As Buck’s Hunting Equipment, Inc. (Buck) has came to an exciting phase of growth and development, a new complexity involving the assignment and presentation of its borrowing and payment activity as it relates to the revolving line of credit extended has emerged. The report has been broken down into the following sections: 1. Assignment of Borrowing and Lending Activity: Presentation of cash flows from the revolving line of credit. 2. Recommendations for Presentation: the use of net or gross basis when reporting borrowing and payment activities.
Applications of the IFRS standards: IFRS standards that apply to Buck’s statement of cash flows (SCF) and how they are differentiated from the U. S. GAAP. Section 1: Assignment of Borrowing and Lending Activity One of Buck’s largest decisions lies in the assignment of borrowing and lending activity in the SCF. According to the Financial Accounting Standards Board (FASB), cash receipts1 and payments must be recorded as one of the followingi: a) Operating Activity
Investing Activity Upon reviewing the FASB codification, we found financing activities specifically includes, “borrowing money and repaying amounts borrowed,”ii. Thus, all borrowing and payment activities are required to be reported as financing activities2. All future sections will be discussing borrowing and payment activities as they are recorded in the financing activities sections of the SCF. Section 2: Recommendations for Presentation
The Business plan on Responsible Borrowing Worksheet 5
Many students acquire federal student loans to pay for college. The goal of this assignment is to help you learn how to borrow responsibly, which may mean that you do not borrow at all or that you borrow only what you truly need. To borrow responsibly, you must understand your options and establish a financial plan for your entire program. With that plan in place, you can focus on your courses and ...
Before proceeding with reporting recommendations for the three scenarios, it would be prudent to offer a brief explanation of the use of gross and net bases and the relative advantages of using one of the two. The use of a gross basis for reporting borrowing and payment in the financing activities section of the SCF is characterized by a disclosure of both borrowing and payment as different line items. The main advantage of using a gross basis is that it better explicates both cash inflows (from borrowing) and cash outflows (payments) where turnover is not quick and debts are long term.
According to FASB, long-term financing activities on the SCF are normally reported on a gross basisiii. On the other hand, the use of a gross basis for reporting borrowing and payment in the financing activities section of the SCF is characterized by a simple summation of cash receipts less cash payments. net basis is often used when debt turnover is quick and maturities are short (equal to or less than three months) as the extra information detailing cash receipts and payments is not pertinent to understanding the entity’s financing activitiesiv.
All that being said, the recommended use of reporting bases for the three scenarios is stipulated below3. Scenario 1: According to the FASB, all debts of large amounts where turnover is quick that are due on demand are to be considered to qualify for net basis recording in the financing activities sectionv. As the agreement specifies that payment is due on demand, the turnover on the cash receipts from borrowing will be quicker (within three months).
The line item on the statement of cash flows will be presented in the following manner on a net basis.
Cash Receipts from Borrowing:$50,000,000 (Net: payments on cash receipts) Scenario 2: Although, Buck did pay back the total amount of the note signed in two months (qualifying for net basis presentation), Buck also signed a note on June 15, 2010, which was paid on December 15, 2010 (6 month maturity).
As the Buck’s debt turnover is not necessarily quick, a gross basis should be used for presentation purposes. Cash Receipts from Borrowing: $100,000,000 Cash Payments ($100,000,000)
The Essay on Buck’s Dilemma
... 3 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. ... — 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 ...
Scenario 3: As the notes do not have specific maturity and Buck is only obligated to pay the full amounts of the notes by the end of the three-year term4, the gross basis of presentation would best illustrate Buck’s borrowing and payment financing activities. Additionally, payment was made on the outstanding balance and was not assigned to one particular note, giving the audience no clear indication the amounts borrowed within three months were paid on December 15, 2010. To provide clarity the following presentation (page 4) of Buck’s borrowing and payment activity is displayed below using the gross basis method.
Cash Receipts from Borrowing:$100,000,000 Cash Payments:($50,000,000) Section 3: Applications of IFRS Standards Although it is not explicitly and discussed in the scenarios in Buck’s initial report, interest payment is a significant part of a revolving line of credit if one holds an outstanding balance over a certain, sometimes interest free period of time. According to US GAAP rules, if interest were to be paid on any credit debt that Buck holds, the total amount paid must be reported in the operating activities section of the statement of cash flowsvi.
On the other hand, according to IFRS principles, Buck must report interest paid in the financing activities section of the statement of cash flowsvii. Although IFRS principles allow for discretionary assignment of interest payment in the statement of cash flows, it is required that the assignment be “disclosed under the activity appropriate to their nature,”viii. In the instance of Buck, the appropriate activity is “borrowing and payment” which is located in the financing activities section. Thus, interest payment must be recorded in financing activities to remain consistent with IFRS principles.
