Investing and financing activities that affect recognized assets or liabilities but that do not result in actual cash receipts or payments should be disclosed as noncash investing and financing activities. Such disclosures should be summarized in a schedule or in narrative form on the face of the statement of cash flows or in another section of the financial statements that refers to the statement of cash flows. Some examples of noncash investing and financing activities include:
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Converting debt to equity.
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Acquiring long-lived assets through the assumption of directly related liabilities (e.g., purchasing a building by incurring a mortgage to the seller).
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Obtaining an asset through a capital lease (under ASC 840) or a finance lease (under ASC 842) and sale-leaseback transactions, when less than the full amount of the consideration is paid/received as of the closing date. (See Sections 7.6.1.1, 7.6.1.3, and 7.6.3 for further discussion of seller financing and lease transactions.)
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Receiving a building or other asset as a gift.
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Exchanging noncash assets (e.g., inventory or accounts receivable) or liabilities for other noncash assets or liabilities.
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A transferor’s beneficial interest obtained in a securitization of financial assets.
Example 5-1
Company A acquired 100 percent of the common stock of Company B in exchange for issuing 10,000 shares of A’s stock. Because the acquisition of B involved no cash consideration, the transaction should be disclosed as a noncash investing (acquisition of B) and noncash financing (issuance of A’s stock) transaction. Disclosure may consist of a narrative or be summarized in a schedule.
In addition, A would generally classify B’s acquired cash and cash equivalents, if any, as an investing activity in the statement of cash flows. In certain circ*mstances, however, the predominant source of cash acquired in a business combination may be more appropriately characterized as financing (e.g., if B had recently issued debt and the acquired cash balance largely comprised the proceeds from that borrowing). See Section 6.4 for a discussion of transactions with more than one class of cash flow.
To the extent that a transaction includes both cash and noncash components, an entity should disclose the noncash component of the transaction and present the cash component in the statement of cash flows.
As discussed above, acquisitions paid for by stock that are accounted for as business combinations under ASC 805 are considered noncash investing and financing activities and should be disclosed in a narrative or summarized in a schedule in the financial statements. Correspondingly, acquisitions paid for in part by cash and in part by stock are split between the cash and noncash aspects of the transaction. Only the cash portion is reported as an investing activity in the statement of cash flows. The stock portion is disclosed in a manner consistent with that discussed above. The amount of cash paid, net of the acquiree’s cash and cash equivalents, is presented as an investing cash outflow. Consider the following examples:
Example 5-2
Company A acquires Company B for 10,000 shares of A’s stock (fair value of $100 per share) and $150,000 of cash. Company B’s net assets have a fair value of $1.15 million, which includes $50,000 of cash and cash equivalents. Company A reflects the transaction in its statement of cash flows and related disclosures as follows:
Noncash investing and financing activity of $1 million.
Investing cash outflow of $100,000 for cash paid in acquisition, net of cash acquired.
Example 5-3
Company A divests one of its subsidiaries (Subsidiary B) to Company C in exchange for all shares that C owns in A. The fair value of C’s shares owned in A is $300 million, and B’s fair value is $150 million. Because the fair value of the treasury stock reacquired is greater than the fair value of the disposed-of business, A infuses an additional $150 million in cash into B before ownership of B is transferred to C. When combined with $10 million in cash already held by B, the total amount of cash transferred as part of B’s divestiture is $160 million. The $10 million of cash held by B before the $150 million cash infusion represents a normal level of (or regular) working capital cash used in B’s operations. Therefore, the substance of this transaction essentially consists of (1) an exchange of A’s shares held by C for the $150 million in cash (i.e., the amount of the cash infusion) and (2) the divestiture of B in exchange for the remaining shares of A’s stock held by C.
As a result, A would generally reflect the transaction in its statement of cash flows and related disclosures as follows:
The $150 million in cash that is infused into B is considered a share repurchase of A’s stock from C andthus should be classified as a financing activity.
The $10 million in regular working capital cash held by B before the cash infusion and transferred to C in the divestiture shouldbe classified as an investing activity.
The remainder — namely the noncash net assets of B transferred to C in exchange for the remainingnumber of A’s shares owned and held by C — should be treated as a noncash investing and financing activity and disclosed.
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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.
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