Frequently Asked Questions on Cash Flow Statements

(1) Is there an exemption for investment companies that enables them to avoid presenting a statement of cash flows? (AAG 7.93)

Yes. FASB ASC 230-10-15-4 exempts investment companies from the requirement to provide a statement of cash flows, if all of the following conditions are met:

Liquidity: During the period of the audit, substantially all of the investments held must be highly liquid. That is, all investments held must have a readily available market.
Market value: During the period of the audit, substantially all of the fund's investments must be carried at market value. Securities for which fair value is determined using matrix pricing techniques would meet this condition. Securities for which market value is not determinable and for which fair value must be determined in good faith by the Board of Directors would not meet this condition.
Debt: During the period of the audit, the fund must have little or no debt, based on the average debt outstanding, in relation to the average total assets. For the purpose of determining average debt outstanding, obligations resulting from capital withdrawals, from unsettled purchases of securities or similar assets, or from covered options written, may be excluded. However, any extension of credit by the seller not in accordance with the standard industry practice related to capital withdrawals or settling purchases of investments should be included in average debt outstanding.
Statement of changes in net assets: The fund must provide a statement of changes in net assets. For investment partnerships, the statement of changes in net assets may be combined with the statement of changes in partners' capital.

(2) Are uncovered options, short sales of securities and reverse repos treated as debt for the purposes of calculating average debt outstanding? (TIS Section 6910.25)

Although presented in the liabilities section of the statement of assets and liabilities, options sold/written (whether covered or uncovered), short sales of securities and other liabilities recorded as a result of investment practices are not necessarily debt. Their classification depends on the nature of the activity. Certain transactions like securities lending, mortgage dollar rolls or short sales may have a practice of being entered into solely for operating purposes or as an investing strategy. The investment company either retains the proceeds of these transactions in cash or uses them to invest in securities that are cash equivalents. In such cases, the proceeds from the transaction would not be considered debt for the purposes of assessing whether the conditions in FASB ASC 230 are met.

(3) Should the effect of any foreign exchange fluctuations on cash balances be disclosed as a separate line item? (AAG 7.98)

Yes. FASB ASC 830-230-45-1 states that the effect of foreign exchange fluctuations on cash balances should be disclosed as a separate line item.

(4) How do you determine whether the purchases and sales of securities presented in the operating section of the cash flow statement of a non-registered investment company should be shown on a net or gross basis? (TIS Section 6910.26)

The investment company's trading style, investment objectives stated in the offering memorandum and portfolio turnover should be the primary determinants of net v gross reporting. Where the investment company's overall activities comport with trading, netting is permissible, otherwise gross reporting of purchases and sales is required.

(5) Can the activities related to long positions be netted against the activity related to short positions for cash flow presentation?

The fund should separately report its activity related to long positions from activity related to short positions. The changes in account balances reported as assets should not be netted against changes in account balances reported as liabilities.

(6) What are some of the disclosures that should be presented under the supplemental section of the cash flow statement? (AAG 7.99)

Cost and fair value of investments contributed and distributed to/from the fund are items disclosed under the non-cash financing activities. Any cash paid during the year as interest is disclosed under the supplemental section of cash flow information.

Frequently Asked Questions on Cash Flow Statements

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