8 Cash-Flow Issues Addressed in Latest FASB Proposalby
The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update on Jan. 29 that provides possible solutions to eight specific cash-flow issues that stakeholders have brought to light.
The FASB was told that a diversity in practice exists in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows.
The proposed guidance, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force, addresses the eight cash-flow issues and aims to reduce the diversity in practice.
Specific accounting guidance does not exist for six of the issues, while current guidance is unclear for the other two.
Here's what the FASB proposed:
1. Debt prepayment or debt extinguishment costs. Cash payments for debt prepayment or extinguishment costs would be classified as cash outflows for financing activities.
2. Settlement of zero-coupon bonds. At settlement, the portion of the cash payment attributable to the accredited 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.
3. 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.
4. Proceeds from the settlement of insurance claims. Cash proceeds received from the settlement would be classified on the basis of the related insurance coverage (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.
5. Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies. Cash proceeds received from the settlement 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 both.
6. Distributions received from equity-method investees. These distributions would be presumed to be returns on investment and classified as cash inflows from operating activities, unless the investor's cumulative distributions received â less distributions received in prior periods that were determined to be returns of investment â 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.
7. 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.
8. 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 (including when reasonable judgment is required to estimate and allocate 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.
The amendments in the proposal would apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under Topic 230.
Comments on the proposed guidance are due by March 29. Instructions on how to submit comments can be found in the exposure draft.