Board Addresses Cash Flow Issues for which GAAP Currently Offers no Guidance

As part of its ongoing review of emerging issues, the Financial Accounting Standards Board (FASB) issued a new update that seeks to narrow variations in how cash receipts and payments are presented and classified in cash flow statements.

Under Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, the FASB addresses eight specific cash flow issues in which current GAAP (Generally Accepted Accounting Principles) offered unclear guidance or no specific direction at all. This amendment is intended to unify the currently diverse presentations and classifications.

Public companies must comply with the updated system in fiscal years beginning after December 15, 2017. All other business entities must comply in fiscal years beginning after December 15, 2018. In its guidance, FASB noted that if an entity finds it “impracticable” to apply amendments retrospectively for some of the identified issues, actions to apply those amendments should be taken at the earliest practicable date.

Hein & Associates, an accounting advisory firm, has released a summary of the new rules.

The rules are listed in bullet points below:

  • Debt Prepayment or Debt Extinguishment Costs

Payments applied to prepay or to costs associated with debt extinguishment should be classified as cash outflows for financing activities.

  • Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing

At settlement for these debt instruments, issuers should classify the portion of cash payments attributable to accreted interest related to the debt discount as cash outflows for operating activities. Additionally, the cash payment portion attributable to the principal should be shown as cash outflows for financing activities.

  • Contingent Consideration Payments Made after a Business Combination

If an acquiring company’s cash payment to settle of a contingent consideration liability is not made soon after the transaction date, the payment should be separated and classified as cash outflows for financing and operating activities. Cash payments up to the amount of contingent consideration liability recognized at the date of acquisition (including any measurement-period adjustments) should be classified as financing activities; all excess should be classified as operating. On the other hand, if this type of cash payment is made soon after the transaction date, it should be classified as cash outflows for investing activities.

  • Proceeds from the Settlement of Insurance Claims

Cash from insurance claim settlements should be classified on the basis of related insurance coverage (or, by the nature of the loss). If the insurance settlement is paid as a lump sum, the entity should classify cash proceeds by the basis of each loss included in the settlement.

  • Proceeds from the Settlement of Corporate

Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies. Cash from settlements of corporate-owned life insurance policies should be classified as cash inflows from investing activities. On the other hand, premium payments 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

When an entity uses the equity method of investment, it should make an accounting policy election to classify distributions from investees using one of two acceptable approaches. Broadly speaking, this includes 1) the cumulative earnings approach, under which distributions received are considered returns on investment and classified as cash inflows from operating activities; or 2) the nature of the distribution approach, under which distributions received should be classified by the nature of the investee activity (or activities) that generated distribution when such information is available to the investor. If the entity elects the nature of the distribution approach and information of investee activity (or activities) is not available, then a change in accounting principle shall be reported on a retrospective basis by applying the cumulative earnings approach (approach #1) for that investee.

  • Beneficial Interests in Securitization Transactions

This type of transaction should be reported as a noncash activity. In addition, cash payment receipts from a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities.

  • Separately Identifiable Cash Flows and Application of the Predominance Principle

If cash receipts and payments have multiple cash flow aspects, the entity’s classification efforts should start with an application of specific GAAP guidance. In the absence of specific guidance, the entity should identify each separate source or use within the cash receipts and payments, based on the nature of underlying cash flows. After that, the entity should classify each separately identifiable source or use of cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations where there are multiple classes of cash receipts and payments that can’t be separated by source or use, classification should depend on any activity judged as “predominant source or use” of cash flows.


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