United States

Classification of certain cash receipts and cash payments

FINANCIAL REPORTING INSIGHTS  | 

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force). To reduce diversity in practice, the ASU provides solutions for eight specific statement of cash flows classification issues, which are summarized as follows:

  • Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities.
  • At settlement of zero-coupon debt instruments, the portion of the cash payment attributable to the accreted interest related to the debt discount should be classified as cash outflows for operating activities, and the portion of the cash payment attributable to the principal should be classified as cash outflows for financing activities.
  • Cash payments not made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be separated and classified as cash outflows for financing activities and operating activities as described in the ASU. Cash payments made soon after the acquisition date to settle a contingent consideration liability should be classified as cash outflows for investing activities.
  • Cash proceeds received from the settlement of insurance claims would be classified on the basis of the related insurance coverage (that is, the nature of the loss).
  • Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows for investing activities, operating activities or a combination of investing and operating activities.
  • When a reporting entity applies the equity method, it should make an accounting policy election to classify distributions received from equity-method investees using either the cumulative-earnings approach or the nature-of-the-distribution approach as described in the ASU.
  • A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity, and cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities.
  • The ASU also addresses the classification of cash receipts and payments that have aspects of more than one class of cash flows.

The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period.