MEMORANDUM

Polluter Corp operates three manufacturing facilities in which various household cleaning products are manufactured and sold to retail stores. Polluter has a certain emission allowances for each year that are classified as intangible assets. Because it anticipates a need for additional emission allowances for the years 2010 – 2014, it purchased $3 million in emissions credits from Clean Air Corp. on April 2, 2010. A complete renovation of its facilities will be completed by 2014, at which point in time Polluter expects to have additional emission allowance that it does not need. Therefore, to offset the cost of having to purchase emissions credits until the renovations are complete, Polluter sold $2 million worth of future emissions credits to Dirty Chemical Corp. The question of how to account for these transactions in the statement of cash flows has been raised. This memo discusses and evaluates the relevant options.

Definitions

Accounting Standards Codification 230-10 Statement of Cash Flows

230-10-20 Glossary

Financing Activities
Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; receiving restricted resources that by donor stipulation must be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit.

Investing Activities
Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity's inventory).

Operating Activities
Operating activities include all