MEMORANDUM
TO:
FROM:
DATE:
RE:
Ryan Wilson
Travis Ables
December 1, 2014
Accounting Guidelines for Buck’s Hunting Equipment Inc.
We have been presented with a set of questions from Buck’s Hunting Equipment
Incorporated (now referred to as “Buck”). The questions were about how Buck should
present certain accounting transactions in accordance with U.S. GAAP and International
Accounting Standard. We answer each of these questions below by providing the relevant
guidelines from the Accounting Standard Codification (ASC) or the International
Accounting Standard 7 (IAS 7).
How to Report a Credit Facility
Should Buck present the borrowing and payment activity related to its revolving line of
credit as cash flows from operating, investing, or financing activities?
According to ASC 230-10-45-14b, all of the following are cash inflows from
financing activities: proceeds from issuing bonds, mortgages, notes, and from
other short- or long-term borrowing. A revolving line of credit belongs to this set,
so we conclude that Buck should present the cash flows as a financing activity.
Whether to Present Gross or Net Method
For each of the following scenarios, on the basis of the specific facts and circumstances,
we determine whether Buck should present its borrowing and payment activity under the
Facility on a net or gross basis within the financing activities section of its statement of
cash flows.
Scenario 1:
According to ASC 230-10-45-9, only lines of credit that mature less than three
months from initiation can be net recorded. Because the Facility did not specify
credit terms on each draw of the line in this scenario, we must assume that partial
draws do not mature until the total line matures. Buck should report the two draws
as a gross amount in the cash flow statement.
Scenario 2:
In this scenario, there are two transactions, so we consider each accordingly. On
June 15, 2010, Buck drew $60 million, and signed a note to repay the full amount
borrowed by December 15, 2010. The maturity on this note is six months.
Because the maturity is more than three months, we conclude that the gross
method should be used.
On September 30, 2010, Buck drew an additional $40 million, and signed a note
to
repay the full amount borrowed by December 1, 2010. The maturity is two
months, which satisfies the maturity condition of the net method. According to
ASC 230-10-45-8, the turnover must also be quick and the amount must be large
to use the net method. Since the volume of the transactions is consider to be large
and the short maturity implies a quick turnover (providing the debt is paid ontime), we conclude the net method should be used for this note.
Scenario 3:
Buck drew lines of credit on June 30, 2010, September 30, 2010, and November 30,
2010. All three sources of debt have maturities of three years, which is greater than three
months. Hence, the gross method should be used.