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Statement of Cash Flows Updates

On August 26, 2016, the FASB issued Accounting Standard Update 2016-15, Statement of Cash Flows (Topic 230). The new guidance is intended to reduce diversity in practice in how certain cash inflows and cash outflows are presented in the statement of cash flows. This update provides guidance on the following eight topics:

  • Debt prepayment or debt extinguishment costs. Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities.
  • Settlement of zero-coupon debt instruments. Cash payments for the settlement of zero-coupon debt instruments, including other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, should be classified as cash outflows for operating activities for the portion attributable to interest, and the portion attributable to principal as cash outflows for financing activities.
  • Contingent consideration payments made after a business combination. Cash payments made soon after an acquisition’s date should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities.
  • Proceeds from the settlement of insurance claims. Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss.
  • Proceeds from the settlement of corporate-owned life insurance (COLI) policies. Cash payments received from the settlement of COLI policies should be classified as cash inflows from investing activities. Cash payments for premiums on COLI policies may be classified as cash outflows for investing, operating, or a combination of investing and operating activities.
  • Distributions received from equity method investments. The guidance provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can be classified using a 1) cumulative earnings approach, or 2) nature of distribution approach. Refer to the standard update on how to classify cash inflows for each approach.
  • Beneficial interests in securitization transactions. A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity. Cash 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. Entities should use reasonable judgement to separate cash flows. In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows

For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method.

By Jenifer Louwagie