Clearing Up the Cash Flows

Clearing Up the Cash Flows Statement

by Allison Mills, CPA (Manager, Greensboro Office)

ASU 2016-15, Statement of Cash Flows, explains certain cash payments and receipts for how they should be presented on the statement of cash flows to clear up some differences on current presentation in the accounting practice.  The update clarifies eight parts of existing guidance on cash flow statement presentation and classification.

The eight changes targeted to clarify how cash receipts and cash payments are presented and classified in the statement of cash flows are:

  1. Debt prepayment or debt extinguishment – these costs should be cash outflows under financing activities.
  2. Payments on zero-coupon or similar debt instruments – at settlement of this debt, the issuer separates the interest portions of the payments (which should be classified as cash outflows under operating activities) and the principle portion of the payments (which should be cash outflows from financing activities).
  3. Payments made for settlement of contingent consideration in a business combination – settlement payments made soon after a business combination should be classified as outflows under investing activities.
  4. Insurance settlement proceeds – proceeds should be based on the nature of the loss, therefore proceeds from business interruption insurance should be operating activities and damage proceeds to property and equipment should be investing activities.
  5. Corporate owned life insurance policies – proceeds should be classified as cash inflows from investing activities, and premium payments can be classified as outflows from either operating or investing activities or a combination of both.
  6. Distributions from equity method investees – this clarifies that you must elect to account for your distributions by either the cumulative earnings approach or the nature of distribution approach.  Generally that means return on investment is an inflow from operating activities and return of investment is an inflow from investing activities.
  7. Beneficial interest in securitization transactions – the transferor beneficial interest obtained is classified as a non cash activity.  Cash receipts from payments on the interest should be classified as cash inflows from investing activities.
  8. Separately identifiable cash flows – if the cash inflows or outflows have characteristics of more than one of the three cash flow classes, then the entity should determine each separately identifiable source or use and classify each as financing, investing or operating activities based on the underlying nature of the cash flows activity.

ASU 2016-15 is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those years.  For all other entities it is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019.  Early adoption is permitted, but all amendments must be adopted in the same period.

Allison Mills

Allison Mills Manager, CPA

NC License #35209