Navigating a principles-based standard

Because ASC 230 is largely principles-based, financial statement preparers must exercise significant judgment when classifying certain cash receipts and payments in their statement of cash flows. Given the lack of prescriptive rules, cash flow presentation continues to challenge financial statement preparers, as noted in recent statements made by regulators. As a result, the FASB has continued to evaluate issues related to the presentation of cash receipts and payments in the statement of cash flows.

Digital Assets

Other than the guidance in ASU 2023-08 (discussed below), there is no explicit guidance in US GAAP on the accounting for digital assets, including how an entity classifies its receipts of and payments for such assets in the statement of cash flows. As a result, an entity must apply judgment when classifying cash flows associated with transactions involving such assets. These transactions commonly include purchases and sales of crypto assets, crypto asset safeguarding, and crypto asset lending.

Changing lanes

In December 2023, the FASB issued ASU 2023-08, which addresses the accounting and disclosure requirements for certain crypto assets. The ASU provides guidance on, among other topics, cash flow presentation related to the sale of crypto assets received as noncash consideration in the ordinary course of business. For all entities, the ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

For more information about the ASU and the presentation of certain digital asset transactions in the statement of cash flows, see Deloitte’s Roadmap Digital Assets.

Constructive receipt and disbursement

An entity may enter into arrangements in which cash is received by or disbursed to another party on behalf of the entity. Although these arrangements may not result in a direct exchange of cash to or from the entity, the same economic result is achieved if cash is received by or disbursed to the entity directly (i.e., constructive receipt and constructive disbursement, respectively). Because ASC 230 does not address constructive receipt and disbursement, an entity will need to use judgment when determining the substance of the arrangement to present the cash flows of the arrangement.

For example, a company may purchase real estate by taking out a mortgage with a third-party financing entity. In some cases, the third-party lender will not deposit cash into the company’s bank account but will electronically wire cash directly to an escrow account at the closing of the transaction, which in turn is wired directly to the seller. Since the third-party lender is acting as the buyer’s agent and transfers the proceeds of the mortgage directly to the escrow agent on behalf of the buyer, the substance of the transaction is that the buyer received the proceeds of the mortgage as a financing cash inflow and disbursed the purchase price of the real estate as an investing cash outflow. Accordingly, the transaction should be presented in such a manner in the company’s statement of cash flows.

Looking ahead—Standard Setting

Recent FASB Activity

In November 2023, the FASB added to its technical agenda a project on the statement of cash flows in response to feedback indicating that improvements to financial institutions’ statement of cash flows are needed to provide investors with more decision-useful information. For example, users of financial institutions’ financial statements indicated that the existing framework that outlines operating, investing, and financing cash flows fails to effectively reflect the complexities of such institutions’ operations. Other commenters expressed a desire for improved disclosures related to changes in working capital. Further, the project is aimed at reorganizing and disaggregating the information in the statement of cash flows for financial institutions (e.g., a requirement for such entities to separately disclose the amount of cash interest income received). In addition to this project on the statement of cash flows, the FASB is exploring improvements to the statement of cash flows more broadly in a project on its research agenda.

Moreover, in January 2025, the FASB released an invitation to comment (ITC) that requests feedback from stakeholders on the Board’s future standard-setting agenda. The Board hopes that such feedback will enable it to reduce complexity and costs while improving the usefulness of the financial information provided to investors. The ITC includes the following question related to the statement of cash flows:

Question 52: Should the FASB pursue a project on the statement of cash flows? If yes, which improvements, if any, are most important? Should the FASB leverage the current guidance in Topic 230, Statement of Cash Flows? If yes, would it be preferable to retain the direct method, the indirect method, or both? Should this potential project be a broad project applicable to all entities that provide a statement of cash flows or limited to certain entities or industries? Please explain. [Footnote omitted]

Comments on the ITC are due by June 30, 2025.

Connecting the Dots

In discussing the statement of cash flows at the 2024 AICPA & CIMA Conference on Current SEC and PCAOB Developments, Mr. Munter invited stakeholders to provide thoughtful feedback related to the FASB’s current research project on this topic. He noted that he supports the FASB’s efforts to improve consistency and comparability in this area (e.g., cash flow classification, information about noncash transactions). Mr. Munter also highlighted the need to “dig deeper” into stakeholder feedback to better understand investors’ informational needs. For example, he noted that he has heard some investors say that the direct-method cash flow statement is unnecessary and others say that they want more information about certain cash flows, including cash collected from customers, cash paid to employees, and cash paid to suppliers and other creditors.