On the Radar
Statement of Cash Flows
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Because ASC 230 is largely principles-based,
financial statement preparers must exercise significant
judgment whenclassifying 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.
In addition, while the guidance on cash flow
presentation of derivative instruments is not new, an
entity’s cash flow presentation may be subject to additional
scrutiny as a result of rising interest rates. For example,
in an increasing interest rate environment, an entity may
pay higher costs to acquire an interest rate cap agreement
that is intended to limit the entity’s exposure to future
variability in interest rates.
Further, given the rise in digital asset
transactions and lack of explicit guidance in U.S. GAAP on
the accounting for digital assets, including classification
in the statement of cash flows, entities must apply judgment
when classifying cash flows associated with transactions
involving such assets.
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Examples of SEC Comments
Examples of SEC Comments1
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.
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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.
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 (1)
constitute trade payables, which would represent operating activities, or (2)
are more akin to debt, which would represent financing activities. Before the
issuance of ASU 2022-04 (discussed below), which requires enhanced disclosures
about supplier finance programs, there were no explicit disclosure requirements
for such programs. Therefore, the staff has encouraged registrants to provide
enhanced disclosures in MD&A 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.
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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).
Changing Lanes
In September 2022, the FASB issued ASU 2022-04 to enhance transparency
about an entity’s use of supplier finance programs. Under the ASU, the
buyer in a supplier finance program is required to disclose information
about the key terms of the program, outstanding amounts as of the end of
the period that the buyer has confirmed as valid in accordance with the
supplier finance program, a rollforward of such amounts during each
annual period, and a description of where in the financial statements
outstanding amounts are presented. The ASU does not affect the
recognition, measurement, or presentation of supplier finance program
obligations on the face of the balance sheet or in the cash flow
statement.
For a discussion of SEC comment letters to registrants on
additional topics, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry
Insights.
Increasing Interest Rates
As a result of rising interest
rates in the current economic environment, entities may have entered into,
amended, or terminated interest rate derivative contracts (such as interest rate
swaps and interest rate caps). The table below summarizes common cash flow
classifications for various derivative transactions. The classifications are
discussed in more detail in Deloitte’s Roadmap Statement of Cash Flows.
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Derivative Instrument
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Classification of the Derivative’s Cash
Flows
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Derivatives with an
other-than-insignificant financing element at
inception
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Financing activities (for the deemed
borrower2) and generally investing activities (for the
deemed lender)
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Derivatives acquired or originated for
trading purposes
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Operating activities
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Hedging derivatives
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Investing activities
or
In the same category as the cash flows
from the item being hedged
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Nonhedging derivatives
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Investing activities
or
In accordance with the nature of the
derivative instrument as it is used in the context of
the entity’s business (if an economic hedge)
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Digital Assets
There is currently 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.
In March 2023, the FASB issued a proposed ASU on the accounting for and
disclosure of certain crypto assets, including the cash flow presentation
related to the sale of crypto assets received as noncash consideration in the
ordinary course of business. Entities should continue to monitor the FASB’s
project for developments related to the presentation of digital assets in the
statement of cash flows.
See Deloitte’s Roadmap Statement
of Cash Flows for more information about the proposed ASU
and the presentation of certain digital asset transactions in the statement of
cash flows.
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
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.
2
The “deemed borrower” refers to
the party that benefits from a financing element
in a derivative instrument in early periods of the
instrument’s term. For example, a party that
receives a premium upon entering into an
arrangement because of the arrangement’s
off-market terms is considered to be the deemed
borrower.