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September 2016
Tidying up the Statement of Cash Flows
A Summary of the FASB’s New Cash Flow Guidance in ASU 2016-15
DHG Risk Advisory
In Under a Minute...
• On August 26, 2016, the FASB issued ASU 2016-15, which provides greater clarity to preparers on the treatment of eight specific
items within an entity’s statement of cash flows. The goal of the new standard is to reduce the current diversity in practice related
to these eight items (see page 2).
• The new guidance becomes effective for fiscal periods, including interim periods, beginning after December 15, 2017. Nonpublic business entities receive a one-year deferral. Early adoption is permitted.
• The guidance in ASU 2016-15 applies retrospectively to all periods presented, unless it is impracticable to do so.
On August 26, 2016, the Financial Accounting Standards Board
(FASB) published Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments, which provides greater
clarity to preparers on the treatment of eight specific items within
an entity’s statement of cash flows. ASU 2016-15 becomes
effective for all public business entities in fiscal years beginning
after December 15, 2017, including interim periods therein. All
other entities are provided a one-year deferral. Early adoption
of the guidance, including within an interim period, is permitted.
The FASB issued ASU 2016-15 primarily to reduce diversity in
practice as to how certain cash receipts and cash payments
are currently presented in an entity’s statement of cash flows.
For example, under today’s cash flow guidance, some entities
classify costs incurred to settle a debt instrument prior to its
maturity date as cash flows from operations while others classify
those costs as financing cash flows. As discussed in the ASU’s
basis for conclusions, the FASB believes the primary reason for
the diversity in practice related to the eight items addressed in
the standard is either the “lack of guidance in Topic 230 and
other Topics or from guidance that is unclear in its application.”
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Transition
Upon adoption, the guidance in ASU 2016-15 applies
retrospectively to all periods presented. However, if retrospective
application is impracticable due to cost, complexity, or lack of
information, an entity may apply the guidance prospectively
as of the earliest date deemed practicable. Entities that use
prospective application must provide additional disclosures
explaining the reasons why retrospective application was not
feasible.
Key Changes
As noted above, ASU 2016-15 provides new guidance for eight
specific cash flow issues with the goal of reducing the existing
diversity in practice. The table on the following page summarizes
each of the eight issues addressed and the FASB’s ultimate
conclusions on each. In addition, the end notes that accompany
the table (see page 3) provide further context of each issue and,
in certain cases, highlight DHG insights on the guidance.
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Summary of ASU 2016-05
Topic
Practice Issue
Revised Guidance
Debt prepayment or debt
extinguishment costs
Diversity in practice. Some entities classify
these outflows as operating activities while
others classify them as financing activities.
Cash payments for debt prepayment or extinguishment costs1 are to
be classified as financing cash outflows.
Settlement of zerocoupon bonds and bonds
with “insignificant” cash
coupons
Lack of specific guidance. Some entities
classify cash payments made when settling a
zero coupon bond as operating activities while
others classify them as financing activities.
Upon settlement of a zero-coupon bond, the portion of the cash
payment attributable to the accreted interest related to the debt
discount will be classified as operating activities, and the portion
of the cash payment attributable to principal will be classified
as financing activities. This guidance also applies to bonds with
"insignificant cash coupons.”2
Contingent consideration
payments made after a
business combination
Diversity in practice. Currently, entities classify
contingent consideration payments into
any one of the three cash flow categories
(operating, investing, or financing outflows), or
even among multiple categories.
The timing of subsequent cash payments to satisfy the contingent
consideration liability will be the driver of their classification.
Specifically, cash payments that are not made soon after3 the
acquisition date of a business combination will be classified as a
financing activity up to the amount necessary to settle the recorded
contingent consideration liability. Any amount paid in excess of the
recorded contingent consideration liability will be classified as an
operating activity.
Cash payments made “soon after” a business combination are
presented as investing activities.
Proceeds from the
settlement of insurance
claims
Diversity in practice. Entities classify cash
received from the settlement of insurance
claims as operating inflows, unless the
settlement is directly related to investing or
financing activities. There is diversity in the
interpretation of whether “directly related”
relates to the nature of the insurance coverage
or the planned use of the settlement proceeds.
Insurance settlement proceeds are to be classified in the cash flow
statement based on the nature of the loss covered by the insurance
policy. A lump sum settlement that relates to more than one type of
loss would need to be classified based on the nature of each loss
included in the settlement.
Proceeds from the
settlement of companyowned life insurance
(COLI)
Diversity in practice. Some corporations
classify the cash inflows from the settlement of
COLI entirely in operating activities or investing
activities, while others allocate the settlement
proceeds between operating and investing
activities.
Cash received from the settlement of COLI claims are to be presented
as cash inflows from investing activities. Companies are permitted,
but not required, to present COLI premiums in the same manner
as COLI cash receipts, as operating activities, or a combination of
operating and investing activities.
Distributions received
from equity method
investments (not
applicable to equity
method investments
measured at fair value)
Diversity in practice. Cash distributions from an
equity method investee can represent either a
return on investment or a return of investment.
Entities currently use different approaches to
determine classification of the distribution.
Entities are to classify distributions received from equity method
investees using one of two approaches: 1) the cumulative earnings
approach; or 2) the nature of the distribution approach. The selection
of either approach would apply to all distributions from all equity
method investees (i.e., treated as an accounting policy election).4
Beneficial interests in
securitization transactions
Lack of specific guidance. The presentation
of a transferor's beneficial interests obtained
in securitized financial assets and the
classification of cash receipts from collections
on a transferor's beneficial interest in securitized
trade receivables are presented inconsistently
due to the absence of guidance.
An entity is to disclose as a non-cash investing activity all beneficial
interests retained in financial assets transferred to an unconsolidated
securitization entity. Cash receipts and payments on a transferor’s
beneficial interests in securitized trade receivables would be
presented as cash inflows from investing activities.
Application of the
predominance principle
The existing guidance concerning whether
and when to use the predominance principle is
unclear.
The predominance principle would only apply in instances where
other guidance in ASC 230 would not cover the transaction in
question or when cash receipts cannot be split into multiple
components.5
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End Notes
5. The predominance principle is applied in situations where
cash receipts and payments have characteristics of more than
one type of cash flow. In these instances, the appropriate
classification depends of the nature of the underlying
transaction. ASU 2016-15 provides further clarity to reporting
entities in the application of the predominance principle.
Absent specific guidance in Topic 230 or other applicable
standards, a reporting entity should categorize all separately
identifiable sources or uses of cash based on the nature
of the underlying cash flows. In cases where transactions
have attributes of more than one type of cash flow and the
transactions cannot be bifurcated into separate components,
the classification will depend on the activity that is likely to be
the predominant source or use of cash flows.
1. Debt prepayment or debt extinguishment costs include all
“third-party costs, premiums paid to repurchase debt in an
open-market transaction, and other fees paid to lenders.”
2. The guidance in ASU 2016-15 addressing the treatment of
zero coupon bonds also applies to bonds that are issued
with “insignificant cash coupons.” Bonds are considered to
be issued with insignificant cash coupons when they have
“coupon interest rates that are insignificant in relation to the
effective interest rate” of the bond.
3. The ASU’s basis for conclusions explains that the phrase
“soon after” represents “a relatively short period of time after
the acquisition date (for example, three months or less).” The
basis for conclusions also explains cash payments made to
satisfy contingent consideration liabilities within three months
of the acquisition date are viewed as “an extension of the
cash paid for the business acquisition (an investing activity)”
whereas cash payments made outside of this window take
on the characteristics of seller financing and, therefore,
classification as a financing activity more accurately reflects
the nature of the transaction.
How DHG Can Help
DHG’s accounting readiness team is positioned to help
companies evaluate how new accounting standards will impact
their financial reporting, including disclosures, accounting
processes and controls, and other areas of the business. We
work with companies to help them 1) understand the accounting
requirements, 2) assess how the guidance impacts their business
and 3) get the accounting right.
4. The cumulative earnings approach treats distributions
received from equity method investees as returns on
investment and will classify them as operating activities,
unless the cumulative cash distributions received exceed the
investor’s share of cumulative earnings of the investee. If
such an excess occurs, those distributions will be considered
a return of investment and would be classified as investment
activities.
Louis Mannello
Partner, DHG Risk Advisory
[email protected]
704.367.5940
Sean Prince
Senior Manager, DHG Risk Advisory
[email protected]
646.798.3455
The nature of the distribution approach classifies all
distributions received based on the nature of the activity of
the investee that generated the distribution as either a return
on investment or a return of investment. The application of
this approach requires the reporting entity to support their
conclusion with the facts and circumstances surrounding the
distribution. If sufficient evidence does not exist to support
the nature of the distribution approach, the reporting entity
must apply the cumulative earnings approach retrospectively
for all impacted equity method investees, and disclose
the change in accounting principle in the footnotes to the
financial statements.
The selection of either approach is considered an accounting
policy election and must be applied consistently to
distributions from all equity method investments. Reporting
entities will be required to disclose the methodology that has
been applied in the footnotes to the financial statements.
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