A Roadmap to the Preparation of the Statement of Cash Flows

A Roadmap to the Preparation of the Statement of Cash Flows

May 2020

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Publications in Deloitte's Roadmap Series

Business Combinations Business Combinations -- SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. GAAP Consolidation -- Identifying a Controlling Financial Interest Contingencies and Loss Recoveries Contracts on an Entity's Own Equity Convertible Debt Current Expected Credit Losses Disposals of Long-Lived Assets and Discontinued Operations Distinguishing Liabilities From Equity Earnings per Share Environmental Obligations and Asset Retirement Obligations Equity Method Investments and Joint Ventures Equity Method Investees -- SEC Reporting Considerations Fair Value Measurements and Disclosures Foreign Currency Transactions and Translations Income Taxes Initial Public Offerings Leases Noncontrolling Interests Non-GAAP Financial Measures Revenue Recognition SEC Comment Letter Considerations, Including Industry Insights Segment Reporting Share-Based Payment Awards Statement of Cash Flows

Acknowledgments

We are grateful for the thoughts and contributions of Adrian Mills, Joe DiLeo, and Matthew Sibert. Teri Asarito, Sandy Cluzet, Amy Davidson, Joseph Renouf, and Lora Spickler-Alot delivered the first-class editorial and production effort that we have come to rely on. Dennis Howell supervised the overall preparation of this Roadmap and extends his deepest appreciation to all professionals who helped in its development.

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Contents

Prefaceviii

Contactsx

Chapter 1 -- Overview

1

Chapter 2 -- Scope

2

Chapter 3 -- Format and Presentation

4

3.1Form and Content of the Statement of Cash Flows

4

3.2Gross and Net Cash Flows

6

3.2.1Situations in Which Net Presentation May Be Appropriate

7

3.3Presentation of Discontinued Operations

8

Chapter 4 -- Cash and Cash Equivalents

12

4.1Definition of Cash and Cash Equivalents

12

4.1.1Restricted Cash

13

4.1.1.1Balance Sheet Presentation of Restricted Cash

13

4.1.1.2Presentation of Restricted Cash in the Statement of Cash Flows

14

4.1.1.3Reconciliation of Cash, Cash Equivalents, and Amounts Generally Described as

Restricted Cash or Restricted Cash Equivalents for an Interim Reporting Period

16

4.1.2Classification of Interest Earned on Restricted Funds

16

4.2Book and Bank Overdrafts

17

4.2.1Balance Sheet Considerations

17

4.2.1.1Book Overdrafts

17

4.2.1.2Bank Overdrafts

19

4.2.2Considerations Related to the Statement of Cash Flows

19

4.3Centralized Cash Management Arrangements ("Cash Pools")

19

4.4Money Market Funds

21

4.5Variable-Rate Demand Notes

22

4.6Auction Rate Securities

23

4.7Credit and Debit Card Receivables

23

Chapter 5 -- Noncash Investing and Financing Activities

24

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Deloitte | A Roadmap to the Preparation of the Statement of Cash Flows (2020)

Chapter 6 -- Classification of Cash Flows

26

6.1Investing Activities

26

6.1.1Securities Lending

27

6.1.2Distributions From Equity Method Investments

28

6.1.3Property, Plant, and Equipment Acquired on Account

30

6.1.4Securities

32

6.1.4.1Debt Securities

32

6.1.4.2Equity Securities

33

6.1.5Company- and Bank-Owned Life Insurance Policies

33

6.2Financing Activities

34

6.2.1Debt Extinguishments and Modifications

35

6.2.2Transactions With Noncontrolling Interest Holders

36

6.2.3Debt Issue Costs

37

6.2.4Advance Payments Received From Customers

37

6.3Operating Activities

38

6.3.1Long-Term Trade Receivables

39

6.3.2Cash Proceeds From Insurance Claims

40

6.3.3Planned Major Maintenance

40

6.3.4Employee Benefit Plans

41

6.4More Than One Class of Cash Flows

42

6.4.1Classification of Cash Flows for Emission Allowances and Related Transactions

45

6.4.2Classification of Cash Flows of Repayments of Zero-Coupon Bonds and Other Debt

Instruments With Coupon Interest Rates That Are Insignificant in Relation to the

Effective Interest Rate of the Borrowing

46

6.4.3Debt Instruments That Contain Interest Payable in Kind

50

6.5Changes to Historical Classification

51

Chapter 7 -- Common Issues Related to Cash Flows

52

7.1Foreign Currency Cash Flows

52

7.2Constructive Receipt and Disbursement

53

7.3Stock Compensation

54

7.3.1Cash Received Upon Early Exercise of a Share-Based Payment Award

55

7.3.2Income Tax Effects of Share-Based Payment Awards

55

7.3.3Settlement of Equity-Classified Share-Based Payment Awards

55

7.3.4Settlement of Liability-Classified Share-Based Payment Awards

56

7.3.5Remittances of Minimum Statutory Withholding on Share-Based Payment Awards

57

7.4Derivatives

58

7.4.1Hedging Derivatives

58

7.4.2Nonhedging Derivatives

59

7.4.3Other Nonhedging Derivatives

60

7.5Business Combinations

61

7.5.1Presentation of Acquisition-Related Costs

62

7.5.2Settlement of Acquired Liabilities After a Business Combination

62

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Contents

7.5.3Debt in a Business Combination

62

7.5.4Contingent Consideration in a Business Combination

63

7.5.4.1Contingent Consideration Classified as a Liability

64

7.5.4.2Contingent Consideration Classified as Equity

66

7.5.4.3Unit-of-Account Considerations

66

7.5.5Acquired IPR&D Assets With No Alternative Future Use

67

7.6Leases

68

7.6.1Initial and Subsequent Recognition of Leases

69

7.6.1.1Capital Leases

69

7.6.1.2Operating Leases

69

7.6.1.3Lessee Presentation

69

7.6.1.4Lessor Presentation

74

7.6.2Lease Incentives

74

7.6.3Sale-Leaseback Transactions

75

7.6.4Termination Costs Received From the Lessor

75

7.6.5Payments for Land-Use Rights

76

7.7Deferred Costs

77

7.8Government Grants

77

7.8.1Capital Grant

78

7.8.2Income Grant

79

7.9Classification of Cash Flows Related to Beneficial Interests in Trade Receivables

80

7.9.1Application of ASU 2016-15 to the Sale of Trade Receivables to Multiseller Commercial

Paper Conduit Structures

80

7.10Classification of Cash Flows for Repurchase Agreements and Reverse Repurchase Agreements 82

7.11Assets Held for Sale

83

7.12Cloud Computing Arrangements

83

7.13Supplier Finance Programs

84

Appendix A -- Implementation Guidance and Illustrations

85

Appendix B -- Selected ASC Glossary Terms

98

Appendix C -- SEC Staff Review Process and Sample SEC Comments Related to the

Statement of Cash Flows

107

Appendix D -- SEC Interim Reporting Considerations

111

Appendix E -- Differences Between U.S. GAAP and IFRS Standards

112

Appendix F -- Titles of Standards and Other Literature

117

Appendix G -- Abbreviations

121

Appendix H -- Changes Made in the 2020 Edition of This Publication

122

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Preface

May 2020

To our friends and clients:

We are pleased to present the 2020 edition of A Roadmap to the Preparation of the Statement of Cash Flows. This Roadmap provides Deloitte's insights into and interpretations of the accounting guidance on the statement of cash flows, primarily that in ASC 230.1

The accounting principles related to the statement of cash flows have been in place for many years; however, errors in the statement of cash flows continue to be causes of restatements and registrants continue to receive comments from the SEC staff on cash flow presentation matters.

While ASC 230 provides some guidance on cash payments and receipts that are classified as either operating, investing, or financing activities, it does not provide consistent principles for evaluating the classification of certain cash payments and receipts in the statement of cash flows, which has led to diversity in practice. In recent years, the FASB issued ASU 2016-152 and ASU 2016-18,3 which clarified guidance in ASC 230 on the classification of certain cash flows and removed some of the diversity in practice. This Roadmap reflects the amendments to ASC 230 made by these ASUs and includes some of Deloitte's interpretive views on them.

The Roadmap also incorporates interpretations and guidance related to the new leasing standard, ASU 2016-02 (codified in ASC 842; see Section 7.6). ASU 2016-02 amended the leasing guidance in U.S. GAAP -- notably by requiring lessees to recognize liabilities for lease payments and right-of-use assets -- and became effective for calendar-year-end public business entities on January 1, 2019. In addition, in response to the global COVID-19 pandemic, the FASB issued a proposed ASU on April 21, 2020, that would (1) delay the effective date of ASC 606 for certain nonpublic entities by one year and (2) defer the effective date of ASC 842 to fiscal years beginning after December 15, 2021, for certain public business entities (e.g., public not-for-profit entities) and all nonpublic entities.

This Roadmap includes several new discussions as well as some modifications to previously expressed views. Appendix H highlights all new content as well as any substantive revisions to previous content.

1 For the full titles of standards, topics, and regulations, see Appendix F. For the full forms of acronyms, see Appendix G. 2 For public business entities, the guidance in ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods

within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities. However, an entity that early adopts ASU 2016-15 must adopt all of the ASU's amendments. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable. 3 For public business entities, the guidance in ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods therein. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities, which must apply the guidance retrospectively to all periods presented.

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