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As discussed in ASC 230-10-45-13(c), payments made soon before, soon after, or at the time of purchase to acquire property, plant, and equipment and other productive assets should be classified as cash outflows for investing activities. Such amounts should include interest payments capitalized as part of the cost of the acquired assets. If a purchase of property, plant, and equipment and other productive assets is solely funded by issuing debt directly to the seller, it is a noncash financing transaction. Subsequent payments of principal on such debt are financing cash outflows.
Purchases of property, plant, and equipment that have not been paid for during the period (i.e., liabilities exist in accounts payable or accrued liabilities to pay for the purchase) represent noncash activities, as discussed in ASC 230-10-50-4. As such, they should generally be excluded from the relevant statement of cash flows line items (i.e., the change in accounts payable or accrued liabilities lines in the operating category, and purchases of property, plant, and equipment in the investing category). Such noncash activity should be separately disclosed as discussed in ASC 230-10-50-3. Refer to Example FSP 6-3 for more information.
In a lease transaction, a lessor may agree to reimburse the cost of leasehold improvements by making payments to either the lessee or directly to a third party. When a lessor makes the payment directly to a third party, judgment is required to determine whether such payment represents a cash flow for the lessee. If the payment was made by the lessor on behalf of the lessee as a matter of convenience, we believe the lessee has received a cash incentive from the lessor (which should be reflected as an operating inflow) and acquired a fixed assets (which should be reflected as an investing outflow). However, when a lessor makes a payment directly to a third party based on a contractual requirement, the lessee should reflect the payment as a noncash investing transaction. Determining whether a payment made by the lessor is a matter of convenience is judgmental and requires an evaluation of the specific facts and circumstances of the arrangement. See FSP 6.8.1 for a discussion of constructive receipt and constructive disbursement.
ASC 230-10-45-14 indicates that donor contributions and investment income thereon, which are stipulated by the donor for the purposes of acquiring, constructing, or improving property, plant, and equipment, should be classified as financing activities.
Real estate is generally considered a productive asset and cash payments to acquire such real estate are classified as investing cash outflows. However, if real estate is purchased by a developer to be subdivided, improved, and sold in individual lots, the cash payments to purchase the real estate and the related cash receipts from sale of the real estate should be classified as operating activities. Thus, the nature of the cash flows is similar to inventory in other businesses.
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