A guide to the statement of cash flows has been saved
A guide to the statement of cash flows
On the Radar: Guidance on cash payments classification
How should you classify cash receipts and payments in the statement of cash flows? The answer may be a matter of judgment, given the lack of bright lines in ASC 230. This edition of On the Radar serves as a cash flow guide, detailing how you can prepare for SEC comments that registrants are seeing.
Statement of cash flows trending topics
Navigating a principles-based standard
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 (CARES) Act.
Examples of SEC comments
Latest authoritative guidance
*The FASB’s objective in the ASUs was to eliminate the diversity in practice related to the classification of certain cash receipts and payments. As a result, there could be significant changes for some entities under the revised guidance, particularly with respect to these issues.
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. 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 depends on the timing of the cash receipt compared with the timing of the associated costs to which the specific grant is related.
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.
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1 These examples of SEC comments have been reproduced from the SEC’s website. Dollar amounts and information identifying registrants or their businesses have been redacted from the comments.