On August 26, 2016, the FASB issued Accounting Standard Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB’s Emerging Issues Task Force. The update, which is eligible to be tested on the CPA Examination in January 2018, addresses eight classification issues:
- Debt prepayment or debt extinguishment costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities.
- Settlement of zero-coupon bonds: Cash payments for the settlement of zero-coupon debt instruments, with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, should be classified as cash outflows for operating activities for the portion attributable to interest and as cash outflows for financing activities for the portion attributable to principal.
- Contingent consideration payments made after a business combination: Cash payments made soon after an acquisition’s date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Cash payments not made soon after the acquisition’s date should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities.
- Proceeds from the settlement of insurance claims: Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss. For lump-sum insurance settlement proceeds, the nature of each loss should be determined.
- Proceeds from the settlement of corporate-owned life insurance (COLI) policies, including bank-owned life insurance policies: Cash payments received from the settlement of COLI policies should be classified as cash inflows from investing activities. Cash payments for premiums on COLI policies may be classified as cash outflows for investing, operating, or a combination of investing and operating activities.
- 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 from equity method investees using either of the following approaches:
a. Cumulative earnings approach: Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor. When such an excess occurs, the current-period distribution up to this excess should be considered a return of investment and classified as cash inflows from investing activities.
b. Nature of the distribution approach: Distributions received should be classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as cash inflows from operating activities) or a return of investment (classified as cash inflows from investing activities) when such information is available to the investor.
If an entity elects to apply the nature of the distribution approach and the information to apply that approach to distributions received from an individual equity method investee is not available to the investor, the entity should report a change in accounting principle on a retrospective basis by applying the cumulative earnings approach for that investee. An entity should disclose that a change in accounting principle has occurred with respect to the affected investee(s) due to the lack of available information and should provide the appropriate disclosures. This amendment does not address equity method investments measured using the fair value option.
- Beneficial interests in securitization transactions: A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a noncash activity. Cash receipts from a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities.
- Separately identifiable cash flows and application of the predominance principle: The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in generally accepted accounting principles (GAAP). In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flows.
ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. For all other entities, the ASU is effective for annual periods in fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Entities should apply this ASU using a retrospective transition method to each period presented.
Accounting pronouncements are eligible to be tested on the CPA Examination in the later of (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six months after the pronouncement’s issuance date; ASU 2016-15 will become testable in January 2018.
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