Investing activities are the class of cash flows covering the loans a business makes and collects, its purchases and sales of the debt and equity instruments of other entities, and its purchases and sales of property, plant, and equipment and other productive assets. In a statement of cash flows they are reported as the investing section. Productive assets means assets held for or used in producing goods or services, other than materials that are part of inventory. The class is a rule about where a cash movement gets reported, not a description of what a business owns.
That wording is the original standard’s own. Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the enterprise, other than materials that are part of the enterprise’s inventory (FASB, Statement of Financial Accounting Standards No. 95, paragraph 15). That Statement is the origin of the wording rather than its live address, having been superseded on the effective date of Statement No. 168, which kept only a short list of named Statements authoritative until each was integrated into the Codification (FASB Statement of Financial Accounting Standards No. 168, paragraph 15). The live address is Topic 230, and how the three sections tie to the closing cash total is set out in the cash flow statement.
What Counts as an Investing Receipt
Four kinds of receipt are listed (FASB Accounting Standards Update 2016-15, ASC 230-10-45-12). Collections or sales of loans the entity made, and of other entities’ debt instruments, come first, together with collections on a transferor’s beneficial interests in a securitization of the transferor’s trade receivables. Cash equivalents, certain debt instruments acquired specifically for resale and certain donated debt instruments received by not-for-profit entities are carved out of that class.
Sales of the equity instruments of other entities are next, along with returns of investment in those instruments, again excluding certain equity instruments carried in a trading account and certain donated equity instruments received by not-for-profit entities. Third are receipts from sales of property, plant, and equipment and other productive assets. The last class covers loans held as investments: if loans were acquired as investments, cash receipts from sales of those loans are investing inflows regardless of a change in the purpose for holding them.
What Counts as an Investing Payment
Four kinds of payment are listed (FASB Accounting Standards Update 2016-15, ASC 230-10-45-13). Disbursements for loans the entity makes, and payments to acquire the debt instruments of other entities, open the list, excluding cash equivalents and certain debt instruments acquired specifically for resale. Payments to acquire the equity instruments of other entities follow, excluding certain equity instruments carried in a trading account.
Third are payments at the time of purchase, or soon before or after purchase, to acquire property, plant, and equipment and other productive assets. The fourth is a payment made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability. An instrument acquired specifically for resale is treated as goods on the operating list instead, which operating activities works through.
The Calls That Catch Preparers Out
Insurance money on a wrecked asset can be an investing receipt. Receipts from disposing of loans, debt or equity instruments, or property, plant, and equipment include directly related proceeds of insurance settlements, such as the proceeds of insurance on a building that is damaged or destroyed (FASB Accounting Standards Update 2016-15, ASC 230-10-45-12). The test is which asset the settlement was directly related to, not the fact that a claim was paid.
A seller-financed purchase splits across two sections. Generally only advance payments, the down payment, or other amounts paid at the time of purchase or soon before or after purchase are investing cash outflows, because incurring directly related debt to the seller is a financing transaction and subsequent payments of principal on that debt are financing cash outflows (FASB Accounting Standards Update 2016-15, ASC 230-10-45-13). A preparer who lifts the year’s additions off the fixed assets register and calls the whole amount investing will overstate the investing outflow.
Capitalized interest follows the asset. The same list puts interest capitalized as part of the cost of property, plant, and equipment and other productive assets in the investing section (FASB Accounting Standards Update 2016-15, ASC 230-10-45-13), which is a different section from the one ordinary interest paid sits in.
Contingent consideration turns on timing. Payments not made soon after the acquisition date stop being investing, and up to the amount of the liability recognized at the acquisition date they are financing outflows (FASB Accounting Standards Update 2016-15, ASC 230-10-45-15). The portion of those later payments exceeding that recognized amount is an operating outflow (FASB Accounting Standards Update 2016-15, ASC 230-10-45-17).
Where a US Firm Builds the Section
The investing lines come off the supporting schedules rather than off a single ledger account. Additions and disposals sit in the fixed asset roll-forward, purchases and redemptions sit in the investment schedules, and each figure has to be the cash actually paid or received in the period. That is why the capital expenditure line does not equal the year’s capitalized additions unless every addition was paid for in the same year, a point capitalised expenditure works through.
An item is tested against the investing list before it can fall to operating, and the ordered test for anything carrying aspects of more than one class is set out in operating activities. The section itself does not change with the method chosen for the operating section, which the cash flow statement with the indirect method covers.
Presentation is gross by default. Investing cash inflows and outflows are reported separately rather than netted, so a year in which a client replaces a vehicle and sells the old one carries a purchase line and a proceeds line rather than one net figure (FASB, Statement of Financial Accounting Standards No. 95, paragraph 31). The exception is narrow. Net reporting is available for cash receipts and payments pertaining to investments other than cash equivalents, loans receivable and debt, and only where the original maturity of the asset or liability is three months or less (FASB, Statement of Financial Accounting Standards No. 95, paragraph 13).
What Investing Activities Is Confused With
The investments a business holds are a balance sheet caption. Investing activities is a cash flow classification, so a portfolio that doubled in value with nothing bought or sold produces no investing cash flow at all, while a single sale of a long-held asset produces one.
Personal investing is a different subject. This term is a rule for classifying a business’s cash receipts and payments, and it says nothing about how an individual should put money into securities.
Capital expenditure is the purchase side of this section rather than the section itself, and free cash flow subtracts that line from operating cash flow, as the formula for FCF and OpEx versus CapEx set out.
Common Questions
Investing activities are the cash flows from making and collecting loans and from acquiring and disposing of the debt or equity instruments of other entities and of property, plant, and equipment and other productive assets. They are reported as the investing section of the statement of cash flows.
Investing activities look at what the business bought, sold or lent. Financing activities look at the people who fund it, covering obtaining resources from owners and providing them with a return on, and a return of, their investment, borrowing money and repaying amounts borrowed or otherwise settling the obligation, and obtaining and paying for other resources obtained from creditors on long-term credit (FASB, Statement of Financial Accounting Standards No. 95, paragraph 18). Buying equipment is investing, and borrowing the money to buy it is financing.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own close work through a trial task before a client’s statement of cash flows depends on it.
