Reference no: EM132622322

ABC Energy Corp. (the "Company"), an SEC registrant, operates three manufacturing facilities in the United States. The Company manufactures various household cleaning products at each facility, which are sold to retail customers. The U.S. government granted the Company emission allowances (EAs) of varying useable years (i.e., the years in which the allowance may be used) to be used between 2015 and 2030. Upon receipt of the EAs, the Company recorded the EAs as intangible assets with a cost basis of zero, in accordance with the Federal Energy Regulatory Commission (FERC) accounting guidance for EAs. The Company has a fiscal year end of December 31.

• As background, in an effort to control or reduce the emission of pollutants and greenhouse gases, governing bodies typically issue rights or EAs to entities to emit a specified level of pollutants. Each individual EA has a useable year designation. EAs with the same useable year designation are fungible and can be used by any party to satisfy pollution control obligations. Entities can choose to buy EAs from, and sell EAs to, other entities. Such transactions are typically initiated through a broker. At the end of a compliance period, participating entities are required to either (1) deliver to the governing bodies EAs sufficient to offset the entity's actual emissions or (2) pay a fine. The Company currently emits a significant amount of greenhouse gases because of its antiquated manufacturing facilities. The Company plans to upgrade its facilities in 2024, which will decrease greenhouse gas emissions to a very low level. On the basis of the timing of the upgrade, the Company currently anticipates a need for additional EAs in fiscal years 2020-2024.

• However, upon completion of the upgrade, the Company believes it will have excess EAs in fiscal years subsequent to 2024 because of reduced emissions as a result of the upgrade. The Company currently has forecasted the updates to its facilities will cost approximately $15 million. As the Company operates in a capital intensive industry, analysts and investors focus on a number of important ratios and measures, including working capital, capital expenditures, cash flows from operations, and free cash flow. As a result, the board of directors and management provide forward-looking guidance on these ratios and measures and expend great effort managing these results in light of the Company's operational needs. The Company entered into the following two separate transactions in fiscal year 2020, which will impact the Company's results as presented in the statement of cash flows, which the Company prepares under the indirect method.

1. To meet its need for additional EAs in fiscal years 2020-2024, on April 2, 2020, the Company spent $6.5 million to purchase EAs with a useable year of 2023 from XYZ Manufacturing Corp.

2. In an effort to offset the costs of the April 2, 2019, purchase of 2023 EAs, the Company sold EAs with a useable year of 2026 to DEF Chemical Corp. for $5 million.

Required:

Problem 1. What is the appropriate classification in the statement of cash flows in the Company's December 31, 2020, financial statements for its purchase of 2023 EAs from XYZ Manufacturing Corp.?

Problem 2. What is the appropriate classification in the statement of cash flows in the Company's December 31, 2020, financial statements for its sale of 2026 EAs to DEF Chemical Corp.?

Problem 3. Should these cash flows be reported at gross amounts or net amounts in the 2020 statement of cash flows?