Statement of Cash Flows Update

By Jennifer DeBor, CPA | February 1, 2018

 

By Jennifer Debor, CPA
The Financial Accounting Standards Board (FASB) issued two accounting standard updates (ASU), ASU 2016-15 and ASU 2016-18, that impact the presentation of an organization’s statement of cash flows.  Both ASU’s are effective in 2019 for non-public entities, or in FASB’s terminology ‘for fiscal years beginning after December 15, 2018’.  Public entities are required to apply the standard one year earlier.  The goal of both ASU’s is to establish a consistency of practice on how cash receipts, cash payments, and restricted cash are presented and classified in the statement of cash flows.  The highlights of the ASU’s are summarized below.
ASU 2016-15
  1. Debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities. 
  2. Interest amounts related to settlement of zero-coupon debt instruments should be classified as operating activities and the principal amounts should be classified as financing activities. 
  3. For contingent consideration payments made after a business combination, payments made within three months or less after the acquisition date should be classified within investing activities.  Payments made after that point toward an original contingent consideration liability should be classified within financing activities and payments made in excess are to be classified within operating activities.
  4. Proceeds from the settlement of insurance claims should be classified based on the nature of the loss.  For example, insurance proceeds on lost inventory should be classified as operating while proceeds received on damaged equipment would be considered investing activities.
  5. Proceeds from the settlement of Corporate-owned life insurance policies should be classified as investing activities.  The premium payments may be considered investing or operating or both.
  6. Distributions received from equity method investments require an accounting policy election. 
    • If choosing the cumulative approach, which is considered a return on investment, the distributions would be classified as operating unless they exceed the cumulative equity in earnings, and if so, it would be classified as investing. 
    • If choosing the nature of distribution approach, the classification is based upon the nature of the activities of the investee, which may be operating or investing. 
  7. Beneficial interests in securitization transactions that are a result of a transferor’s securitization of a financial asset should be disclosed as a noncash activity.  Cash receipts from payments on a transferor’s beneficial interest would be classified within investing activities. 
  8. Lastly, as a catch all, the ASU states that for each separately identifiable cash flow, the specific GAAP guidance should be applied.  For those cash flow items that may have more than one classification aspect that cannot be easily separated, the classification of the predominance source should be applied.
ASU 2016-18
  1. On the statement of cash flows, restricted cash is to be included within the cash amount when reconciling the beginning-of-period and end-of-period total cash amounts.   
  2. The balance sheet cash line items should be reconciled to the cash totals in the statement of cash flows.  This can be presented within the statement of cash flows or in the notes to the financial statements.  (This is applicable if more than one cash line exists on the balance sheet).
While early adoption is permitted for both ASU’s, if an organization is issuing comparative reports, the changes should be applied to all periods presented.