Chapter 4 — Other Accounting and Financial Reporting Items

4.1 Statement of Cash Flows

In developing a statement of cash flows to be presented in carve-out financial statements, management must use judgment and make estimates to determine and report various cash flow components. It may be best for management to first develop the carve-out balance sheet and income statement before developing the statement of cash flows since most components of the cash flow statement are derived from the balance sheet accounts. For example, after management determines the proper balance sheet allocation of fixed assets to the carve-out entity, it must consider the related cash flow statement implications associated with these balances (e.g., additions, disposals, and depreciation expense). These amounts should be derived from the parent entity’s historical financial statements and would generally not be adjusted for information identified after the issuance of the parent-entity financial statements unless the adjustment is required by U.S. GAAP or other regulatory guidance (see Section 4.7 for further discussion).

4.1.1 Intercompany Transactions

The carve-out entity’s statement of cash flows typically will be similar to that of the parent entity. However, differences may arise as a result of the presentation of the cash flow effects of intercompany transactions. As discussed in Section 3.2, although intercompany transactions are eliminated in consolidation of the parent entity’s financial statements, they generally should not be eliminated from the carve-out financial statements unless they are transactions that take place exclusively within the carve-out entity. Once management determines whether intercompany activities should be reflected in the carve-out entity’s statement of cash flows, it must classify cash receipts and cash payments related to each activity as operating, investing, or financing on the basis of the nature of that activity in accordance with the guidance in ASC 230.

As discussed in Section 2.8.1, a parent entity may have arrangements in place in which its excess cash is pooled or swept to one or more centralized cash management accounts (i.e., sweep accounts or cash pools). In such cases, management must determine how, on the carve-out entity’s balance sheet, to present any amounts resulting from participation in these arrangements. Similarly, management should determine how the carve-out entity’s deposits to and distributions from the cash pool should be classified in the carve-out entity’s statement of cash flows as well as whether such transactions will be presented by the carve-out entity gross or net.

When a carve-out entity determines that it is appropriate to present amounts due from or due to its parent that result from a cash pool arrangement as intercompany receivables or payables, the transactions will typically be classified in the carve-out entity’s statement of cash flows as investing or financing depending on whether the amount is due from or due to the parent entity. Alternatively, when a carve-out entity determines that it is appropriate to report the effects of transactions with the cash pool arrangement within equity as part of the parent’s net investment, the transactions will typically be classified as financing in the carve-out entity’s statement of cash flows. For further discussion of considerations related to reporting of centralized cash management arrangements in the statement of cash flows, see Deloitte’s Roadmap Statement of Cash Flows.