Question

Up and Coming, Inc. (“UCI” or the “Company) is a privately held provider of canoes and kayaks for competition as well as recreation. In September 2018, the Company secured financing of $40 million from an independent investor, Daddy Warbucks, Inc. (DWI) in exchange for the following:

• $30 million for the issue of a new series of its Series E Preferred Stock (“Preferred Stock”), and

• $10 million of the sale of its shares of common stock (“Common Stock”).

The purchase of the Preferred Stock and Common Stock were executed within the same transaction. Thus, DWI paid the same value per share for the Common Stock as it did for the Preferred Stock, which is a common practice among venture capitalists.

The Company had previously awarded common stock to employees as share-based compensation. As required by the terms of the financing agreement, UCI conducted a tender offer to repurchase an aggregate of $10 million of common stock from its current employees at a per-share price of $4.68. The common stock reacquired from the employees was then sold by UCI to DWI for a like amount of $10 million. The purchase price of $4.68 was independently negotiated with DWI. UCI acted as a principal in both transactions with DWI and the employees. That is, the Company did not act as an agent to purchase shares from employees on behalf of DWI.

On the basis of an independent third-party valuation, UCI concluded that the purchase price paid to the employees ($10 million) exceeded the fair value of common stock by $2.6 million.

ASC 718-20-35-7 states, in part:

The amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity instruments repurchased at the repurchase date. Any excess of the repurchase price over the fair value of the instruments repurchased shall be recognized as additional compensation cost.

Pursuant to the guidance above, UCI recorded debits to treasury stock and expense in the amounts of $7.4 million (representing the fair value of the common stock) and $2.6 million (representing the excess of purchase price over fair value), respectively, and a credit to cash.

As an accountant on the staff of UCI, you are to research and document the following questions:

1. Should the $10 million paid to employees and the $10 million received from DWI be presented gross or net in UCI’s statement of cash flows?

2. How should UCI classify the cash received and paid in its statement of cash flows?

3. Does the accounting analysis or conclusion change for each of the above questions when analyzed in accordance with IFRS?

Answer 1

1. As per the applicable standard , $ 10 million paid to employees and received from DWI should be presented as gross, and $ 10 million is not received on behalf of DWI and paid to him.

2. ASC 718-20-35-7 states that, the fair value of the amount paid to the employees the common stock acquired should be recognized in equity as a treasury stock transaction and should be shown as a cash out-flow for financing activities in cash-flow statement. The amount paid in excess of the fair value of the common stock to the employees of the incorporation is compensation expenses and should be shown as a cash out-flow for operating activities in cash-flow statement.

UCI should show cash paid to employees as cash out-flow for financing activities in cash-flow statement.

UCI should show cash paid to employees as cash out-flow for investing activities in cash-flow statement.

3. In accordance with IFRS,  ,

(a) $ 10 million paid to employees and received from DWI should be presented as net and not gross.

(b) UCI should show cash paid to employees as cash out-flow for financing activities in cash-flow statement.

(c) UCI should show cash paid to employees as cash out-flow for investing activities in cash-flow statement.