FASB Proposal Relating to Statement of Cash Flows
On January 29, 2016, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards Update (“ASU”) Statement of Cash Flows (Topic 230); “Classification of Certain Cash Receipts and Cash Payments” to reduce the diversity in how the following eight items are presented and classified in the statement of cash flows:
1) Debt prepayment or debt extinguishment costs such as prepayment penalties paid should be classified as cash outflows for financing activities.
2) Cash payment for the settlement of zero-coupon bonds. The amount of cash payments for accreted interest should be classified as a cash outflow for operating activities while the cash payment for principal should be classified as a cash outflow for financing activities.
3) Cash payments for the settlement of a contingent liability made subsequent to a business combination should be separated and classified between cash outflows for financing and operating activities.
4) Cash proceeds from settlement of insurance claims should be classified based the type of coverage and loss (for example a claim received for a building would be classified as cash inflows from investing activities while a claim received for inventory would be classified as cash inflows from operating activities).
5) Cash proceeds businesses received from corporate-owned life insurance policies would be classified as cash inflows from investing activities.
6) Cash distributions received from equity method investees would be classified as cash inflows from operating activities unless such cumulative distributions exceed the cumulative equity in earnings and therefore, the excess of cash distributions would be classified as cash inflows from investing activities.
7) Beneficial interests in securitization transactions where the transferor’s beneficial interest obtained in a securitization of financial assets would be classified as a noncash activity and the cash receipts from payments on the transferor’s beneficial interest in securitized trade receivables would be classified as cash inflows from investing activities.
8) The “predominance” principle which is where certain cash receipts and payments have attributes of more than one type of activity and therefore, the predominant source of the activity should be used to classify the activity in the statement of cash flows.
As noted above, the ASU is only a FASB proposal with comments due by March 29, 2016.
If you have any questions on the above proposal, please contact your HW&Co Executive or Joe Sbrocco, CPA, CGMA.