ASU 2016-15, 2016-18, and the Statement of Cash Flows

by Sheila A. Border, CPA | Feb 28, 2020

Two Accounting Standards Updates (ASUs) from the Financial Accounting Standards Board (FASB) in 2016 may require changes to Dec. 31, 2019, financial statements: ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, and ASU 2016-18, Restricted Cash.

ASU 2016-15 

ASU 2016-15 provides guidance on transactions that affect consistency in operating, investing, and financing for all entities. Five of the more common affected transactions are as follows. 

Debt prepayment or extinguishment costs made in connection with settling a debt before the maturity date – Discussion related to these costs had included whether to categorize a portion as interest expense in operating activities or as 100% financing. The final determination was to include such costs in financing activities.

Contingent consideration payments made after a business combination – The guidance distinguishes between cash flows “not made soon after” and cash flows “made soon after” an acquisition date. However, “not made soon after” and “made soon after” are not defined. 

For cash payments not made soon after the acquisition date, cash payments up to the amount of the acquisition date for contingent consideration liability (including measurement-period adjustments) should be classified as financing. Any excess should be classified as operating. Cash payments made soon after the acquisition date to settle a contingent consideration liability should be classified as investing activities.

The FASB is attempting to separate payments into the bucket closest to the event. For example, if a payment is close to the acquisition date, then it should be classified similar to the payments to acquire (investing); but if the payment is after the acquisition date, it is more likely a financing activity (repayment of a liability).

Proceeds from settlement of insurance claims – Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage (nature of the loss). Property coverage would likely be an investing inflow, while cybercrime coverage would be an operating inflow.

Proceeds from corporate-owned life insurance policies – Cash proceeds received from the settlement of corporate-owned life insurance policies should 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 the two.

Distributions received from equity method investees – When a reporting entity applies the equity method, it should make an accounting policy election to classify distributions received using either the cumulative earnings approach or the nature of the distribution approach. Both result in distributions being reported as operating or investing inflows, but differ in the allocation method. However, the method selected must be applied to all equity investments held by an entity. While this approach doesn’t bring total conformity, required disclosures will provide additional information to users.

ASU 2016-18 

ASU 2016-18 provides guidance on restricted cash and restricted cash equivalents (restricted cash) when preparing the statement of cash flows. Generally accepted accounting principles (GAAP) will now require restricted cash accounts to be included with cash and cash equivalents (cash) in the beginning-of-period and end-of-period cash balances. ASU 2016-18 also requires direct cash receipts and payments into and out of restricted cash accounts to be reported as operating, investing, or financing cash flows. Previously, there had been no GAAP guidance, resulting in varying reporting options. 

ASU 2016-18 is based on the premise that it is most meaningful to present the ultimate cash inflows and outflows of an entity, irrespective of whether they are to or from restricted cash accounts. Including restricted cash accounts will result in a presentation of the ultimate cash flows of an entity in the body of the statement.

The ASU requires certain disclosures: information about the nature of the cash restrictions, and – when cash and restricted cash are presented in more than one line item within the statement – the line items and amounts of cash and restricted cash are to be presented on the face of the statement of cash flows or in the notes.

These changes will result in a more descriptive statement and a move toward more consistent statements, entity to entity. Also, each bucket (operating, investing, and financing) will present a more complete picture of cash flows. For example, debt repayments from a restricted cash account will be reported as a financing outflow in the period when the payment is made, and not in the period when cash is moved from an operating to a restricted account.

In the end, the timing and classification of cash flows will be more complete and truer, allowing for better analysis and use of the statement.  


Sheila A. Border, CPA, is a senior manager with Wipfli LLP in Radnor, and serves on the PICPA Accounting and Auditing Procedures Committee. She can be reached at sborder@wipfli.com.
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