The Future of the Cash Flow Statement
Tiffany Edwards, Audit Senior Manager
Due to the diversity in practice in how certain cash transactions are presented and classified in the Statement of Cash Flows, the Financial Accounting Standards Board (FASB) has recently issued two accounting standards updates (ASU) including ASU 2016-15 and ASU 2016-18 with the objective of reducing this existing diversity.
ASU 2016-15 was issued on August 26, 2016 and addresses the following eight specific cash flow issues:
- Debt prepayment or debt extinguishment costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities;
- Settlement of zero-coupon debt instruments: Cash payments for the settlement of zero-coupon debt instruments, including other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of borrowing, should be classified as cash outflows for operating activities for the portion attributable to interest and as cash outflows for financing activities for the portion attributable to principal;
- Contingent consideration payments made after a business combination: Cash payments not made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be separated and classified as cash outflows for financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date should be classified as financing activities with any excess classified as operating activities. However, cash payments made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be classified as cash outflows for investing activities;
- Proceeds from the settlement of insurance claims: Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage. For insurance proceeds that are received in a lump sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement;
- Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies: Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of the two;
- Distributions received from equity method investees: Such distributions can be classified using either a cumulative earnings approach or nature of distribution approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity-method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return on investment and classified in investing activities. Alternatively, an investor can choose to classify the distributions based on the nature of the activities of the investee that generated the distribution. If the necessary information is subsequently not available for an investee to determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and report a change in accounting principle on a retrospective basis;
- Beneficial interests in securitization transactions: A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity, and cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities; and
- Separately identifiable cash flows and application of the predominance principle: The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in generally accepted accounting principles (GAAP). In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item.
In addition to ASU 2016-15 described above, the FASB also issued ASU 2016-18 on November 17, 2016 pertaining to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.
The amendments to the cash flow statement presentation of restricted cash require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period total amounts shown on the statement of cash flows.
Both ASU 2016-15 and ASU 2016-18 amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The amendments should be applied using a retrospective transition method to each period presented.
If you have any questions, contact Tiffany Edwards or your BNN advisor at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.