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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.
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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.
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 US 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.
On the Radar: Statement of cash flows
Examples of SEC comments
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.
Digital Assets
There is currently no explicit guidance in US 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.
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.
Continue your statement of cash flows learning
Deloitte’s Roadmap Statement of Cash Flows comprehensively discusses the accounting guidance on the statement of cash flows, primarily that in ASC 230.
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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.
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.
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