6.9 Supplementary cash flow information – updated May 2024
In addition to the presentation of cash flows, ASC 230 requires supplementary cash flow information, which includes disclosure of interest and income taxes paid as well as noncash investing and financing activities.
6.9.1 Income taxes paid (after adoption of ASU 2023-09)
ASC 230-10-50-2A requires income taxes (net of refunds received) to be disclosed in accordance with ASC 740-10. Refer to FSP 16.7 for guidance on disclosure requirements under ASC 740.
6.9.1A Income taxes paid (before adoption of ASU 2023-09)
As discussed in ASC 230-10-50-2, when the indirect method is used, amounts of interest paid (net of amounts capitalized) and income taxes paid during the period must be disclosed, either on the face of the statement of cash flows or in the footnotes.
Questions have arisen as to whether cash flows that result from the sale or purchase of transferable credits (received from or paid to third parties) should be included in the supplemental income taxes paid disclosure. Given the lack of explicit guidance in this area and pending any further guidance, we believe a reporting entity can choose to either include or exclude these third-party amounts when determining the amount of income taxes paid to disclose. If these amounts are included, the reporting entity should transparently disclose the amounts that relate to the sale or purchase of transferable credits.
6.9.2 Interest paid
As discussed in ASC 230-10-50-2, when the indirect method is used, amounts of interest paid (net of amounts capitalized) during the period must be disclosed, either on the face of the statement of cash flows or in the footnotes.
6.9.3 Noncash investing and financing activities
ASC 230 requires separate disclosure of all investing or financing activities that do not result in cash flows. This disclosure may be in a narrative or tabular format. The noncash activities may be included on the same page as the statement of cash flows, in a separate footnote, or in other footnotes, as appropriate.
Following the principles in ASC 230-10-50-3 through 50-6, the following are noncash investing and financing transactions:
- Converting debt to equity
- Acquiring productive assets by assuming directly related liabilities
- Obtaining a right-of-use asset in exchange for a lease liability
- Obtaining a beneficial interest as consideration for transferring financial assets (excluding cash), including the transferor’s trade receivables (commonly referred to as a holdback or deferred purchase price)
- Obtaining a building or investment asset as a gift
- Exchanging noncash assets or liabilities for other noncash assets or liabilities
Other examples include:
- Issuing stock in connection with a stock compensation plan where no cash payment is required
- Acquiring a business through the issuance of stock
- Acquiring productive assets not yet paid for
Separately, reporting entities may undertake transactions in which cash is received or disbursed on its behalf by another entity. ASC 230 does not address these situations. As explained in FSP 6.9.3.1, we believe a reporting entity may be able to recognize those cash flows as if they had received or disbursed the cash from its bank account under a constructive receipt and disbursement concept.
Example FSP 6-15 and Example FSP 6-16 demonstrate the identification and presentation of noncash investing and financing activities.
EXAMPLE FSP 6-15
Noncash investing or financing activity — purchased equipment not yet paid for
On December 20, 20X1, FSP Corp purchases and takes title to equipment costing $100, and accordingly debits property, plant, and equipment and credits accounts payable. As of December 31, 20X1, FSP Corp has not yet made cash payment to settle the accounts payable.
How should the equipment acquisition be reflected in FSP Corp’s December 31, 20X1 statement of cash flows?
Analysis
Until FSP Corp has made a cash payment related to the equipment, the equipment acquisition is a noncash activity that should not be reflected in the statement of cash flows. Understanding if FSP Corp’s equipment acquisition is a noncash investing or financing activity requires an understanding of the words “soon before or after purchase” and evaluation of whether seller financing was provided. Regardless, it would be incorrect to include a $100 investing outflow and a corresponding $100 operating inflow (created by the increase in accounts payable as a reconciling item using the indirect method of presentation) in FSP Corp’s December 31, 20X1 statement of cash flows because neither of those cash flows occurred.
EXAMPLE FSP 6-16
Noncash investing and financing activity — equipment partially financed by a note
FSP Corp acquires computer equipment for $100 cash and a $400 installment note payable to the seller. Providing installment notes payable to its customers is not a normal trade term for the seller.
How should the $100 cash payment be recorded in the statement of cash flows? How should the $400 installment note payable to the seller be reflected?
Analysis
The $100 cash payment should be reported as an investing activity outflow and included with purchases of property, plant, and equipment. The noncash investing and financing transaction of $400 should be disclosed.
The subsequent principal payments on the debt should be classified as financing cash outflows, whereas the payments of interest on the debt should be classified as operating cash flows.
Alternatively, if the $400 was borrowed from a third-party lender who agrees to disburse the funds either to the buyer or the seller at the direction of the buyer, the loan would be a financing cash inflow and the full purchase price of the equipment would be an investing cash outflow.
6.9.3.1 Constructive receipts and disbursements
Numerous processes and protocols have developed in which financial institutions or other entities act as quasi-agents on behalf of reporting entities in regard to transfers of cash. Thus, a reporting entity may have certain transactions that do not result in an exchange of currency or an entry into its cash account, but for which the same economic results are obtained as if an exchange of currency or an entry into its cash account had occurred. In these situations, the question arises as to whether the transactions should be reflected as a noncash activity or if the reporting entity should gross up its statement of cash flows to reflect that cash was constructively received and disbursed.
If an arrangement is made whereby a cash disbursement is made by a third party (e.g., a financial institution) on behalf of the reporting entity to satisfy the reporting entity’s obligation to another party (e.g., a vendor), we believe the substance of the transactions and its constructive cash flows should be reported in the statement of cash flows. Therefore, a reporting entity should include cash flows received or paid by a third party on behalf of the reporting entity as though the transaction took place through the bank accounts of the reporting entity.
For example, assume a reporting entity engages a transfer agent to assist in the simultaneous borrowing under a new loan with Lender B and the payoff and retirement of an existing loan with Lender A. The new debt proceeds from Lender B are sent to the transfer agent, and from the transfer agent to Lender A. Neither the new loan proceeds nor the old loan payoff enter or leave the reporting entity’s bank account. In this situation, the reporting entity should gross up its statement of cash flows to reflect that cash was constructively received from Lender B (a financing inflow) through the reporting entity’s agent, and then this same cash was constructively disbursed to Lender A in the form of principal and interest (a financing outflow and operating outflow).
Another example of constructive receipt and disbursement is when a reporting entity obtains financing from a bank which is immediately used to pay a vendor payable. If the reporting entity instructs the bank to pay the vendor directly on its behalf, the reporting entity should reflect a financing inflow for the receipt of the debt proceeds and an operating outflow for the payment of the vendor payable.
Disclosing Non-Cash Investing and Financing Activities
Understanding how to disclose non-cash investing and financing activities is crucial. Discover how disclosures occur, how to report them, and why it’s essential to become familiar with them.
Table of Contents
- Reasons & Methods of Disclosure
- Disclosure or Reporting
- Examples of Methods of Disclosure
- Why Disclosure Is Important
- Lesson Summary
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Reasons & Methods of Disclosure
As the name suggests, non-cash investing and financing activities involve the use of financial tools other than cash to make an investment or purchase. Examples of non-cash spending include taking out a loan or signing a note payable. While these transactions need to show the associated assets and liabilities on the balance sheet, they will not show on the statement of cash flows.
Let’s look at a common example. Imagine that you own a construction business, and you need another truck. You go to the local truck dealership and buy the perfect truck for your business. However, instead of writing a check, you take out a loan from the dealership. Your loan is approved and you drive away with the truck, but you haven’t exchanged any cash. The terms of your loan dictate that you’ll be spending money to pay back this purchase every month until the terms of the loan are fulfilled. However, the purchase will definitely impact your business. It’ll allow you to accomplish more work and earn even more money.
Information about non-cash investing and financing activities is useful for determining how financially healthy a business or other organization is. Non-cash investing and financing activities can impact a business’ performance and may need to be analyzed to help determine future performance. The impact of non-cash investing and financing activities on an organization can be seen in revenues, profits, and cash flow.
Because these activities are very important to decision makers and the organization, the General Accepted Accounting Principles (GAAP), a set of reporting regulations for the accounting industry, requires that these activities are recorded if they are significant. In some cases, this recording may be referred to as ‘disclosure.’
Disclosure or Reporting
Normally, transactions involving the generation or use of cash are recorded in the statement of cash flows, but since we’re looking at non-cash transactions, we cannot use the exact same technique.
Instead, to record a non-cash investing and financing activity, you should include a footnote on the bottom of the statement of cash flows or in the notes of the financial statements. You can also disclose the non-cash investing and financing activity in a separate schedule or list.
It is also important to report any assets and liabilities created by these non cash transactions on the financial statements, particularly the balance sheet. In our example the truck is an asset since we have the title, and the loan is a liability since we owe money to the bank. It must also be disclosed in the financing section of the cash flow statement.
Examples of Methods of Disclosure
Let’s talk about specific techniques for reporting your non-cash investing and financing activities. Returning to the previous example, you can see how you could disclose the fact that you bought a truck.
Disclosure should appear at the bottom of the statement of cash flows. Let’s say you have a statement of cash flows that has information about how much cash you have that looks like this:
| Net increase in cash during the year | $98,000 |
| Total Cash at the beginning of the year | $20,000 |
| Total Cash at the end of the year | $118,000 |
To report your non-cash investing and financing activity, you’d simply include a line item underneath this information with a defining statement about the non-cash investing and financing activity that would look something like this:
| Non-cash investing and financing activities | |
| Purchase of truck needed for business | $50,000 |
If you want to use disclosure in a separate note, you could simply attach an addendum that looks something like this:
| Note A: Significant Non-cash transactions | The company engaged in the following significant non-cash investing and financing transactions |
| Purchase of truck | $50,000 |
Of course once the contractor takes possession of the truck, he has a liability for the loan and it must be properly reported in the balance sheet and cash flow statement.
Why Disclosure Is Important
So, why all this fuss about disclosing? Simply put, we disclose non-cash investing and financing activities because the information is important. These transactions will often be included on the balance sheet, but since no cash exchanged hands they will not show on the statement of cash flows. People who use an organization’s financial statements, such as owners, employees, shareholders, and financing organizations, need to have access to this information to get an accurate picture of an organization’s financial situation.
As an owner of a business, you can see why it’s important to understand the financial implications of purchasing and making monthly payments on a truck. If you were to decide that you needed a large loan to buy a larger office building, a bank would want to review your financial statements to see if you’re capable of paying back that amount of money.
If your recent truck purchase wasn’t disclosed, the bank may not realize you have a monthly payment for your truck, which lowers the available cash that you could use to pay the bank back. Failing to disclose this information could have legal consequences.
Lesson Summary
Now you see why it’s so important to report your non-cash investing and financing activities. You may not have used cash to buy your truck, but that doesn’t mean it wasn’t an important purchase, and the people who look at your financial statements need to know about it. The people who look at an organization’s financial statements can include owners, employees, shareholders, and financing organizations. Not only is it a good idea to disclose non-cash investing and financing activities, the General Accepted Accounting Principles (GAAP), a set of reporting regulations for the accounting industry, requires it. The various methods of disclosure include using footnotes at the bottom of the statement of cash flows, including it in a separate note, or by listing the items in a schedule.
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