FASB issued a proposal Friday that is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.
All entities would be affected by the proposed amendments, which are described in Proposed Accounting Standards Update, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
The proposal, a consensus of FASB’s Emerging Issues Task Force, addresses eight specific cash flow issues for which existing guidance does not exist or is unclear:
Debt prepayment or debt extinguishment costs. Cash payments for these items would be classified as cash outflows for financing activities.
Settlement of zero-coupon bonds. At settlement, the portion of the cash payment attributable to the accreted interest would be classified as cash outflows for operating activities, and the portion of the cash payment attributable to the principal would be classified as cash outflows for financing activities.
Contingent consideration payments made after a business combination. Cash payments made by an acquirer that are not paid soon after a business combination for the settlement of a contingent consideration liability would be separated and classified as cash outflows for financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date would be classified as financing activities; any excess would be classified as operating activities.
Proceeds from the settlement of insurance claims. Cash proceeds received would be classified on the basis of the related insurance coverage (i.e., the nature of the loss). For insurance proceeds that are received in a lump-sum settlement, an entity would be required to 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 policies, including bank-owned life insurance policies. Cash proceeds received would 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.
Distributions received from equity-method investees. These would be presumed to be returns on investment and classified as cash inflows from operating activities. The exception would occur when the investor’s cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed cumulative equity in earnings recognized by the investor. When such an excess occurs, the current-period distribution up to this excess would be considered a return of investment and would be classified as cash inflows from investing activities. This proposed solution does not address equity-method investments measured using the fair value option.
Beneficial interests in securitization transactions. A transferor’s beneficial interest obtained in a securitization of financial assets would be disclosed as a noncash activity, and cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables would be classified as cash inflows from investing activities.
Separately identifiable cash flows and application of the predominance principle. Additional guidance would clarify when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows, and when an entity should classify the aggregate of those cash receipts and payments into one class of cash flows on the basis of predominance.
Comments can be submitted through March 29 at FASB’s website.
—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.
