Polluter Corp Memo

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MEMORANDUM

To:
From:
Date:
Subject:

Statement of Facts
* Polluter Corp. runs three manufacturing facilities in the United States where they make various household cleaning products. * The Federal Government restricts the company to an emission allowance or EA, which must be used in the year prescribed by the government between 2010 and 2030. * EAs are considered intangible assets with a cost basis of zero. * EAs can be bought and sold from other companies with no consequence in order to satisfy pollution control obligations. * At the end of a compliance period, Polluter Corp. must provide sufficient EAs to the government or pay a fine. * Polluter Corp expects they will need to purchase additional EAs for fiscal years 2010-2014, but will be upgrading their facilities to reduce emissions and should be able to sell some of their EAs after 2014. * Polluter Corp purchased additional EAs on April 2, 2010 to be used in 2012 for $3 million. On the same day, they sold EAs to be used in 2016 for $2 million.

Identification of Questions and Alternatives
The following questions and alternatives have been identified: Issue 1: Should the purchase of emission allowances for 2012 be considered an investing, operating, or financing activity in the statement of cash flows for 2010?

Issue 2: Should the sale of emission allowances for 2016 be considered an investing, operating, or financing activity in the statement of cash flows for 2010?

Conclusions and Authoritative Reasoning
Issue 1: The purchase of emission allowances for 2012 is an investing activity on the 2010 statement of cash flows. * ASC 230-10-45-13 includes all of the following are cash outflows for investing activities: * a. “Disbursements for loans made by the entity and payments to acquire debt instruments of other entities” * b.  “Payments to acquire equity instruments of other entities” c.  “Payments at the time of purchase or soon before or...
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