It’s no secret the statement of cash flows can be difficult to prepare with the wide variety of transactions companies are involved with on a daily basis. Beginning in December 2016, the Financial Accounting Standards Board (“FASB”) issued a new Accounting Standards Update “ASU” to standardize the reporting and classification for eight tricky cash-related transactions. This update, referred to as ASU 2016-15, addresses issues faced by both financial statement preparers and users, making cash flow reporting easier along the way!
ASU 2016-15 was issued to standardize reporting and classification for eight types of cash transactions for all entities required to prepare a statement of cash flows. Below are the new reporting requirements announced in the update:
- Prepayments or extinguishment of debt: These transactions are considered a cash outflow infinancing activities.
- Lump-sum payment made for anon interest-bearing bond: The principal portion of the payment is a cash outflow in financing activities, while the interest portion is a cash outflow in operating activities.
- Contingent liabilities in acquisition:If the company you are acquiring has a contingent liability and a payment is made to pay-off the liability soon after acquisition of the company, then the cash payment is classified as an investing activity. If the cash payment is NOT made soon after acquisition, the amount of the payment, to the extent of the liability, is a financing activity. Any excess payment made is an operating activity.
- Insurance claim proceeds:The classification of the cash proceeds received on a claim will depend on the nature of the claim. For example, if insurance proceeds are received for an investment property that burned down in a fire, then the proceeds would be considered an investing activity.
- Corporate-owned life insurance policies:Proceeds received under a policy are considered aninvesting activity, whereas premiums paid are either an operating or investing activity.
- Investment distributionsreceived under the equity method: If the amount of the distribution is less than the amount invested, the amount of the cash received is included in operating activities. If the amount of the distribution exceeds the amount invested, the amount of the cash received, to the extent of the investment, is an investing cash inflow. Any amount received in excess of the investment is an operating activity.
- Beneficial interests in securitization:A transferor’s beneficial interest obtained in a securitization of financial assets must be disclosed as a noncash activity. Cash receipts from payments on a transferor’s beneficial interest should be considered inflows from investing activities.
- Steps to follow for guidance:If posed with a difficult cash flow transaction, look for specific U.S. GAAP guidance. If there’s no specific guidance, try to separate each identifiable aspect and classify the cash transaction by nature. If the components of the transaction cannot be separated, classify by the related activity.
This Accounting Standard Update becomes effective for public entities in fiscal years beginning after December 15, 2017, and all other entities in fiscal years beginning after December 15, 2018. Early adoption is permitted with retrospective adjustments to be made for the beginning of the first fiscal year presenting this update.
For further information regarding this Accounting Standards Update or ASU 2016-18, which addresses additional changes to cash flow reporting of Restricted Cash, please feel free to contact Kristi Yanover at (858) 558-9200