Example FSP 6-3 and Example FSP 6-4 demonstrate the identification and presentation of noncash investing and financing activities.
EXAMPLE FSP 6-3
Noncash investing or financing activity — purchased equipment not yet paid for
On December 20, 20X1, FSP Corp purchases and takes title to equipment costing $100, and accordingly debits property, plant, and equipment and credits accounts payable. As of December 31, 20X1, FSP Corp has not yet made cash payment to settle the accounts payable.
How should the equipment acquisition be reflected in FSP Corp’s December 31, 20X1 statement of cash flows?
Until FSP Corp has made a cash payment related to the equipment, the equipment acquisition is a noncash activity that should not be reflected in the statement of cash flows. Understanding if FSP Corp’s equipment acquisition is a noncash activity requires an understanding of the words “or soon before or after purchase.” Regardless, it would be incorrect to include a $100 investing outflow and a corresponding $100 operating inflow (created by the increase in accounts payable as a reconciling item using the indirect method of presentation) in FSP Corp’s December 31, 20X1 statement of cash flows, because neither of those cash flows occurred.
EXAMPLE FSP 6-4
Noncash investing and financing activity — equipment partially financed by a note
FSP Corp acquires computer equipment for $100 cash and a $400 installment note payable to the seller. Providing installment notes payable to its customers is not a normal trade term for the seller.
How should the $100 cash payment be recorded in the statement of cash flows? How should the $400 installment note payable to the seller be reflected?
The $100 cash payment should be reported as an investing activity outflow and included with purchases of property, plant, and equipment. The noncash investing and financing transaction of $400 should be disclosed.
The subsequent principal payments on the debt should be classified as financing cash outflows, whereas the payments of interest on the debt should be classified as operating cash flows.
Alternatively, if the $400 was borrowed from a third-party lender who agrees to disburse the funds either to the buyer, or to the seller at the direction of the buyer, the loan would be a financing cash inflow and the full purchase price of the equipment would be an investing cash outflow.