Finally, some clarity when it comes to cash flow classification. Recently issued Accounting Standards Update 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments reduces ambiguity in the classification of certain cash receipts and disbursements in the statement of cash flows. This Financial Accounting Standards Board (FASB) update provides new guidance on eight cash flow classification issues, which previously were unaddressed or unclear in the FASB guidance. The new guidance applies to all entities required to issue a statement of cash flows and seeks to offer additional clarification in hopes of reducing the occurrence of financial statement restatements.
To offer a quick look at what’s new, we’ve summarized these eight below.
- Debt prepayment or debt extinguishment costs now should be categorized as cash outflows from financing activities.
- Settlement of zero coupon debt instruments should be divided into two parts. Accrued interest related to a debt discount should be categorized as cash outflow for operating activities, and principal payments should be categorized as cash outflow for financing activities.
- Contingent consideration payments made after a business combination should be categorized based on timing. If cash is paid soon after the date of acquisition, it should be categorized as cash outflow for investing activities. If not paid soon after such date, payments should be categorized as outflow for financing activities up to the amount of the contingent liability recorded on the acquisition date. Payments in excess of the recorded liability should be categorized as outflow for operating activities. While the update does not explicitly define the term “soon,” it does suggest that three months or less is a good standard.
- Proceeds from settlement of insurance claims should be categorized based on the nature of the loss incurred.
- Proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, should be categorized as cash inflow from investing activities.
- Distributions received from equity-method investees should be categorized using either the cumulative earnings approach or the nature of distribution approach. If the cumulative earnings approach is selected, distributions are recorded as cash inflows from operating activities unless the cumulative distributions received, less the distributions received in prior periods, exceed the cumulative equity in investee earnings. In such a case, the excess should be categorized as cash inflow from investing activities. If the nature of distribution approach is selected, distributions are categorized based on the nature of the activities that generated the distribution.
- Beneficial interest in securitization transactions should be reported as non-cash activity with related cash payments categorized as cash inflows from investing activities.
- Separately identifiable cash flows should first be determined by applying current guidance in generally accepted accounting principles. If no specific guidance is available, each separately identifiable payment or receipt should be categorized based on the nature of the cash flow. In cases where the cash flows cannot be separated, the payment or receipt should be categorized using the predominance principal. Application of this principal involves categorizing cash based on the predominant source or use of funds.
This update will apply to all entities that are required to present a statement of cash flows. It is effective for fiscal years following December 15, 2017, for public entities and December 15, 2018, for all other entities, and should be applied retrospectively to all periods presented.
If you have any questions about this ASU and cash flow classification, or would like to request a speaker on this topic for your organization or event, contact one of our executives below at (800) 270-9629.