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 Exam in January 2018, addresses eight classification issues:
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.
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.
It’s important to be aware of changes in authoritative literature which could impact how you answer the questions on the CPA Exam within that topic. Since exam material could conceivably change from one exam testing window to another, turn to Surgent for the latest updates. Our CPA Review team stays informed of all authoritative and pronouncement changes and ensures you’ll receive the news as soon as we do!
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