The cash inflow should be classified in terms of what is “likely to be the predominant source

Disputing the EITF’s Arguments

ASU 2016-15 states that some Emerging Issues Task Force (EITF) members had noted the lack of symmetry in not recording the receipt as a cash inflow from an operating activity. The analogy with the receipt from the sale of a typical investment breaks down even further, however, on the grounds that the cash used for the typical investment in another company would first have been recorded as a cash inflow, the cash spent on the investment would then have been recorded as a CFFI cash outflow, and then finally, the cash received from the sale of the investment in another company would be recorded as a CFFI cash inflow.

Generally, cash received from the sale of these assets necessitates the spending of that cash on replacing the sold factors of production, or it causes the entity to borrow cash to replace them

The cash received from a beneficial interest in securitized trade receivables is not analogous to either of these typical CFFI activities.

The truth of the matter is that ASU 2016-15’s treatment of cash received from a beneficial interest is not analogous to how cash flows are treated with typical investments. For example, assume that a bakery bakes bread, sells it at a profit, payday loans Youngstown OH uses the cash received to buy an investment in another company, and then sells that investment. The entity would record a CFFO inflow from selling the bread at a profit, a CFFI outflow for the purchase of the investment, and then a CFFI inflow from the selling of that investment. The point is that the CFFO from the selling of the bread comes first. Under the treatment required by ASU 2016-15, the transferor is never able to record the cash received from the beneficial interest in its trade receivables as a CFFO. This is not analogous to the required GAAP treatment for generating cash via an operating activity, spending it on an investment in another company, and then selling that investment. The essence of the economic transactions involved in generating the trade receivables and securitizing them for cash inflows is not captured by the new guidance.

The other typical category of CFFI activities consists of cash flows from selling or buying long-term assets; these assets are capital assets that are factors of production. Returning to the bakery analogy, CFFI is cash received from selling an oven; the oven needs to be replaced, or the business must be scaled down or liquidated. CFFO, on the other hand, is cash received from baking bread, selling it at a profit to customers, and receiving the cash from those sales. CFFO is, therefore, more attractive to investors than CFFI; any manager can sell the bakery’s oven and get cash, but getting cash from selling bread at a profit is achieving the financial objective of the company, and it is not as easy to do.

Clearly, the cash receipt from a beneficial interest in securitized receivables is not analogous to cash received upon the sale of a bakery’s oven. Thus, the cash received from a beneficial interest in securitized receivables is not akin to either of the typical forms of CFFI. It is not analogous to a cash inflow from the sale of an investment in another entity, and it is not analogous to a cash inflow from the sale of a bakery’s oven. It literally is cash received as a result of “delivering or producing goods for sale and providing services,” which is ASC 230’s definition of operating activities. As such, it should be classified as CFFO.

ASU 2016-15 also noted that some EITF members were in favor of the CFFI classification on the grounds that the transferor’s ability to receive cash from its beneficial interest is “sometimes linked to the performance of third-party trade receivables.” It is indeed true that in some securitization cases, trade receivables are transferred into an SPV, together with the receivables of another entity. The authors agree that the portion of the beneficial interest that flows from another entity’s receivables should be classified as CFFI; however, this is not an argument that all the cash received from the beneficial interest should be classified as CFFI. If it is not practical to separately identify the receipts from each source of receivables, the authors submit that the update should follow its own advice, given in the “Issue 8” section of ASU-2016-15. ” If the major source of cash inflows from the beneficial interest is likely to be the transferor’s own receivables, the cash inflow should be classified as CFFO.