Executive Summary

Each year, key stakeholders gather in Washington, D.C., for the AICPA Conference on Current SEC and PCAOB Developments to discuss issues and trends affecting accounting, financial reporting, auditing, and other related matters. Although the event was fully virtual this year in light of the COVID-19 pandemic, it was no less informative.

Customers Accounting and Statement of Cash Flow Presentation for Consideration Received From a Vendor

The session on current OCA projects included remarks from OCA professional accounting fellows related to consideration received from a vendor. Damon Romano addressed customers accounting, and Mr. Cherrstrom discussed a statement of cash flow presentation. Their remarks are summarized as follows:

• Customers accounting In the fact pattern shared by Mr. Romano, the registrant had purchased fixed assets from a vendor and had a noncancelable contractual obligation to purchase additional fixed assets in the future from that vendor. As a result of 7 significant issues with the fixed assets, the vendor made repairs and provided the registrant with additional cash compensation. The contractual agreements did not obligate the vendor to make payments for the issues identified. The registrant considered the guidance in ASC 705-20-25-1, which indicates that consideration received from a vendor should be accounted for as a reduction of the purchase price of a good or service unless certain criteria are met. The registrant asserted that the vendor made the cash payment, among other reasons, to retain the registrant as a customer. The consideration was not (1) received in exchange for a distinct good or service, (2) a reimbursement of costs incurred by the registrant to sell the vendors products, or (3) for sales incentives. As a result, the registrant concluded that it would be appropriate to reflect the cash consideration from the vendor as a reduction of the purchase price of both previously purchased fixed assets and the fixed assets that the registrant was firmly committed to purchase from the vendor. The SEC staff did not object to the registrants conclusion.
• Cash flow presentation The fact pattern shared by Mr. Cherrstrom addressed whether cash outflows to a vendor may be presented net of cash inflows received from that vendor. In this case, the cash outflows are related to payments for the purchase of fixed assets from the vendor and are classified as investing activities in the statement of cash flows. The registrant concluded that these payments and receipts can be presented net within investing activities. According to Mr. Cherrstrom, the registrant indicated that certain aspects of the transaction are similar to the specific scenarios described in GAAP where net reporting is deemed acceptable. For example, the registrant argued that (1) turnover is quick because the entity has contracts to purchase additional fixed assets in amounts in excess of the cash receipts, (2) the amounts are large, and (3) the maturities are irrelevant since the payments do not have stated maturity dates. The SEC staff objected to the registrants conclusion that net presentation is appropriate.

Connecting the Dots ASC 230-10-45-26 states, in part, that [e]xcept for items described in paragraphs 230-10-45-8 through 45-9, both investing cash inflows and outflows and financing cash inflows and outflows shall be reported separately in a statement of cash flows.

Equity Method Investments

During the session on current OCA projects, OCA Professional Accounting Fellow Jeffrey Nick discussed a recent consultation related to whether the equity method should be applied to a registrants investment in a corporation. ASC 323-10-15-8 states, in part, that an investment of less than 20 percent of the voting stock of an investee shall lead to a presumption that an investor does not have the ability to exercise significant influence unless such ability can be demonstrated.

In the consultation described by Mr. Nick, the registrant held less than 20 percent of the outstanding voting stock of an investee. However, the registrant also (1) had access to nonpublic information about the corporation as a result of various informal arrangements with the corporation, (2) shared with the corporation certain managerial personnel, and (3) was a party to a contractual agreement with certain other investors to vote in concert with respect to electing members to the board of directors. The contractual agreement to conform 8 votes gave the participating investors, as a group, the ability to unilaterally appoint specified individuals to the board of directors, including an individual from the registrant, who would collectively constitute the majority of the board of directors. The investors participating in the contractual agreement would not have had sufficient votes to guarantee the appointment of the specific board members without the registrants voting interest.

• Connecting the Dots: On the basis of the facts as described by the SEC staff, we assume that the registrant only needed to vote in concert with others to appoint the specified individuals to the board of directors but that the contractual agreement did not require the specified individuals on the board to vote as a group on matters at board meetings. That is, we assume that each appointed director would be permitted to vote in his or her best interest.

The registrant concluded that it did not have the ability to exercise significant influence over the investee and that it therefore was not required to apply the equity method to its investment. However, the SEC staff objected to that conclusion.

• Connecting the Dots The determination of whether an investor has the ability to exercise significant influence over an investees reporting and financial policies should not be limited to the evaluation of voting rights given that significant influence may be exhibited through other means. Representation on the board of directors (through contractual agreement or otherwise) allows an investor to influence the operating and financial policies of an investee by virtue of its presence and participation at meetings of the board of directors. Therefore, any board representation is an indicator of significant influence notwithstanding an investors ownership in the legal entity, even if the amount of board representation is mathematically less than 20 percent of the board of directors.

Questions:

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