The FASB continues to work to identify and address areas in the accounting standards where diversity in practice exists. Its’ latest Accounting Standards Update (ASU) focuses on clarifying how certain cash receipts and cash payments are to be classified within the statement of cash flows. The ASU provides updated guidance on eight cash flow issues, which are summarized below:
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Debt prepayment or debt extinguishment costs
Cash payments for debt prepayment or extinguishment costs must be classified as financing activities.
Settlement of zero-coupon bonds
Upon 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 the settlement of insurance claims 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. An entity may align premium payments with proceeds on policies; however, this is not required.
Distributions received from equity method investees
An entity must elect to classify distributions received under the cumulative-earnings approach or the nature of the distribution approach. Under the cumulative-earnings approach, distributions are considered returns on investment and classified as operating activities. Under the 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
For cash receipts or payments that have aspects of more than one class of cash flows, an entity first determines whether specific classification guidance exists. If no guidance exists, an entity determines each separately identifiable source or use of the receipt or payment and classifies it based on the nature of the underlying cash flows. If separation is not possible, the entity classifies the cash flow activity that is likely the predominant source or use of cash flows.
For public entities, the guidance is effective for fiscal years beginning after December 15, 2017. For all other entities, the guidance is effective for 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.
For more information on cash flow classification, contact Hartley Hartman at email@example.com or Scott Haynes at firstname.lastname@example.org.