Cash Flows Guidance – Consistency is Now!

As companies diversify their day-to-day business transactions, they may be found scratching their heads wondering how and where to classify cash activities on their statement of cash flows. To help reduce diversity in practice, the FASB issued Accounting Standards Update (ASU) 2016-15, which focuses on clarifying how certain cash receipts and cash payments are to be classified. The ASU provides updated guidance on the following cash flows issues:

Debt prepayment or debt extinguishment costs

Cash payments for such costs must be classified as financing activities.

Settlement of zero-coupon bonds

Principal payments are classified as financing activities and interest payments are classified as operating activities.

Contingent consideration payments made after a business combination

Cash payments for contingent consideration liabilities not made soon after the acquisition date are classified as operating activities. Cash payments up to the amount of the contingent consideration liability recognized as of the acquisition date are classified as financing activities.

Proceeds from the settlement of insurance claims

Cash receipts from such settlements are classified based on the nature of the loss.

Proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies

Cash proceeds must be classified in investing activities. Premium payments may be aligned with policy proceeds; however, this is not required.

Distributions received from equity method investees

An entity must elect to classify distributions received using one of the following approaches:

• Cumulative-earnings approach – Distributions are considered returns on investment and classified as operating activities
• Nature of the distribution approach – Distributions are evaluated based on the source of payment and classified accordingly as operating or investing activities

Beneficial interest in securitization transactions

A transferor’s beneficial interest received in the securitization of financial assets is disclosed as a noncash activity. Subsequent receipts from the securitization of an entity’s trade receivables are classified as investing activities.

Separately identifiable cash flows and application of the predominance principle

If a cash receipt or payment has aspects of more than one class of cash flows, an entity must determine whether specific classification guidance exists. If none exists, an entity must separately identify each source/use of the receipt/payment and classify it based on the nature of the underlying cash flows. If separation is impossible, the activity should be classified according to the predominant source/use.

The guidance is effective as follows:

• Public entities – Fiscal years beginning after December 15, 2017
• All other entities – Fiscal years beginning after December 15, 2018.

Early adoption is permitted and the guidance must be applied retrospectively unless it is impracticable to do so.