financing activities. In this regard, please provide us with your basis for reporting changes in book overdrafts as cash flows from financing activities instead of cash flows from operating activities. Also, clarify whether the overdraft is with a bank.
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Please explain why you classified your short-term investments as trading and why the corresponding cash flows have been classified as investing instead of as operating in your Statements of Cash Flows. See ASC 320 and ASC 230-10-45-20.
ASC 230 requires entities to classify cash receipts and cash payments as
operating, investing, or financing activities on the basis of the nature of
the cash flow. Many of the SEC staff’s comments are related to understanding
the classification or potential misclassification among these three cash
flow categories. In some cases, the SEC staff has raised questions about the
presentation of cash inflows resulting from a transaction in a manner
inconsistent with the underlying balance sheet classification.
Net Versus Gross Presentation
Examples of SEC Comments
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Please revise the other assets and liabilities, net line item to present changes in other assets separately from other liabilities and further breakout any material components. Refer to ASC paragraphs 230-10-45-7 and 45-29.
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We note that you present the caption Investments in property and equipment, net. Please revise future filings to separately present the cash inflows and cash outflows for property and equipment on a gross basis as discussed in ASC 230-10-45-26.
The SEC staff may challenge whether it is appropriate to report the net
amount of certain cash receipts and cash payments on the face of the
statement of cash flows. Generally, cash payments should not be presented
net of cash receipts in the statement of cash flows. However, ASC
230-10-45-7 through 45-9 state that although reporting gross cash receipts
and gross cash payments provides more relevant information, financial
statement users sometimes may not need gross reporting to understand certain
activities. Further, 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.
Accordingly, the SEC staff may ask a registrant to revise the presentation
or to explain (in accordance with ASC 230) why it is appropriate to report
certain cash flows on a net basis rather than on a gross basis.
Extended Vendor Payable Arrangements
Example of an SEC Comment
We note your “Accounts Payable days” are [X] days as
of [the fiscal year-end]. We further note your
Accounts Payable days [have] increased substantially
over the past ten years . . . . Please tell us if
you are engaging in supply chain finance operations
and mechanisms, such as reverse factoring or similar
methods to increase your Accounts Payable days.
Otherwise, please explain how you have been able to
achieve such extended accounts payable terms with
your suppliers.
The SEC staff has recently issued comments to registrants that use extended
vendor-payable arrangements involving the participation of a paying agent or
other financial institution. Under such programs, the paying agent or
financial institution may settle the payment obligation directly with the
registrant’s supplier, for a fee, earlier than the extended payment term.
Because there is no explicit authoritative guidance on these arrangements,
the SEC staff has challenged registrants’ determinations of whether the
payments under such programs (1) constitute trade payables, which would
represent operating activities, or (2) are more akin to debt, which would
represent financing activities. In addition, the staff has encouraged
registrants to provide enhanced disclosures about their extended vendor
payable arrangements, such as the following:
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A description of the program, including relevant terms, related risks, and impacts on the registrant’s working capital, liquidity, and capital resources.
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Amounts settled through the program, including relevant terms, related risks, and impacts on the registrant’s working capital, liquidity, and capital resources.
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Amounts remaining in trade payables at year-end for which the registrant’s supplier has elected early payment (i.e., the balance sheet impact).
See Section 7.13 for interpretive views
on how supplier finance programs (also referred to herein as extended
vendor-payable arrangements) are presented in the statement of cash
flows.
Digital Assets
Other than the guidance in ASU
2023-08 (discussed below), there is no explicit guidance in
U.S. GAAP on the accounting for digital assets, including how an entity
classifies its receipts of and payments for such assets in the statement of cash
flows. As a result, an entity must apply judgment when classifying cash flows
associated with transactions involving such assets. These transactions commonly
include purchases and sales of crypto assets, crypto asset safeguarding, and
crypto asset lending.
Changing Lanes
In December 2023, the FASB issued ASU 2023-08, which addresses the
accounting and disclosure requirements for certain crypto assets. The
ASU provides guidance on, among other topics, cash flow presentation
related to the sale of crypto assets received as noncash consideration
in the ordinary course of business. For all entities, the ASU’s
amendments are effective for fiscal years beginning after December 15,
2024, including interim periods within those fiscal years. Early
adoption is permitted. If an entity adopts the amendments in an interim
period, it must adopt them as of the beginning of the fiscal year that
includes that interim period.
For more information about the ASU and the presentation of certain digital asset
transactions in the statement of cash flows, see Section 7.15 as well as Deloitte’s Roadmap Digital Assets.
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).
Because ASC 230 does not address constructive receipt and disbursement, an
entity will need to use judgment when determining the substance of the
arrangement to present the cash flows of the arrangement.
For example, a company may purchase real estate by taking out a mortgage with a
third-party financing entity. In some cases, the third-party lender will not
deposit cash into the company’s bank account but will electronically wire cash
directly to an escrow account at the closing of the transaction, which in turn
is wired directly to the seller. 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.
Looking Ahead — Standard Setting
Recent FASB Activity
In November 2023, the FASB added to its technical agenda a project on the statement of cash flows in response to
feedback indicating that improvements to financial institutions’ statement
of cash flows are needed to provide investors with more decision-useful
information. For example, users of financial institutions’ financial
statements indicated that the existing framework that outlines operating,
investing, and financing cash flows fails to effectively reflect the
complexities of such institutions’ operations. Other commenters expressed a
desire for improved disclosures related to changes in working capital.
Further, the project is aimed at reorganizing and disaggregating the
information in the statement of cash flows for financial institutions (e.g.,
a requirement for such entities to separately disclose the amount of cash
interest income received). In addition to this project on the statement of
cash flows, the FASB is exploring improvements to the statement of cash
flows more broadly in a project on its research agenda.
Moreover, in January 2025, the FASB released an
invitation to comment (ITC) that
requests feedback from stakeholders on the Board’s future standard-setting
agenda. The Board hopes that such feedback will enable it to reduce
complexity and costs while improving the usefulness of the financial
information provided to investors. The ITC includes the following question
related to the statement of cash flows:
Question
52: Should the FASB pursue a project on the statement of cash
flows? If yes, which improvements, if any, are most important? Should
the FASB leverage the current guidance in Topic 230, Statement of Cash
Flows? If yes, would it be preferable to retain the direct method, the
indirect method, or both? Should this potential project be a broad
project applicable to all entities that provide a statement of cash
flows or limited to certain entities or industries? Please explain.
[Footnote omitted]
Comments on the ITC are due by June 30, 2025.
Connecting the Dots
In discussing the statement of cash flows at the
2024 AICPA & CIMA Conference on Current SEC and PCAOB
Developments, Mr. Munter invited stakeholders to provide thoughtful
feedback related to the FASB’s current research project on this
topic. He noted that he supports the FASB’s efforts to improve
consistency and comparability in this area (e.g., cash flow
classification, information about noncash transactions). Mr. Munter
also highlighted the need to “dig deeper” into stakeholder feedback
to better understand investors’ informational needs. For example, he
noted that he has heard some investors say that the direct-method
cash flow statement is unnecessary and others say that they want
more information about certain cash flows, including cash collected
from customers, cash paid to employees, and cash paid to suppliers
and other creditors.
This Roadmap comprehensively
discusses the accounting guidance on the statement
of cash flows, primarily that in ASC 230.