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FASB Issues Guidance on Cash Flow Classification
On August 26, 2016, the FASB issued ASU 2016-15, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to eight types of cash flows.
Key Provisions of the ASU
The ASU is a result of consensuses reached by the FASB’s Emerging Issues Task Force (EITF) on issues related to the eight types of cash flows. Key provisions of the amendments are summarized below.
|Cash Flow Issues||Amendments|
|Debt prepayment or debt extinguishment costs||Cash payments for debt prepayment or extinguishment costs (including third-party costs, premiums paid, and other fees paid to lenders) must “be classified as cash outflows for financing activities.”|
|Settlement of zero-coupon bonds||The cash outflows for the settlement of a zero-coupon bond must be bifurcated into operating and financing activities. The portion of the cash payment related to accreted interest should be classified in operating activities, while the portion of the cash payment related to the original proceeds (i.e., the principal) should be classified in financing activities.|
|Contingent consideration payments made after a business combination||Contingent consideration payments that were not made soon after a business combination (on the basis of the consummation date) must be separated and classified in operating and financing activities. Cash payments up to the amount of the contingent consideration liability recognized as of the acquisition date, including any measurement-period adjustments, should be classified in financing activities, while any excess cash payments should be classified in operating activities.|
|Proceeds from the settlement of insurance claims||Cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss. For insurance proceeds 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 (COLI) policies and bank-owned life insurance (BOLI) policies||Cash proceeds from the settlement of COLI and BOLI polices must be classified in investing activities. However, an entity is permitted, but not required, to align the classification of premium payments on COLI and BOLI policies with the classification of COLI and BOLI proceeds (i.e., payments for premiums may be classified as investing, operating, or a combination thereof).|
|Distributions received from equity method investees||An entity is required to make an accounting policy election to classify distributions received from equity method investees under either of the following methods:
• Cumulative-earnings approach — Under this approach, distributions are presumed to be returns on investment and classified as operating cash inflows. However, if the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed the entity’s cumulative equity in earnings, such excess is a return of capital and should be classified as cash inflows from investing activities.
• Nature of the distribution approach — Under this approach, each distribution is evaluated on the basis of the source of the payment and classified as either operating cash inflows or investing cash inflows.
If an entity whose chosen policy is the nature of the distribution approach cannot apply the approach because it does not have enough information to determine the appropriate classification (i.e., the source of the distribution), the entity must apply the cumulative-earnings approach and report a change in accounting principle on a retrospective basis. The entity is required to disclose that a change in accounting principle has occurred as a result of the lack of available information as well as the information required under ASC 250-10-50-2, as applicable.
The amendments do not address equity method investments measured under the fair value option.
|Beneficial interests in securitization transactions||A transferor’s beneficial interests received as proceeds from the securitization of an entity’s financial assets must be disclosed as a noncash activity. Subsequent cash receipts of beneficial interests from the securitization of an entity’s trade receivables must be classified as cash inflows from investing activities.|
|Separately identifiable cash flows and application of the predominance principle||The guidance provides a three-step approach for classifying cash receipts and payments that have aspects of more than one class of cash flows:
1. An entity should first apply specific guidance in U.S. GAAP, if applicable.
2. If there is no specific guidance related to the cash receipt or payment, an entity should bifurcate the cash payment or receipt into “each separately identifiable source or use [of cash] on the basis of the nature of the underlying cash flows.” Each separately identifiable source or use of cash will be classified as operating, investing, or financing activities by applying the guidance in ASC 230.
3. If the cash payment or receipt cannot be bifurcated, the entire payment or receipt should be classified as operating, investing, or financing activities on the basis of the activity that is likely to be the predominant source or use of cash.
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