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USA: Statement of cash flows classifications – Clarified by FASB

2nd December 2016
Robert N. Gray ( Rubino & Company, Chartered)

Various stakeholders have notified the Financial Accounting Standards Board (FASB) that there is diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. This article by MSI's Washington D.C. accounting member Rubino & Company, Chartered reports on the Accounting Standard Updates (ASU) 2016-15 issued by the FASB.

The FASB has issued Accounting Standard Update (ASU) 2016-15 to address eight specific cash flow issues to reduce the existing diversity in practice.

Debt Extinguishments or Prepayment Costs

These cash payments should be classified as cash outflows for financing activities.

Settlement of Zero-Coupon or Other Debt Instruments with Insignificant Rates

When an entity settles these debt instruments, the issuer should classify the portion of the cash payment attributable to accreted interest for the debt discount as cash outflows for operating activities. The portion of the cash payment attributable to the principal should be classified as cash outflows for financing activities.

Insurance Proceeds

Cash proceeds received from the settlement of insurance claims, including lump-sum amounts, should be classified on the basis of the related insurance coverage. For example, proceeds relating to the loss of equipment would be cash flows from investing activities.

Cash proceeds for the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. Cash payments on these policies, however, may be classified as cash outflows for investing activities, operating activities, or a combination of both. For example, the portion of the premium that builds up cash surrender value might be classified as investing activity, with the remaining portion classified as operating activity.

Contingent Consideration Payments after a Business Combination

When settling a contingent consideration liability soon after the business acquisition date (i.e., approximately three months or less), the payment 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 contingent liability recognized at acquisition.  Any excess should be classified as operating activities.

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About Rubino & Company, Chartered - Washington, District of Columbia

Rubino & Company offers comprehensive accounting, tax, and financial services to organizations, individuals, and companies across the Washington, DC metropolitan area.

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