A Roadmap to the Preparation of the Statement of Cash Flows May 2020 The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. 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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. iv Contents Preface viii Contacts x Chapter 1 — Overview 1 Chapter 2 — Scope 2 Chapter 3 — Format and Presentation 4 3.1 Form and Content of the Statement of Cash Flows 4 3.2 Gross and Net Cash Flows 6 3.2.1 Situations in Which Net Presentation May Be Appropriate 7 3.3 Presentation of Discontinued Operations 8 Chapter 4 — Cash and Cash Equivalents 12 4.1 Definition of Cash and Cash Equivalents 12 4.1.1 Restricted Cash 13 4.1.1.1 Balance Sheet Presentation of Restricted Cash 13 4.1.1.2 Presentation of Restricted Cash in the Statement of Cash Flows 14 4.1.1.3 Reconciliation of Cash, Cash Equivalents, and Amounts Generally Described as Restricted Cash or Restricted Cash Equivalents for an Interim Reporting Period 16 4.1.2 Classification of Interest Earned on Restricted Funds 16 4.2 Book and Bank Overdrafts 17 4.2.1 Balance Sheet Considerations 17 4.2.1.1 Book Overdrafts 17 4.2.1.2 Bank Overdrafts 19 4.2.2 Considerations Related to the Statement of Cash Flows 19 4.3 Centralized Cash Management Arrangements (“Cash Pools”) 19 4.4 Money Market Funds 21 4.5 Variable-Rate Demand Notes 22 4.6 Auction Rate Securities 23 4.7 Credit and Debit Card Receivables 23 Chapter 5 — Noncash Investing and Financing Activities 24 v Deloitte | A Roadmap to the Preparation of the Statement of Cash Flows (2020) Chapter 6 — Classification of Cash Flows 26 6.1 Investing Activities 26 6.1.1 Securities Lending 27 6.1.2 Distributions From Equity Method Investments 28 6.1.3 Property, Plant, and Equipment Acquired on Account 30 6.1.4 Securities 32 6.1.4.1 Debt Securities 32 6.1.4.2 Equity Securities 33 6.1.5 Company- and Bank-Owned Life Insurance Policies 33 6.2 Financing Activities 34 6.2.1 Debt Extinguishments and Modifications 35 6.2.2 Transactions With Noncontrolling Interest Holders 36 6.2.3 Debt Issue Costs 37 6.2.4 Advance Payments Received From Customers 37 6.3 Operating Activities 38 6.3.1 Long-Term Trade Receivables 39 6.3.2 Cash Proceeds From Insurance Claims 40 6.3.3 Planned Major Maintenance 40 6.3.4 Employee Benefit Plans 41 6.4 More Than One Class of Cash Flows 42 6.4.1 Classification of Cash Flows for Emission Allowances and Related Transactions 45 6.4.2 Classification 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 6.4.3 Debt Instruments That Contain Interest Payable in Kind 50 6.5 Changes to Historical Classification 51 Chapter 7 — Common Issues Related to Cash Flows 52 7.1 Foreign Currency Cash Flows 52 7.2 Constructive Receipt and Disbursement 53 7.3 Stock Compensation 54 7.3.1 Cash Received Upon Early Exercise of a Share-Based Payment Award 55 7.3.2 Income Tax Effects of Share-Based Payment Awards 55 7.3.3 Settlement of Equity-Classified Share-Based Payment Awards 55 7.3.4 Settlement of Liability-Classified Share-Based Payment Awards 56 7.3.5 Remittances of Minimum Statutory Withholding on Share-Based Payment Awards 57 7.4 Derivatives 58 7.4.1 Hedging Derivatives 58 7.4.2 Nonhedging Derivatives 59 7.4.3 Other Nonhedging Derivatives 60 7.5 Business Combinations 61 7.5.1 Presentation of Acquisition-Related Costs 62 7.5.2 Settlement of Acquired Liabilities After a Business Combination 62 vi Contents 7.5.3 Debt in a Business Combination 62 7.5.4 Contingent Consideration in a Business Combination 63 7.5.4.1 Contingent Consideration Classified as a Liability 64 7.5.4.2 Contingent Consideration Classified as Equity 66 7.5.4.3 Unit-of-Account Considerations 66 7.5.5 Acquired IPR&D Assets With No Alternative Future Use 67 7.6 Leases 68 7.6.1 Initial and Subsequent Recognition of Leases 69 7.6.1.1 Capital Leases 69 7.6.1.2 Operating Leases 69 7.6.1.3 Lessee Presentation 69 7.6.1.4 Lessor Presentation 74 7.6.2 Lease Incentives 74 7.6.3 Sale-Leaseback Transactions 75 7.6.4 Termination Costs Received From the Lessor 75 7.6.5 Payments for Land-Use Rights 76 7.7 Deferred Costs 77 7.8 Government Grants 77 7.8.1 Capital Grant 78 7.8.2 Income Grant 79 7.9 Classification of Cash Flows Related to Beneficial Interests in Trade Receivables 80 7.9.1 Application of ASU 2016-15 to the Sale of Trade Receivables to Multiseller Commercial Paper Conduit Structures 80 7.10 Classification of Cash Flows for Repurchase Agreements and Reverse Repurchase Agreements 82 7.11 Assets Held for Sale 83 7.12 Cloud Computing Arrangements 83 7.13 Supplier 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 vii 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; seeSection 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.