On the Radar
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
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Examples of SEC Comments
Examples of SEC Comments2
Category Classification
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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.
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
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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.
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:
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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.
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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).
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
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Capital Grants
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Income Grants
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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
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Ignacio Perez
Managing
Director
Deloitte &
Touche LLP
+1 203 761
3379
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Bryan Anderson
Partner
Deloitte &
Touche LLP
+ 1 512 226
4559
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Footnotes
1
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.
2
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.
3
While the entity should present the cash inflow
as investing, it may sometimes be appropriate to
present it as financing.