Statement of Cash Flows

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Statement of Cash Flows

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. While the FASB has issued two ASUs in the past few years to assist financial statement preparers and to reduce the diversity in practice regarding cash flow presentation, registrants continue to receive comments from the SEC staff regarding the statement of cash flows. In addition, while the guidance on cash flow presentation of government assistance is not new, certain financial statement preparers may need to brush up on how to present cash flows associated with government grants stemming from the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).1

Examples of SEC Comments

Examples of SEC Comments2

Category Classification

Please tell us your basis for classifying the capitalization of contract costs as an investing cash flow activity as opposed to an operating activity.
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.

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.

Examples of SEC Comments

Gross Versus Net Classification

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.
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.

Example of an SEC Comment

Extended Vendor Payable Arrangements

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:

A description of the program; the material and relevant terms of the program, including the risks along with the general benefits; amounts settled through the program; and impacts of the program on the registrant’s payment terms to suppliers, days payable outstanding, working capital, liquidity, and capital resources.
Amounts remaining in trade payables at year-end for which the registrant’s supplier has elected early payment (i.e., the balance sheet impact).

For a discussion of SEC comment letters to registrants on additional topics, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

Latest Authoritative Guidance

The FASB issued ASU 2016-15 and ASU 2016-18 to clarify guidance in ASC 230 on classifying the following cash flows and reduce diversity in practice:

Presentation of Government Grants

In the determination of the appropriate cash flow presentation of government grants (that are not tax credits recognized as a reduction of income tax and accounted for in accordance with ASC 740), it is important to consider the nature of the grants since government assistance can take many different forms. We consider government grants related to long-lived assets to be capital grants and grants related to income to be income grants, as discussed below. However, some government grants may have aspects of both capital grants and income grants (i.e., the grant may be intended to subsidize the purchase of long-lived assets and certain operating costs). Ultimately, classification generally depends on the timing of the cash receipt compared with the timing of the associated costs to which the specific grant is related.

Government Grants
If the entity receives the funding after it has incurred the capital costs, the entity should present the cash inflow as investing (the same category as the original payment for the associated long-lived asset).3 If the entity receives the funding before entity has incurred the capital costs, the entity should present that cash inflow as a financing activity.	If the entity receives the funding as a reimbursement for qualifying operating expenses incurred, the entity should present the cash inflow as operating. If the entity receives the funding before it has incurred the qualifying operating expenses, the entity could present the cash inflow as either (1) financing (in a manner consistent with the guidance on capital grants) or (2) operating if the entity expects to comply with the terms of the grant so that both the inflow and outflow are presented in the operating category. An entity’s election of either approach is a matter of accounting policy and should be disclosed and consistently applied.

Government Grants

Capital Grants

Income Grants

If the entity receives the funding after it has incurred the capital costs, the entity should present the cash inflow as investing (the same category as the original payment for the associated long-lived asset).3
If the entity receives the funding before entity has incurred the capital costs, the entity should present that cash inflow as a financing activity.

If the entity receives the funding as a reimbursement for qualifying operating expenses incurred, the entity should present the cash inflow as operating.
If the entity receives the funding before it has incurred the qualifying operating expenses, the entity could present the cash inflow as either (1) financing (in a manner consistent with the guidance on capital grants) or (2) operating if the entity expects to comply with the terms of the grant so that both the inflow and outflow are presented in the operating category. An entity’s election of either approach is a matter of accounting policy and should be disclosed and consistently applied.

See Deloitte’s April 9, 2020 (last updated September 18, 2020), Heads Up for more information and financial reporting considerations related to government grants associated with the CARES Act.

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 presenting 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.

Deloitte’s Roadmap Statement of Cash Flows comprehensively discusses the accounting guidance on the statement of cash flows, primarily that in ASC 230.

Contacts

Ignacio Perez

Managing Director

Deloitte & Touche LLP

+1 203 761 3379

igperez@deloitte.com

Bryan Anderson

Partner

Deloitte & Touche LLP

+ 1 512 226 4559

bryaanderson@deloitte.com

Footnotes

See Deloitte’s April 9, 2020 (last updated September 18, 2020), Heads Up for more information about the CARES Act and related financial reporting considerations.

These examples of SEC comments have been reproduced from the SEC’s Web site. Dollar amounts and information identifying registrants or their businesses have been redacted from the comments.

While the entity should present the cash inflow as investing, it may sometimes be appropriate to present it as financing.