A comprehensive guide Statement of cash flows

Financial reporting developments

A comprehensive guide

Statement of cash flows

Accounting Standards Codification 230

Updated as of June 2019

To our clients and other friends

Accounting Standards Codification (ASC) 230, Statement of Cash Flows, addresses the presentation of the statement of cash flows. This publication is designed to assist professionals in understanding the statement of cash flows. This publication reflects our current understanding of this guidance based on our experience with financial statement preparers and related discussions with the staff of the Financial Accounting Standards Board (FASB or Board) and Securities and Exchange Commission (SEC). This publication has been updated to provide further clarifications and enhancements to our interpretive guidance. Refer to Appendix D for a summary of substantive updates to this publication. We hope this publication will help you understand and apply the accounting for the statement of cash flows. EY professionals are prepared to assist you in your understanding and are ready to discuss your concerns and questions.

June 2019

Contents

1 Overview and scope ................................................................................................... 1

1.1 Overview ............................................................................................................................... 1 1.2 Scope....................................................................................................................................2 1.3 Effects of recent accounting standards updates (updated June 2019) ...................................... 4

2 Form and content ...................................................................................................... 6

2.1 Definitions -- cash and cash equivalents................................................................................... 6 2.1.1 Cash............................................................................................................................. 6 2.1.2 Cash equivalents ........................................................................................................... 6

2.2 Application of cash equivalents guidance ................................................................................ 7 2.2.1 Investments in equity securities ..................................................................................... 9 2.2.2 Auction rate securities and variable rate demand obligations........................................... 9 2.2.3 Short-term paper .......................................................................................................... 9

2.3 Gross vs. net cash flows ....................................................................................................... 10 2.3.1 Revolving lines of credit...............................................................................................11 2.3.2 Financial institutions ................................................................................................... 11 2.3.2.1 Commercial letters of credit ............................................................................... 12 2.3.2.2 Fee-based financial services ............................................................................... 12

2.4 Restricted cash and restricted cash equivalents (before the adoption of ASU 2016-18) ........... 12 2.4A Restricted cash and restricted cash equivalents (after the adoption of ASU 2016-18) ............. 13

2.4.1 Assets donated to not-for-profits, including those with restrictions ................................ 14

3 Classification of cash flows ....................................................................................... 15

3.1 Overview ............................................................................................................................. 15 3.2 Investing activities ............................................................................................................... 15 3.3 Financing activities .............................................................................................................. 19 3.4 Operating activities .............................................................................................................. 22 3.5 More than one class of cash flows (before the adoption of ASU 2016-15) ............................... 25 3.5A More than one class of cash flows (after the adoption of ASU 2016-15)..................................26 3.6 Common issues related to classification ................................................................................ 26

3.6.1 Restricted cash and restricted cash equivalents ............................................................ 26 3.6.2 Loans and trade receivables (updated June 2019)........................................................26 3.6.3 Securitized loans or trade receivables .......................................................................... 27

3.6.3.1 Gross vs. net presentation (before the adoption of ASU 2016-15) ....................... 28 3.6.3.1A Gross vs. net presentation (after the adoption of ASU 2016-15) .......................... 28 3.6.3.2 Initial cash receipts in securitizations accounted for as sales ................................ 28 3.6.3.3 Accounting and cash flow presentation considerations for

beneficial interests (before the adoption of ASU 2016-15) .................................. 28 3.6.3.3A Accounting and cash flow presentation considerations for beneficial

interests (after the adoption of ASU 2016-15) (updated November 2018) ........... 30 3.6.4 Acquisitions and sales of certain securities ................................................................... 30 3.6.5 Inventory financing by a captive finance subsidiary of the seller.....................................31

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3.6.6 Inventory purchases from a supplier financed by a subsidiary of the supplier (i.e., `floor plan' financing transactions) ........................................................... 31

3.6.7 Distributions received from unconsolidated entities (including joint ventures).................32 3.6.7.1 Determining whether distributions are returns on or returns of the investment (before the adoption of ASU 2016-15) .............................................. 32 3.6.7.1.1 `Cumulative earnings' approach ......................................................... 32 3.6.7.1.2 `Look-through' approach ................................................................... 33 3.6.7.1A Determining whether distributions are returns on or returns of the investment (after the adoption of ASU 2016-15) ................................................ 34

3.6.8 Transactions with noncontrolling interest holders while control is maintained.................35 3.6.9 Seller-financed purchases............................................................................................35 3.6.10 Leases (before the adoption of ASC 842) ..................................................................... 36 3.6.10A Leases (after the adoption of ASC 842) (updated June 2019) ....................................... 36 3.6.11 Business combinations ................................................................................................ 37

3.6.11.1 Sale and purchases ............................................................................................ 37 3.6.11.2 Transaction costs...............................................................................................37 3.6.11.3 Contingent consideration (before the adoption of ASU 2016-15) ......................... 37 3.6.11.3A Contingent consideration (after the adoption of ASU 2016-15) ............................ 38 3.6.12 Overdrafts .................................................................................................................. 38 3.6.13 Contributions and premiums related to postretirement plans (updated June 2019) ............. 39 3.6.14 Payment-in-kind interest (i.e., settlement of interest by issuing additional

securities or restructuring debt) (updated November 2018) .......................................... 39 3.6.15 Repurchase of shares from an employee to satisfy minimum tax

withholding (before the adoption of ASU 2016-09) ....................................................... 39 3.6.15A Repurchase of shares from an employee to satisfy minimum tax

withholding (after the adoption of ASU 2016-09) ......................................................... 40 3.6.15B Repurchase of shares from a grantee to satisfy minimum tax withholding

(after the adoption of ASU 2018-07) (updated November 2018) ................................... 40 3.6.16 Excess tax benefit from share-based payment awards (before the

adoption of ASU 2016-09) .......................................................................................... 40 3.6.16A Excess tax benefit from share-based payment awards (after the adoption

of ASU 2016-09) ........................................................................................................ 40 3.6.17 Cash flows related to hedging activities ........................................................................ 40 3.6.18 Insurance claim proceeds (before the adoption of ASU 2016-15) .................................. 41 3.6.18A Insurance claim proceeds (after the adoption of ASU 2016-15) ..................................... 41 3.6.19 Debt prepayment or extinguishment costs (after the adoption of ASU 2016-15) ............ 42 3.6.20 Settlement of zero-coupon debt instruments (after the adoption of ASU 2016-15) .............. 42 3.6.21 Consideration of accrued capital expenditures (updated June 2019) ............................. 42 3.7 Noncash investing and financing activity (updated June 2019) .............................................. 43 3.7.1 Renewals of loans and deposits....................................................................................44 3.7.2 Collections -- not-for-profit entities ............................................................................... 44 3.8 Cash flows from discontinued operations .............................................................................. 44 3.8.1 Income tax effects of discontinued operations .............................................................. 46 3.8.2 Disclosures -- cash flows from discontinued operations..................................................46 3.9 Insurance company cash flow classification ........................................................................... 47 3.9.1 Cash and cash equivalents ........................................................................................... 47 3.9.2 Separate accounts ...................................................................................................... 48 3.9.3 Presenting investing activities......................................................................................48

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3.9.4 3.9.5 3.9.6

Universal life insurance ............................................................................................... 48 Policy acquisition costs................................................................................................49 Fund withheld coinsurance .......................................................................................... 49

4 Cash flow presentation of certain financial instruments.............................................. 50

4.1 Overview ............................................................................................................................. 50 4.2 Derivatives .......................................................................................................................... 50

4.2.1 Cash flows related to hedging activities ........................................................................ 50 4.2.2 Trading derivatives ..................................................................................................... 51 4.2.3 Derivatives with financing elements ............................................................................. 51 4.2.4 Settlement of derivatives with no initial investment....................................................... 52 4.2.5 Termination payment/receipt of forward-starting swap hedging

forecasted issuance of fixed-rate debt .......................................................................... 52 4.2.6 Forward placement commitment contracts and when-issued securities .......................... 53

4.2.7 Put and call options and standby commitments............................................................. 54 4.2.8 Fair value option for financial assets and liabilities......................................................... 55 4.3 Loan fees and costs (updated June 2019).............................................................................55 4.4 Securities lending ................................................................................................................ 55

5 Reporting cash flows from operating activities .......................................................... 56

5.1 Overview ............................................................................................................................. 56 5.2 Direct method......................................................................................................................57

5.2.1 Indirectly determining amounts of major classes of cash flows.......................................59 5.3 Indirect method ................................................................................................................... 61

6 Statement of cash flows for a commercial company ................................................... 63

6.1 Complete statement of cash flows -- indirect method ............................................................. 63 6.2 Operating cash flows using the direct method........................................................................ 68

7 Foreign currency cash flows ..................................................................................... 70

7.1 Overview ............................................................................................................................. 70 7.2 Presenting the effects of exchange rate changes (translation)................................................70

7.3 Alternatives to the consolidating approach ............................................................................ 73 7.4 Preparing and translating a foreign currency statement of cash flows.....................................73

7.5 Foreign subsidiaries that have their parent's functional currency............................................76 7.5.1 Highly inflationary economies ...................................................................................... 77

A Index of ASC references in this publication ...............................................................A-1

B Glossary ................................................................................................................. B-1

C Abbreviations used in this publication ...................................................................... C-1

D Summary of important changes ............................................................................... D-1

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