Solution 1 — Classification with the Statement of Cash Flows Buck should present the borrowing and payment activity as a cash flow from financing activities. ASC 230-10-45-14 states that “proceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing” are a cash inflow from financing activities. Similarly, ASC 23010-45-15 states that “repayments of amounts borrowed” are a cash outflow for financing activities.
Solution 2 — Gross versus net presentation
Net presentation is appropriate. Buck may classify the activity as a $50 million net cash inflow ($100 million in total draws less the $50 million repayment) within the financing activities section of the statement of cash flows.
Buck’s activities in Scenario 1 are broadly consistent with the requirements for net presentation under ASC 230-10-45-8 and 45-9. Specifically, the draws and payments on the facility can be considered large in relation to the maximum borrowing capacity (Buck actually reached its maximum borrowing capacity before making any repayments). The volume of the transactions is assumed to be large (note, in practice, this determination typically involves judgment and is dependent upon individual facts and circumstances). In addition, the terms of both draws stipulate that all amounts are due on demand; therefore, Buck should consider the draws as having original maturities of three months or less. ASC 230-10-45-9 only permits net presentation when borrowings have original maturities of three months or less.
The activity related to Buck’s first draw and subsequent repayment should be presented on a gross basis within the financing activities section as a $60 million inflow for the draw on July 15, 2010, and a $60 million outflow for the repayment on December 15, 2010. The activity related to Buck’s second draw and subsequent repayment may be presented on a net basis within the financing activities section. The $40 million draw on September 30, 2010, and the repayment on December 1, 2010, net to zero for annual reporting purposes. Buck’s activities related to both of the draws in Scenario 2 once again reflect some of the characteristics within the cash flow statement guidance.
The transactions can be considered large in relation to the maximum borrowing capacity, and the volume of activity is assumed to be large (note, in practice, these determinations typically involve judgment and are dependent upon individual facts and circumstances). Unlike Scenario 1, the terms of the draws do not consider the draws to be due on demand to Buck’s bank. Rather, the first draw has an original maturity of six months, and the second draw has an original maturity of three months or less. Therefore, in accordance with ASC 230-10-45-9, Buck must present the activity related to the first draw on a gross basis because the original maturity is greater than three months. In turn, net presentation is appropriate for the second draw since it has an original maturity of three months or less.
Buck should present all borrowing and payment activity under the Facility on a gross basis within the financing activities section of the statement of cash flows. The draws on the Facility do not have any specific repayment provisions other than the overall expiration date of the Facility as of December 31, 2012. While the activity does have some of the factors needed to
consider net presentation, including large dollar amounts in relation to the maximum borrowing capacity and large volumes of transactions (see notes in Scenarios 1 and 2 above), the draws do not have an original maturities of three months or less. Under the provisions of Scenario 3, the only activities that Buck could potentially present net within its statement of cash flows are transactions occurring on or after October 1, 2012. Said differently, only draws occurring within three months of the Facility’s expiration would be considered to have original maturities of three months or less.
Solution 3 — IFRSs
Under IFRSs, IAS 7 is the primary source of guidance for determining how to present information about the cash flows of an entity within the financial statements. IFRSs and U.S. GAAP are broadly consistent regarding net versus gross presentation. Similar to U.S. GAAP, IFRSs generally require entities to present information about an entity’s amounts of cash receipts and cash payments during a period on a gross basis. However, in certain circumstances, IFRSs permit certain cash flow activities to be presented on a net basis. Paragraph 22(b) of IAS 7 states that cash flows may be reported on a net basis when “cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.” This guidance is generally consistent with the provisions of ASC 230-1045-8. Further, paragraph 23A of IAS 7 provides the following examples of cash receipts and payments that may be presented net under the criteria set forth in paragraph 22(b):
a. principal amounts relating to credit card customers;
b. the purchase and sale of investments; and
c. other short-term borrowings, for example, those which have a maturity period of three months or less.
Accordingly, under IFRSs, an entity’s cash inflows and outflows associated with a revolving line of credit may potentially be presented on a net basis within the financing activities section of the statement of cash flows, provided the aforementioned criteria are met. Therefore, the conclusions under IFRSs for each scenario in this case would be consistent with that reached under U.S. GAAP.