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.
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.
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.
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.