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Year-end toolkit: Cash flow classification · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PwC's National Office.
• 0:07
  SPEAKER_03: Hello, and welcome back to PWC's Accounting Podcast.
• 0:10
  SPEAKER_03: I'm Heather Horn.
• 0:12
  SPEAKER_03: Today's episode is our next installment in our year-end miniseries, which covers a wide range of topics designed to help you through the year-end reporting process.
• 0:20
  SPEAKER_03: In today's episode, we're turning our attention to the statement of cash flows and the practical challenges and key judgments that come with preparing it.
• 0:28
  SPEAKER_03: We've released an episode on this topic at year-end for several years now, and each year it ends up being one of our most popular episodes.
• 0:35
  SPEAKER_03: So even if this isn't your year-end, there's almost certainly something new you'll take away from this discussion.
• 0:44
  SPEAKER_03: Joining us today for the conversation, I'm happy to welcome Chris Trudeau, a partner, and Suzanne Stefani, a director, both in PWC's national office, who spent a lot of time focusing on the statement of cash flows.
• 0:55
  SPEAKER_03: And I'm also happy to welcome back to the podcast Diane Stoltzfiss, also a partner in our national office, as the guest host for today's episode.
• 1:03
  SPEAKER_03: With that, let's get started.
• 1:05
  SPEAKER_04: Chris, Suzanne, thanks for joining me today to talk about the statement of cash flows.
• 1:10
  SPEAKER_04: This is another episode in our year-end miniseries designed to help companies prepare for year-end reporting.
• 1:16
  SPEAKER_04: But even if you're not closing out year-end, there's still plenty here to take away.
• 1:20
  SPEAKER_04: Cash flows is a topic we come back to every year, and for good reason.
• 1:24
  SPEAKER_04: It continues to be top of mind for the SEC.
• 1:27
  SPEAKER_04: It's a critical tool for investors, and it's an area where we see lots of questions in the national office.
• 1:32
  SPEAKER_04: The FASB is also looking at some targeted improvements.
• 1:36
  SPEAKER_04: And notably, it's been one of the top five areas of restatement for the past 20 years.
• 1:42
  SPEAKER_04: With all that in mind, let's start with restatements.
• 1:45
  SPEAKER_04: I know from speaking with you both that there isn't necessarily a specific classification topic that's driving this.
• 1:52
  SPEAKER_04: It's more of a controls and process-related issue.
• 1:55
  SPEAKER_04: Chris, what practical tips would you share with preparers to help avoid this issue?
• 2:00
  SPEAKER_01: Thanks, Diana.
• 2:01
  SPEAKER_01: Yeah, if you maybe listen to some of our podcasts in the past, you may feel like I'm uh repeating myself because I am.
• 2:08
  SPEAKER_01: Um, but you know, it's kind of the, as we say, like the basic blocking and tackling.
• 2:13
  SPEAKER_01: Um, a lot of times the cash flow statement is kind of the secondary statement in the view of um a lot of people.
• 2:21
  SPEAKER_01: And so it doesn't necessarily get the same rigor when you talk about controls and process that, say, the balance sheet and the income statement get.
• 2:29
  SPEAKER_01: Um I think that leads to, you know, certainly some of the uh the issues that come up.
• 2:34
  SPEAKER_01: A lot of times it's the kind of last thing in the reporting process.
• 2:38
  SPEAKER_01: Um, a lot of times it's a different team or or individual that's preparing the cash flow statement, um, especially when you compare it to, say, the actual transactions, right?
• 2:48
  SPEAKER_01: Think about like an unusual transaction or a non-recurring transaction that comes up.
• 2:53
  SPEAKER_01: I think a lot of times there's a lot of focus on what's the accounting.
• 2:56
  SPEAKER_01: And by the accounting, I mean the measurement and the recognition of the particular transaction.
• 3:02
  SPEAKER_01: And not all the time does it go all the way to say, and those, so therefore, what is the cash flow impact of that?
• 3:09
  SPEAKER_01: And then the person that or group that's preparing the cash flow statement doesn't have the benefit of all those conversations or analyses that were done around the transaction itself and maybe loses a little bit of that knowledge.
• 3:23
  SPEAKER_01: Um, I know when Suzanne and I answer a lot of cash flow questions, you know, a lot of times our first question is, well, how's the transaction accounted for?
• 3:33
  SPEAKER_01: Because that helps understand and helps drive then maybe where in the cash flow statement it should go.
• 3:39
  SPEAKER_01: Um, you know, a detailed understanding of the accounting is really helpful in thinking about what the proper cash flow classification is.
• 3:46
  SPEAKER_04: Okay, that's really helpful, Chris.
• 3:48
  SPEAKER_04: So it's important to think about the whole transaction at once, both the accounting and the presentation implications, not thinking of them separately.
• 3:56
  SPEAKER_04: So this would be more efficient and hopefully prevent some of these last-minute fire drills we sometimes see around the cash flow statement.
• 4:03
  SPEAKER_04: This concept about thinking about the whole transaction and how it's reflected throughout the financial statements and the broader 10K is one of the themes that we've seen in some of the recent SEC comment letters.
• 4:15
  SPEAKER_04: Chris, I think it'd be helpful if you can share some examples of some of the comments that we've seen.
• 4:20
  SPEAKER_01: Sure.
• 4:21
  SPEAKER_01: So you're right.
• 4:22
  SPEAKER_01: Um there are have been a lot of um comments that have come up in this year and in past years around the cash flow statement.
• 4:28
  SPEAKER_01: Um one of the, if you want to call it a theme, like I'm not sure there's a lot of themes per se, um, but if you want to call it a theme, it's consistency.
• 4:36
  SPEAKER_01: And what I mean by that is um the SEC may be reading the financials and you know, we'll come back to the uh unusual or or non-recurring transaction, right?
• 4:47
  SPEAKER_01: Because that tends to get a lot of disclosure and transparency throughout the financial statements.
• 4:51
  SPEAKER_01: And so they'll see, you know, XYZ disclosed in one section, and they'll say, Oh, let's see what is in the cash flow statement.
• 4:59
  SPEAKER_01: And they either can't find it in the cash flow statement or the numbers are different in the cash flow statement versus what was disclosed.
• 5:05
  SPEAKER_01: And it could be a very valid reason for that.
• 5:08
  SPEAKER_01: Um, but the SEC will ask the question like, like, why was it X over here, but in the cash flow statement it's Y, or it's not even in the cash flow statement.
• 5:16
  SPEAKER_01: So one thing that we may recommend is to think about um if there are kind of either inconsistencies or it's just not apparent on the, you know, why the cash flow would be consistent with the disclosure, is think about a little bit more transparency around the transaction and maybe bridging that gap.
• 5:34
  SPEAKER_01: So I think at the end of the day, that's all it is.
• 5:35
  SPEAKER_01: It's just a, you know, there's a non-cash piece to it.
• 5:38
  SPEAKER_01: And so that's what's causing the the uh inconsistency between the two.
• 5:43
  SPEAKER_01: Um mDNA is another area.
• 5:45
  SPEAKER_01: Um now I know that's not necessarily, you know, from a you talk about the national office, we don't really deal with the mDNA portion of it per se.
• 5:52
  SPEAKER_01: But um, but we are aware that there's often a lot of comments around the mDNA.
• 5:56
  SPEAKER_01: And I think that gets down to more the purpose of the um disclosure in the MDNA.
• 6:00
  SPEAKER_01: It's usually in the liquidity section.
• 6:03
  SPEAKER_01: And oftentimes what the comment is is that the preparer simply restated everything that's in the cash flow statement in the liquidity section.
• 6:11
  SPEAKER_01: So if you think about it, not overly helpful because I can just read the cash flow statement.
• 6:15
  SPEAKER_01: Right.
• 6:15
  SPEAKER_01: I don't need you know the liquidity.
• 6:17
  SPEAKER_01: And the purpose of the liquidity is supposed to be more like what's going to impact your liquidity, you know, maybe even from a going forward perspective.
• 6:25
  SPEAKER_01: And so the comment is often to do more, um, you know, go beyond what's just in the cash flow statement, but really talk about what's driving your cash needs, what will drive your cash needs, and where are your sources of cash um coming from?
• 6:37
  SPEAKER_01: Um, that's the gist of what the comments are from the SEC or said differently, the recommendations on how to fix it going forward.
• 6:43
  SPEAKER_05: Right.
• 6:44
  SPEAKER_01: Um, and you know, what's interesting is we we've seen this year a lot of comments around um disaggregating the cash flow statement, specifically around the operating section.
• 6:54
  SPEAKER_01: So um you may be aware there's two choices in preparing the operating, the direct and the indirect method.
• 7:00
  SPEAKER_01: And for the 99.99% of the companies out there that use the indirect method, yeah, um, it's basically just a reconciliation from your net income to your operating cash flows.
• 7:10
  SPEAKER_01: There's not a lot of real guidance um in terms of like what must be disclosed when you're doing that, just that you need to reconcile and maybe some guidance around what is in the operating section.
• 7:23
  SPEAKER_01: But, you know, doesn't really say you must disclose in a fashion that says here's XYZ disaggregated out.
• 7:30
  SPEAKER_01: And I think consistent with the SEC conference in December, um, you know, the the SEC is looking for a little bit more in terms of the cash flow statement in general.
• 7:40
  SPEAKER_01: Um, but again, the comments are have been more on this reconciliation to, hey, if there are some significant items in there, break it out so the reader can actually understand a little bit more about what's going on.
• 7:52
  SPEAKER_04: Right.
• 7:52
  SPEAKER_04: I mean, I think to your point, Chris, the SEC continues to focus on the statement of cash flow as you mentioned in the conference, but you know, we've seen statements over the years from them as well, continuing to reiterate how important this statement is and how they want to make sure that investors are getting sufficient information to assess a company.
• 8:08
  SPEAKER_04: So definitely something for companies to think about as they prepare their cash flow statement this year.
• 8:13
  SPEAKER_04: So let's shift to some of the frequently asked questions we get in the national office.
• 8:18
  SPEAKER_04: We've seen a good deal of debt restructuring activity this year.
• 8:22
  SPEAKER_04: And with that, plenty of questions around how those transactions show up in the cash flow statement.
• 8:27
  SPEAKER_04: Suzanne, what are some of the common questions you're getting?
• 8:30
  SPEAKER_02: Yeah, um, a good deal of the questions that we get for debt restructuring in general, even for the accounting, is around syndicated debt restructurings, but for the cash flow too.
• 8:40
  SPEAKER_02: And I would say the the number one question is how do you present the new debt proceeds received and old debt repayment?
• 8:48
  SPEAKER_02: So typically, right, what we see is like a company will issue new debt, get the money, and take the proceeds and pay off old debt.
• 8:56
  SPEAKER_02: And it can get, it's not just always as simple as just, oh, you have a financing inflow and financing outlook.
• 9:02
  SPEAKER_02: Look, it's a little more tricky with syndicated.
• 9:05
  SPEAKER_02: And sometimes we're using agents like investment banks as agents and things like that.
• 9:09
  SPEAKER_02: So, like just maybe just a quick example or try.
• 9:12
  SPEAKER_02: And sometimes numerical examples are hard on these, but let's try.
• 9:15
  SPEAKER_02: So, say you're a company and you issue$150 million of new debt, and you immediately at the same time, same day, you're repaying existing debt, say like$50 million.
• 9:27
  SPEAKER_02: And really common, you're going to use some sort of investment banker to act as an agent to kind of facilitate all the payments rather than you getting all the payments in from all the different lenders.
• 9:37
  SPEAKER_02: So the agent will get all the proceeds from the$150 million of new debt, immediately take$50 out of that, out of those new proceeds and repay the old lenders.
• 9:47
  SPEAKER_02: Um, then they would send, if it was me doing it, they'd send me whatever's left over,$100 million.
• 9:53
  SPEAKER_02: So in my bank account at the end of the day, all I see is$100 million.
• 9:58
  SPEAKER_02: So the question is, how do you present it on the cash flow statement?
• 10:01
  SPEAKER_02: And I think like sometimes like kind of a knee-jerk reaction is, oh, I should just have a hundred million dollar financing inflow because that's what came into my bank account, right?
• 10:11
  SPEAKER_02: I didn't see the like the whole amount or like repay.
• 10:16
  SPEAKER_02: But what needs to be thought about here is we have an agent.
• 10:20
  SPEAKER_02: In my example, I have an agent, right?
• 10:21
  SPEAKER_02: An investment banker working for me to do these cash flows.
• 10:24
  SPEAKER_02: And whenever I have someone acting as an agent on my behalf, I have to kind of say look through them.
• 10:31
  SPEAKER_02: So, like whatever they do, the agent does as far as cash flows, it's as if I did it myself, right?
• 10:38
  SPEAKER_02: And so I should reflect all of that on the cash flow statement.
• 10:41
  SPEAKER_02: So in this case, I would say, okay, I have a financing inflow for the all the proceeds on the new debt, 150 and a separate line financing outflow for 50 million for the repayment.
• 10:54
  SPEAKER_02: So two lines, not the net, even though it does, I know it nets to 100, but like they have to be separate here.
• 11:00
  SPEAKER_02: And I'll I'll I'm gonna assume in this one that they're totally different lender groups too.
• 11:04
  SPEAKER_02: So there's no way to net, right?
• 11:05
  SPEAKER_02: Like with different counterparties.
• 11:07
  SPEAKER_02: So we just look through the agent.
• 11:08
  SPEAKER_04: Okay, got it.
• 11:09
  SPEAKER_04: So you look through the agent since the agent was paying different counterparties.
• 11:12
  SPEAKER_04: The amounts are presented as gross inflows and outflows.
• 11:16
  SPEAKER_04: Right.
• 11:16
  SPEAKER_04: Right.
• 11:17
  SPEAKER_04: And I I think this is you've kind of mentioned this, but I know it gets more complicated when there's a debt restructuring and some of the lenders in the existing debt also come over and are part of the new debt.
• 11:27
  SPEAKER_04: So maybe you can touch on that.
• 11:29
  SPEAKER_02: Yeah, like so that's super common.
• 11:31
  SPEAKER_02: So the first part I was talking about kind of base case, like I assume everybody's different, right?
• 11:35
  SPEAKER_02: But it's not really true.
• 11:36
  SPEAKER_02: In most cases, you'll have these lenders, we kind of call them rollover lenders, right?
• 11:42
  SPEAKER_02: They're in the old debt and they're also in the new debt.
• 11:46
  SPEAKER_02: And so those cases, the cash flow can get a little bit more complicated because it depends on how the cash flows actually worked, right?
• 11:55
  SPEAKER_02: And you may need to do a lender-by-lender analysis.
• 11:58
  SPEAKER_02: For the accounting, you always have to do a lender-by-lender analysis for those, but for the cash flow, it kind of depends.
• 12:04
  SPEAKER_02: So let's take a little subset of my earlier example.
• 12:07
  SPEAKER_02: Like, say we have one rollover lender in there and they've got old debt of five million and new debt of three, right?
• 12:15
  SPEAKER_02: So they come down by two million.
• 12:17
  SPEAKER_02: Now, there's different ways that the agent could settle them.
• 12:21
  SPEAKER_02: One would be a net settlement.
• 12:23
  SPEAKER_02: So it's kind of a lot of times referred to as like a cashless roll, where the exit the rollover lender will roll three million into the new debt, no cash, and then they'll get paid out in my example for two, because they went from five to three.
• 12:38
  SPEAKER_02: So in that case, the only cash that I didn't move it, but the agent moved it on my behalf.
• 12:44
  SPEAKER_02: So I'll say I the only cash that I moved was two million out.
• 12:48
  SPEAKER_02: Right.
• 12:48
  SPEAKER_02: So in that case, we can only show for that lender a$2 million financing outflow.
• 12:55
  SPEAKER_02: And so when it happens, when it's settled like this, you kind of have to look lender by lender at these rollover ones to figure out what to do, um, given that no cash really moved from the gross amount.
• 13:08
  SPEAKER_02: But oftentimes there really is a gross settlement, even though it's like the same lender, the same person, they'll really put in a new three million in my example and then turn around and get paid five.
• 13:21
  SPEAKER_02: They just they are gross settled.
• 13:23
  SPEAKER_02: And that's easier because you can just say, okay, it was really settled gross, so I can just show it gross.
• 13:30
  SPEAKER_02: And that means I don't have to look lender by lender.
• 13:33
  SPEAKER_02: I can have lump these rollover lenders with the new lenders or the pay down lenders.
• 13:39
  SPEAKER_02: That's the easiest option if you have a settlement like that to do that.
• 13:43
  SPEAKER_02: Now, some companies will look to see if they should still be netting these rollover lenders even when they grow subtle, because their their thought is, well, it's it's really the same party and we're all the cash is kind of fungible, right?
• 14:00
  SPEAKER_02: Right.
• 14:00
  SPEAKER_02: So we have, you know, our thoughts are that there's kind of a policy choice here.
• 14:05
  SPEAKER_02: It gets a little more complex.
• 14:06
  SPEAKER_02: So if so I said this earlier, the accounting is done lender by lender.
• 14:12
  SPEAKER_02: And so back to Chris's point that you have to kind of understand the accounting here.
• 14:16
  SPEAKER_02: So if you assess the accounting and it's this the 10% kind of debt restructuring, if you get to a situation where it's considered a modification, so like for accounting purposes is not new debt.
• 14:27
  SPEAKER_02: Right.
• 14:28
  SPEAKER_02: If you're in that scenario where that lender's a modification, that rollover lender, then you have a policy choice where you can show it gross if it's settled gross, but you can also show it net, in my case, two million.
• 14:41
  SPEAKER_02: Although I think that many choose not to do that just because it's um, A, it's a little more work because you're gonna be looking lender by lender for the cash flow statement.
• 14:50
  SPEAKER_02: And B, doesn't always, well, I'd say companies like to see like that gross proceeds of the whole new debt minimum payment.
• 14:57
  SPEAKER_02: It just makes more sense sometimes for the user.
• 15:00
  SPEAKER_02: Right.
• 15:00
  SPEAKER_02: But it's a policy choice.
• 15:01
  SPEAKER_02: So it so it depends, you know, what you want to do there.
• 15:04
  SPEAKER_02: And I'd say it's something you have to establish and apply consistently to every restructuring that you have.
• 15:11
  SPEAKER_04: Okay, got it.
• 15:12
  SPEAKER_04: And for anyone looking for more detail, there's a great example of a syndicated restructuring in chapter six of our financial statement presentation guide.
• 15:21
  SPEAKER_04: Okay, so let's move on to another area where we're getting a lot of questions.
• 15:25
  SPEAKER_04: Payment processing.
• 15:26
  SPEAKER_04: Chris, can you walk us through what we're seeing there?
• 15:29
  SPEAKER_01: Sure.
• 15:29
  SPEAKER_01: And and I think we use the term payment processing, like, you know, the different kinds of companies that are out there may call it something different, uh, funds processing, you know, payments transfers, whatever the case is.
• 15:41
  SPEAKER_01: But, you know, at its core, it's the different types of businesses that will um transact with a customer, maybe be a go-between between the customer and um a merchant, say, and they are there to facilitate the transaction.
• 15:55
  SPEAKER_01: So they'll take the customer funds, they'll send it through to the merchant and be a settlement um company is another term that's used for some of these folks.
• 16:05
  SPEAKER_01: Um and we see them all over the place, right?
• 16:07
  SPEAKER_01: So, you know, you you may hear the word fintech.
• 16:10
  SPEAKER_01: That's generally, you know, kind of a catch-all for a lot of these, but they could be technology companies, um, they could be financial institutions or lending companies, combinations of the two, and anything else, to be honest with you.
• 16:24
  SPEAKER_01: A lot of these are coming up as um ancillary type businesses to help with the you know core business somewhere else.
• 16:31
  SPEAKER_01: Um, so there are companies that do this as that's their bread and butter, and then there are companies that do this as kind of an additional service to provide.
• 16:38
  SPEAKER_01: Um, but you know, like I said, the the basicness is that I'm going to collect funds from one customer who's looking to, you know, you know, buy product da um and just be that goal go-between person.
• 16:51
  SPEAKER_01: Um sometimes I may even tack onto that and and you know help facilitate by offering some kind of short-term lending or something like that, but that's a whole other ball of act.
• 16:59
  SPEAKER_01: So um, so you know, the we get a lot of questions on that, especially over the last couple of years.
• 17:05
  SPEAKER_01: You know, we talked about the SEC conference.
• 17:07
  SPEAKER_01: Well, it wasn't so much this year, but last year's conference.
• 17:09
  SPEAKER_01: This was a big topic um at one of the um one of the sessions at at that um at that conference.
• 17:15
  SPEAKER_01: So over the course of the year, we've gotten a lot of questions um about that.
• 17:19
  SPEAKER_01: And it's generally going to be, you know, two areas.
• 17:21
  SPEAKER_01: I mean, one is which of the three, you know, um cash flow categories should it be in operating, investing, or financing?
• 17:30
  SPEAKER_01: And um, you know, we we do see um ways to get to maybe one or two different spots.
• 17:36
  SPEAKER_01: I think when asked, you know, we we think is the best presentation is to put it into financing.
• 17:42
  SPEAKER_01: And the reason being is that you're basically um when you're collecting the money from the customers, you're kind of short-term borrowing that money.
• 17:49
  SPEAKER_01: You may be able to earn some sort of float or something.
• 17:52
  SPEAKER_01: Sure.
• 17:53
  SPEAKER_01: Um, obviously you're charging a fee for the service you're providing as well.
• 17:56
  SPEAKER_01: Um, but you have some sort of temporary use of of that funds.
• 18:00
  SPEAKER_01: Could be as short as, you know, minutes or hours, could be overnight, could be, you know, hold on to it for a month.
• 18:05
  SPEAKER_01: It kind of depends on what your settlement agreements are um with the merchants.
• 18:09
  SPEAKER_01: But in any case, it's it's more akin to like a short-term use of somebody else's money.
• 18:15
  SPEAKER_01: Um, and then obviously when you when you collect it, it would be uh uh financing inflow.
• 18:20
  SPEAKER_01: When you s finish the settlement process or you remit the funds, um it becomes a uh financing outflow.
• 18:26
  SPEAKER_05: Right.
• 18:27
  SPEAKER_01: Um but like I said, there are potentially, you know, other views and other places it can be.
• 18:32
  SPEAKER_01: Um we would suggest, you know, doing your your assessment or your analysis and um try and use your your best judgment.
• 18:39
  SPEAKER_01: But when asked what we think the best is, we'll always say financing.
• 18:42
  SPEAKER_04: Okay, got it.
• 18:43
  SPEAKER_01: Um the second part is then gross versus net.
• 18:46
  SPEAKER_01: You know, do I have to show each one of these transactions on an in-out basis on a gross basis?
• 18:50
  SPEAKER_01: If you think about like the hundreds, thousands, maybe even millions of of transactions that could get processed, um, that could be a lot and a really big number on your cash flow statement.
• 19:01
  SPEAKER_01: Um, but you know, what we say is well, if you use the general netting guidance, which usually is if the maturity is three months or less, you can net.
• 19:12
  SPEAKER_01: Um think about in terms of what's the remittance requirement.
• 19:15
  SPEAKER_01: You know, so if one collected, you there, you know, part of your agreement with the merchant or or whoever um is your your customer on the other side.
• 19:24
  SPEAKER_01: Um you know, if the remittant um period is three months or less, you can kind of view that as the maturity and apply a netting concept to that.
• 19:33
  SPEAKER_01: So that makes it a little easier.
• 19:35
  SPEAKER_01: Yeah, you just need to kind of know what the in net in, net out was over the period you're talking about and show it on a net basis.
• 19:41
  SPEAKER_01: Um, if you want to, there's never any wrong answer in saying gross.
• 19:45
  SPEAKER_01: So if you're not sure, gross is always acceptable in the cash flow statement.
• 19:49
  SPEAKER_01: It's just may not be the one that you want to do.
• 19:52
  SPEAKER_01: Um, what's interesting is that this year, a lot of our questions have been on companies that may have had it in um operating as an example because they say, well, this is my business, is the quote we're doing operating.
• 20:05
  SPEAKER_01: But we're seeing more and more people putting it in finance.
• 20:08
  SPEAKER_01: Um, I will not take any credit to say that's because we're telling people that's what the best.
• 20:12
  SPEAKER_01: Um, but nonetheless, um, so we got a lot of questions this year uh about like reclassing on cash flow statements.
• 20:18
  SPEAKER_01: So so we have seen if there was any kind of trend here, more companies maybe going more to the financing um than we had in the past.
• 20:26
  SPEAKER_04: Okay, that's really helpful.
• 20:27
  SPEAKER_04: Another thing we've seen is a lot of business combination activity recently.
• 20:31
  SPEAKER_04: And these transactions can generate a lot of different types of cash flows, which naturally leads to a lot of questions.
• 20:37
  SPEAKER_04: So, Suzanne, let's walk through a few.
• 20:40
  SPEAKER_04: First up, how should cash paid on the acquisition date be classified?
• 20:44
  SPEAKER_02: Yeah, and and we have gotten, I I did search kind of all the consoles for the year, and this was like the no the FISCOM was the number one topic.
• 20:53
  SPEAKER_02: So it's good we're chatting.
• 20:54
  SPEAKER_02: But yeah, so cash paid to the seller.
• 20:57
  SPEAKER_02: So you're buying a business, even though you once you buy that business and you bring everything on your balance sheet, you're gonna have like lots of changes on your assets, liabilities on your balance sheet.
• 21:07
  SPEAKER_02: The unit of account um for the cash flow statement is just the acquired business as one, right?
• 21:13
  SPEAKER_02: So the individual balance sheet line changes are not because of the VISCOM, are not gonna be shown on the cash flow statement.
• 21:19
  SPEAKER_02: If you're doing kind of the indirect method and all that, if AR goes up because you brought on acquired AR from the VISCOM, you're not gonna show that change in your reconciliation.
• 21:29
  SPEAKER_02: But rather, it's just gonna be one line item for the cash paid to buy the business.
• 21:33
  SPEAKER_02: Of course, net of any cash you may have acquired and it would go into investing.
• 21:37
  SPEAKER_02: So it's just like the the cash payment directly to the seller.
• 21:41
  SPEAKER_02: Um then there's transaction costs.
• 21:44
  SPEAKER_02: If you incur transaction costs, those are operating because they're expensed.
• 21:49
  SPEAKER_02: So they're not part of, they're not netted with investing.
• 21:52
  SPEAKER_02: So a separate line, a separate point in operating.
• 21:56
  SPEAKER_02: And then of course, there might be non cash transactions.
• 22:00
  SPEAKER_02: As well, where you know, you maybe you pay for some for the business, some portion in like stock, or you have some sort of contingent consideration liability or things like that.
• 22:10
  SPEAKER_02: Could even be all non-cash, perhaps.
• 22:12
  SPEAKER_02: And that would be just disclosing the non-cash component.
• 22:16
  SPEAKER_02: So, but often there's like a combination, right?
• 22:19
  SPEAKER_02: Cash.
• 22:20
  SPEAKER_02: So don't forget the non-cash.
• 22:21
  SPEAKER_04: Okay.
• 22:21
  SPEAKER_04: What about situations where the acquirer pays off the seller's debt as part of the business combination?
• 22:28
  SPEAKER_04: How does that impact the cash flow classification?
• 22:32
  SPEAKER_02: Yeah.
• 22:32
  SPEAKER_02: So sometimes often, right, the the seller's debt is going to have some sort of change in control provision or something.
• 22:39
  SPEAKER_02: So the debt gets paid off.
• 22:41
  SPEAKER_02: And I think sometimes the bank wants the um buyer to just pay directly rather than round-tripping it to the seller, right?
• 22:48
  SPEAKER_02: So yeah, so first we'll start with you don't legally assume the seller's debt.
• 22:54
  SPEAKER_02: And that's the most common situation, right?
• 22:56
  SPEAKER_02: Because it needs to change in control provisions.
• 22:59
  SPEAKER_02: So in that case, you don't bring obviously you're not bringing any debt on your books for for that.
• 23:04
  SPEAKER_02: So any funds paid to the seller's bank to extinguish their debt is just an investing outflow.
• 23:11
  SPEAKER_02: It's really just part of consideration.
• 23:14
  SPEAKER_02: Okay.
• 23:14
  SPEAKER_02: You're just paying, instead of paying the seller, you're just paying their bank directly, right?
• 23:19
  SPEAKER_02: So that's just um investing.
• 23:22
  SPEAKER_02: Now, in the more rare case, if you did in fact assume the seller's debt, then you're gonna bring the debt on your books at fair value.
• 23:31
  SPEAKER_02: And then really anytime anything you pay on that debt going forward, because now it's your debt, would be a financing outflow.
• 23:40
  SPEAKER_02: So that I mean later, right?
• 23:41
  SPEAKER_02: Yeah, yeah.
• 23:42
  SPEAKER_02: On the acquisition date, you wouldn't, in fact, have any cash.
• 23:46
  SPEAKER_02: You wouldn't have paid anything out at that point.
• 23:48
  SPEAKER_02: Okay.
• 23:48
  SPEAKER_01: You know, that's um similar to where we were talking before about like really understanding the transaction.
• 23:54
  SPEAKER_01: Because when Suzanne and I and others in our group get these kind of questions, one of the things that we ask is, well, you know, what would our business combinations team say um where it should get treated in the transaction?
• 24:05
  SPEAKER_01: You know, is it part of the proceeds that Suzanne mentioned?
• 24:08
  SPEAKER_01: Is it on the line of the business combination?
• 24:11
  SPEAKER_01: Is it part of the step up, you know, fair value and everything?
• 24:13
  SPEAKER_01: And that kind of helps then drive, as Suzanne was saying, like if it's kind of that's just part of the proceeds, then it's just part of the cash proceeds, right?
• 24:20
  SPEAKER_05: Yep.
• 24:20
  SPEAKER_01: Um, or um if it's actually coming through and you're gonna show the debt, you know, on your books first, then once it's on your books, it's kind of your debt.
• 24:27
  SPEAKER_04: Debt, yeah.
• 24:28
  SPEAKER_04: Okay.
• 24:28
  SPEAKER_04: So what if there's a pre-existing relationship that gets settled as part of the business combination?
• 24:34
  SPEAKER_04: So for example, let's say the buyer has an outstanding payable to the seller for inventory purposes, and that payable is settled as part of the deal.
• 24:44
  SPEAKER_04: How is that handled?
• 24:46
  SPEAKER_02: Yeah.
• 24:46
  SPEAKER_02: So that's again like understanding the accounting.
• 24:49
  SPEAKER_02: So if the buyer had AP to the seller, because like they bought inventory.
• 24:55
  SPEAKER_02: And now since they're buying the business, they're kind of doing two things.
• 24:59
  SPEAKER_02: They're they're paying cash, right?
• 25:01
  SPEAKER_02: For two things.
• 25:02
  SPEAKER_02: They're buying a business and they're settling their AP, right?
• 25:06
  SPEAKER_02: So I think back to Chris's point for the accounting, you're accounting for two things.
• 25:11
  SPEAKER_02: And so just in general, like often this comes up not just in Biscom, but where you kind of check and you're you're doing two things, and there could be two different classes of cash flows.
• 25:21
  SPEAKER_02: There's guidance in in the cash flow guidance um for when this happens, that it says one, you know, look to see if there's specific cash flow guidance to tell you what to do.
• 25:32
  SPEAKER_02: So here, no.
• 25:33
  SPEAKER_02: So the second step is try to bifurcate that cash into separate identifiable uses, right?
• 25:41
  SPEAKER_02: Or sources in here in this case, use.
• 25:44
  SPEAKER_02: And often the way we do that is we look at the accounting, right?
• 25:47
  SPEAKER_02: So in this case, because we know the accounting is different, some of that cash paid is going to be for consideration for the business, and some of it's gonna be to settle the AP, you follow that.
• 25:58
  SPEAKER_02: So, like whatever was attributed to settling the AP is just like you're paying any other AP, so it's operating.
• 26:05
  SPEAKER_02: And then the rest, which is attributed to business, the purchase price consideration of the business, then would then be investing.
• 26:12
  SPEAKER_02: So it's just kind of you don't just like blanket say, like, oh, it's like most of it's for buying the business, so it's investing.
• 26:18
  SPEAKER_02: Like you have to really look and kind of understand what's going on.
• 26:22
  SPEAKER_01: So, Suzanne, your point's kind of like we were just talking about, right?
• 26:25
  SPEAKER_01: So if you think about your AP, the company you're acquiring has an AR for this, hopefully the same amount, right?
• 26:31
  SPEAKER_01: Yeah.
• 26:32
  SPEAKER_01: And so in the business combination accounting, the guidance would not tell you to put the account receivable on your book at its fair value, would say, no, that actually gets settled.
• 26:41
  SPEAKER_01: Right.
• 26:41
  SPEAKER_01: Right.
• 26:41
  SPEAKER_01: And so that's why we're saying follow the accounting.
• 26:43
  SPEAKER_01: So since it's not going to be part of the AR coming on and then an intercompany elimination, it's, you know, you're allocating the cash to first settle your AP, that goes away.
• 26:52
  SPEAKER_01: And then you do your business combination accounting on the rest.
• 26:56
  SPEAKER_04: Yeah.
• 26:56
  SPEAKER_04: Seems like just continuing to reinforce the point that we've been talking about is really important to really understand these transactions.
• 27:02
  SPEAKER_04: Absolutely.
• 27:02
  SPEAKER_04: Yeah.
• 27:02
  SPEAKER_04: And think about the cash flow at the same time.
• 27:04
  SPEAKER_04: Right.
• 27:05
  SPEAKER_04: Okay, one more in the business combination bucket.
• 27:08
  SPEAKER_04: What about contingent consideration?
• 27:10
  SPEAKER_04: How should that be treated in the statement of cash flows?
• 27:13
  SPEAKER_02: Yeah.
• 27:14
  SPEAKER_02: So um pretty common to see that, right?
• 27:16
  SPEAKER_02: And the Fazbe actually put out some guidance uh some years ago now, I guess, on that.
• 27:21
  SPEAKER_02: So if you have contingent consideration, right, on the acquisition day, the buyer is gonna set up a liability for the fair value of what they think they're gonna have to pay, right?
• 27:33
  SPEAKER_02: So they put up some liability that's gonna be um disclosed as a non-cash consideration on day one.
• 27:40
  SPEAKER_02: And then as things change and this and that, they're gonna kind of remeasure that liability, you know, over time.
• 27:46
  SPEAKER_02: And they remeasure it um through the PL.
• 27:50
  SPEAKER_02: Right.
• 27:50
  SPEAKER_02: So when the payment is ultimately made to the seller, classification.
• 27:55
  SPEAKER_02: So so this could be like months down the road, right?
• 27:59
  SPEAKER_02: The payment depends on two things timing when you make it and how the amount compares to the original liability.
• 28:05
  SPEAKER_02: So if you do end up, which is kind of rare, but making the contingent consideration payment within three months of the original acquisition date, it's considered soon after the VISCOM date.
• 28:18
  SPEAKER_02: And there's guidance that says payments made soon after the acquisition date are investing.
• 28:24
  SPEAKER_02: So in that case, the whole amount would still be investing, anything within three months of the acquisition date.
• 28:29
  SPEAKER_02: If it's after three months, you know, which is more than norm, then you say, okay, I'm paying this after three months.
• 28:37
  SPEAKER_02: Any amount up to the original liability is financing because that's like, okay, I put that as a liability on day one, like whatever I, you know, pay on that is just kind of like debt.
• 28:48
  SPEAKER_02: But any payment over the original liability, it if so if you have to increase that liability, it goes to the PL, right?
• 28:55
  SPEAKER_02: That's how you you get it um larger.
• 28:57
  SPEAKER_02: So anything that was recorded over the original liability is going to be operating, reflected and operating.
• 29:04
  SPEAKER_02: So it really depends on kind of when and and what amount it was that.
• 29:09
  SPEAKER_02: But I want to say something else that we've gotten some questions on over, I guess, the past year or so.
• 29:16
  SPEAKER_02: There's sometimes we're seeing situations where it's like not even contingent consideration.
• 29:21
  SPEAKER_02: It's just the way the VISCOM is structured, the buyer doesn't pay for everything up front.
• 29:30
  SPEAKER_02: Let's say there's a deal where they buy a business and they pay 50% of the consideration in cash up front.
• 29:36
  SPEAKER_02: And there's a just set agreement that they're gonna pay the remaining 50%, let's say in one year.
• 29:43
  SPEAKER_02: There's no like um contingency or anything.
• 29:46
  SPEAKER_02: It's just paying the payment.
• 29:50
  SPEAKER_02: And so basically on the BizCom date, they're again, they're gonna record that liability for the amount they're gonna pay in the future.
• 29:57
  SPEAKER_02: It's gonna be non-cash.
• 29:58
  SPEAKER_02: Um, and when it's paid, you know, it should be a financing outflow because it's almost more like financing than contingent consideration because it's a known amount.
• 30:09
  SPEAKER_02: Right.
• 30:09
  SPEAKER_02: And you're just paying the liability you established on the BISCOM date.
• 30:13
  SPEAKER_02: It's financing.
• 30:14
  SPEAKER_02: Um, I bring it up just because some people have asked us and were initially thinking that it should be investing because there's not specific guidance for it.
• 30:25
  SPEAKER_02: Whereas they're like, no, I get contingent consideration because the 230 guidance specifically addresses it.
• 30:31
  SPEAKER_02: It doesn't address this specifically, but it's just that same concept, right?
• 30:36
  SPEAKER_02: It's like it's like even more of a financing, I would say.
• 30:39
  SPEAKER_02: So I just wanted to bring that up just in case um anyone's dealing with that.
• 30:42
  SPEAKER_01: And Suzanne, is isn't there like a general investment guidance or investing activity guidance that I would say, you know, think about in more in the terms of if I bought a building, like PE, right?
• 30:52
  SPEAKER_01: And would say the soon after guidance is there for that.
• 30:55
  SPEAKER_01: So it would say if I bought a building, but I pay for it, you know, six months down the road because seller provided financing or whatever, then the ultimate payment would be, or the transaction would be a non-clash, non-cash disclosure on the acquisition date.
• 31:08
  SPEAKER_01: Um, and then I would, you know, put the cash flow through financing.
• 31:12
  SPEAKER_01: So a business, acquiring a business is just simply an investing activity.
• 31:16
  SPEAKER_01: So really it's more looking at that guidance as opposed to the contingent consideration guidance, which would get you to the same spot.
• 31:22
  SPEAKER_02: Yeah.
• 31:22
  SPEAKER_02: Okay.
• 31:23
  SPEAKER_02: Any other insights you want to highlight?
• 31:25
  SPEAKER_02: One other one that um we've been getting some questions on.
• 31:29
  SPEAKER_02: So I just want to bring up um working capital adjustments, get questions on where to put that.
• 31:35
  SPEAKER_02: So sometimes you have to make a the buyer would have to make a payment.
• 31:40
  SPEAKER_02: Sometimes they get a payment, you know, it depends.
• 31:42
  SPEAKER_02: Um, typically these are made during the measurement period and they're treated as adjustments to purchase price consideration.
• 31:50
  SPEAKER_02: Um, so in that case, when these, if these working capital payments are um made in the measurement period and they are in fact treated as an adjustment to consideration, they would be investing.
• 32:03
  SPEAKER_02: And so you might be like, wait, why is this different than the one you just talked about with the financing?
• 32:08
  SPEAKER_02: It is different because it's like it's treated more like an adjustment of the purchase price.
• 32:13
  SPEAKER_02: It's not like the seller was letting you finance the business and hey, later.
• 32:19
  SPEAKER_02: Oh, like you're just if you made a payment.
• 32:21
  SPEAKER_02: It's not like you're just paying later because you wanted to defer some of the payment for cash flow, you know, can keep your cash flow better.
• 32:28
  SPEAKER_02: This is more like, yeah, there was an adjustment.
• 32:31
  SPEAKER_02: I thought something was there at the acquisition date and there was some sort of it wasn't right, or there was some sort of adjustment.
• 32:38
  SPEAKER_02: I'm not a Biscom person, but like, yeah, that's how I think about it.
• 32:41
  SPEAKER_02: Right.
• 32:42
  SPEAKER_02: And so it's more like, okay, so you're just adjusting like that initial amount that went through investing, but it's in a different period, and you're gonna put it there.
• 32:50
  SPEAKER_02: So that's why we think that makes sense.
• 32:52
  SPEAKER_02: And we have seen that come up uh a few times this year.
• 32:54
  SPEAKER_02: So I just want to mention it.
• 32:56
  SPEAKER_02: Awesome.
• 32:56
  SPEAKER_04: Okay, Chris, maybe turning back to you now on recent FASB activities.
• 33:01
  SPEAKER_04: I know the FASBE has a targeted improvements project focused on the statement of cash flows.
• 33:06
  SPEAKER_04: Can you give an update on that?
• 33:08
  SPEAKER_01: Sure.
• 33:08
  SPEAKER_01: And we may stretch the uh definition of recent because I'm not sure there's been a lot of activity on that uh since 2023.
• 33:15
  SPEAKER_01: But nonetheless, um, there is still a project um that ongoing for the statement of cash flows.
• 33:21
  SPEAKER_01: Um, where the project currently is is that there were some initial decisions made mostly on the impact to financial institutions.
• 33:30
  SPEAKER_01: Um if you think about a financial institution and thinking about what we've been talking about with you know the cash flow statement, um, you know, there's three basic um classifications, right?
• 33:39
  SPEAKER_01: There's operating and then there's investing and financing, right?
• 33:42
  SPEAKER_01: So take a bank for an example, right?
• 33:45
  SPEAKER_01: What is a bank's operations investing and financing?
• 33:48
  SPEAKER_01: So kind of can cover all three, right?
• 33:50
  SPEAKER_01: Right.
• 33:51
  SPEAKER_01: Um, so today, generally, you know, financial institutions will put their you know investments in investing and their um financings like deposits for a bank in financing, um, despite the fact that it's core to their operations, right?
• 34:04
  SPEAKER_01: Yeah.
• 34:04
  SPEAKER_01: And so that's what the project is kind of addressing or looking at, right?
• 34:08
  SPEAKER_01: Because there's been feedback that would say, well, um, if I think about that for a financial institution, that doesn't necessarily give me the most useful information.
• 34:17
  SPEAKER_01: Um, so they're definitely taking a look at um, should you know, again, use a bank, you know, should the loans that they make and the deposits that they bring in, should that just be uh an operating transaction instead of investing in financing?
• 34:31
  SPEAKER_01: Um the second piece of um the initial decisions has been on interest income.
• 34:37
  SPEAKER_01: Um so if you're familiar with the um cash flow statement, there's a supplemental disclosure around interest paid.
• 34:43
  SPEAKER_01: Um but again, for a financial institution, um, interest received is kind of just as important as interest paid.
• 34:50
  SPEAKER_01: And so they're looking at, you know, should there be either within the body of the cash flow statement um, you know, required disclosures around interest received and/or a supplemental um disclosure to um include the interest received.
• 35:05
  SPEAKER_01: So those are the two main components on the initial decisions made.
• 35:09
  SPEAKER_01: Yeah, the the board still has then on its um research agenda for should there be other uh improvements made in the cash flow statement.
• 35:18
  SPEAKER_01: But um, you know, it hasn't been any like near-term recent activity, but um, but it still is a project um that's on uh the uh the agenda.
• 35:27
  SPEAKER_04: Okay.
• 35:28
  SPEAKER_04: So mainly impacts financial institutions and see if there's any more to come from the FASB.
• 35:34
  SPEAKER_04: I also saw that there was a new project added on stable coins.
• 35:38
  SPEAKER_04: Can you tell us a little bit about that?
• 35:40
  SPEAKER_01: Sure.
• 35:40
  SPEAKER_01: That was just added during the last quarter.
• 35:42
  SPEAKER_01: I think it was in October of 2025.
• 35:45
  SPEAKER_01: Um, and it's you know, a start to address some of the questions on digital assets, right?
• 35:50
  SPEAKER_01: So, you know, in the grand scheme of everything, digital assets is still a very new um activity that a lot of companies question, you know, kind of, well, what makes sense from the accounting, the reporting, the measurement, and the presentation of those?
• 36:03
  SPEAKER_01: Um, and so the project is focused on whether certain digital assets um and certain stable coins um more specifically um should be a cash equivalent.
• 36:14
  SPEAKER_01: You know, if you think about it, you know, what's the difference between, say, a stable coin and a money market, which is typically um included in cash equivalent, right?
• 36:23
  SPEAKER_01: Um, at least in terms of how people use it, right?
• 36:26
  SPEAKER_01: Um, so that is um what the board is looking at is you know, should those um stable coins be treated at cash equivalents?
• 36:35
  SPEAKER_01: And if so, under what guidelines?
• 36:37
  SPEAKER_01: Like what does the stable coin need to um demonstrate in order to be considered a cash equivalent?
• 36:45
  SPEAKER_04: Okay.
• 36:45
  SPEAKER_04: Well, great project to be following.
• 36:47
  SPEAKER_04: Thank you both so much for your insights.
• 36:49
  SPEAKER_04: State has been a great conversation.
• 36:51
  SPEAKER_04: But before we go, any final words of advice to our listeners?
• 36:56
  SPEAKER_04: Maybe Suzanne, I'll start with you.
• 36:58
  SPEAKER_02: Yeah, just uh I would say, you know, we just covered touched on a few topics today.
• 37:02
  SPEAKER_02: We get lots of questions in all sorts of areas, so it's a little bit hard to boil it down uh to catch something for everyone.
• 37:08
  SPEAKER_02: But um, we have lots of these issues and more in our financial statement presentation guide.
• 37:15
  SPEAKER_02: It's chapter six, all cash flows.
• 37:17
  SPEAKER_02: So I encourage um listeners to check it out if they have questions.
• 37:21
  SPEAKER_02: Okay, great.
• 37:22
  SPEAKER_02: Chris?
• 37:22
  SPEAKER_01: Yeah, so I'm gonna take us back to the beginning, right?
• 37:25
  SPEAKER_01: So where we talked about um, you know, the the um restatements and the practical tips around like what to do about uh about that.
• 37:32
  SPEAKER_01: So maybe a uh reiteration of what we said before, you know, don't wait.
• 37:37
  SPEAKER_01: Think about the cash flow when you're thinking about the transaction.
• 37:40
  SPEAKER_01: Don't leave it to the very end.
• 37:42
  SPEAKER_01: Um, have good direct controls uh around the statement of cash flows and and the cash flow presentation.
• 37:49
  SPEAKER_01: Um and maybe one last thing that I would say is be mindful of non-cash transactions because a lot of times, just in the you know, general preparation, you could be uh looking at change in assets and liabilities and believe that that's your cash flow.
• 38:03
  SPEAKER_01: Um but there was a non-cash component that happened during the year.
• 38:07
  SPEAKER_01: Um, so that could kind of throw off uh what you're doing.
• 38:11
  SPEAKER_01: So be mindful of cash flow, um, non-cash transactions and how it impacts um how you're preparing the cash flow statement.
• 38:18
  SPEAKER_04: Well, great advice from both of you.
• 38:19
  SPEAKER_04: Thank you so much for joining me today.
• 38:21
  SPEAKER_01: Thank you.
• 38:23
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• 38:45
  SPEAKER_03: From Thought Leadership at PwC, I'm Heather Horn.
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