SEC Staff Guidance in AICPA Alert on

Statement of Cash Flows

UPDATE: On March 15, 2006, the Securities and Exchange Commission (SEC) posted the speech given by SEC Division of Corporation Finance Associate Chief Accountant Joel Levine at the American Institute of Certified Public Accountants (AICPA) National Conference on Current SEC and PCAOB Developments on December 6, 2005, referenced below, and also posted a link to a related powerpoint presentation entitled, “Current Developments in the Division of Corporation Finance.”

On February 15, 2006, the American Institute of Certified Public Accountants (AICPA's) Center for Public Company Audit Firms (CPCAF) published CPCAF Alert No. 90, "SEC Staff Position Regarding Changes to the Statement of Cash Flows Relating to Discontinued Operations" ("CPCAF Alert 90 or "the Alert").

The alert includes additional guidance the CPCAF received from Securities and Exchange Commission (SEC) staff with respect to issuers making certain changes to their Statement of Cash Flows pertaining to discontinued operations, and is related to remarks on this topic in a speech by Joel Levine of the SEC's Division of Corporation Finance at the December 2005 AICPA conference on current SEC and Public Company Accounting Oversight Board (PCOAB) Developments.

• We understand the crux of the issue is that the SEC staff would object to single line treatment of results of discontinued operations in the Statement of Cash Flows - i.e., that the SEC staff believes cash flow from discontinued operations should be separately broken out according to operating, investing, and financing related sections of Statement of Cash Flows. (According to CPCAF Alert 90, it would also be acceptable, if a company previously provided results of discontinued operations in one line item at bottom of Statement of Cash Flows, to expand the one line caption to the three categories (operating, investing, financing.)
• This matter is time sensitive in that, according to the Alert, changes made by issuers in the "next periodic report filed subsequent to February 15, 2006 (the date the alert was issued) would not have to treated as correction of an error, but any later changes (i.e., in other than the next periodic report filed subsequent to February 15, 2006) pertaining to the subject discussed in the Alert would have to be treated as correction of an error. Specific disclosure requirements are also discussed.

A summary of CPCAF Alert No. 90 follows.

• "The SEC staff has advised us [the AICPA CPCAF] that their views concerning classification of discontinued operations within the statement of cash flows were discussed in Joel Levine's December speech at the AICPA Annual Conference on SEC and PCAOB Current Developments. In that speech, Mr. Levine identified certain presentation formats considered to be inconsistent with Statement of Financial Accounting Standard No. 95, Statement of Cash Flows (SFAS 95).
• While the staff believes issuers using any of those formats should revise their presentation through restating prior periods as correction of an error, the staff further advised us they will not object to issuers retrospectively modifying their presentation similar to a change in accounting method (without referring to the correction of an error).
  • In reaching this position, the staff considered many factors, including the usefulness of information currently depicted in those presentations and the longstanding practice of a large population of issuers.
  • Issuers who choose to retrospectively modify their presentation must provide enhanced disclosures such that readers are aware that the cash flow presentation has been modified.
• For example, if the previous presentation was to have a single line at the bottom of the statement of cash flows containing the combined Operating, Investing and Financing cash flows of Discontinued Operations and the registrant's choice is to disclose such cash flows by expanding the previous one caption display, then the footnotes would need to clearly disclose the change, and the face of the cash flow statement should indicate the change by labeling either the column or the marginal heading as "revised" or "restated."
  • However the SEC Staff has advised us that characterizing the modification as "reclassified" in the column or marginal heading would not be acceptable.
• If a registrant chooses to provide the disclosures of the cash flows pertaining to the discontinued operations by adding an additional line to each of the three categories of cash flows, that method would have the effect of changing the total for each such category.
  • In that case, the marginal caption revision described above cannot be used and the column heading of each year must be labeled "Revised - See note X" or "Restated - See note X."
• The SEC staff has stated that the footnote disclosure of the change must be specific.
  • It is not acceptable to assert that this change is already encompassed by the general policy note statement "Certain prior year amounts have been reclassified for comparative purposes to conform to current year presentation."
  • The SEC Staff would expect the disclosure to more closely approximate "In 2005 the company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount."
• Registrants would need to make these changes in the next periodic report filed subsequent to February 15, 2006.
  • If the issue is discovered and corrected in a later interim or annual period, the SEC staff would expect the modification to be treated as a correction of an error, and would expect the prior filing(s) to be amended.
  • The staff believes that misclassifications in the statement of cash flows that are caused by a misapplication of SFAS 95 are errors and therefore their conclusions in this issue would not affect other situations."

Updated March 17, 2006 by Edith Orenstein (eorenstein@fei.org), Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above.