Accounting Rule Change Intends to Clarify Company Cash Flows

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By Steven Marcy

Nov. 17 —Analysts and investors should have a sharper picture of how a company uses its funds under an amendment to the Financial Accounting Standards Board’s rules on stating cash flows.

The Nov. 17 amendment—Accounting Standard Update No. 2016-18, Statement of Cash Flows (ASC 230), Restricted Cash—is intended to provide more clarity and eliminate diversity in practice for how a company reports its cash, cash equivalents and restricted cash.

Restricted cash is money set aside for a particular purpose and usually unavailable for general use. Cash equivalents are highly liquid assets—usually with maturities of not more than three months—that are readily convertible to cash.

Currently, “entities classify transfers between cash and restricted cash as operating, investing, or financing activities, or as a combination of those activities, in the statement of cash flows,” said the update to ASC 230.

“Also, some entities present direct cash receipts into, and direct cash payments made from, a bank account that holds restricted cash as cash inflows and cash outflows, while others disclose those cash flows as noncash investing or financing activities,” it said. “This Update addresses that diversity.”

Explanation Required

FASB’s amendment will require the statement of cash flows to explain the changes in cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents for each quarter. When companies reconcile their amounts of money at the beginning of a quarter and the end of a quarter, they should include restricted cash and restricted cash equivalents along with regular cash and cash equivalents, the amendment said.

FASB said the update will be effective for public business entities for fiscal years beginning after Dec. 15, 2017, and interim periods within those fiscal years. For all other entities, it will be effective for fiscal years beginning after Dec. 15, 2018.

FASB voted to Oct. 5 to finalize the amendment for publication.

To contact the reporter on this story: Steven Marcy in Washington at smarcy@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

FASB’s cash flow amendment is available at http://src.bna.com/j9P.

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