FASB Proposes Classification Rules for Aspects of Cash Flows

By Denise Lugo

Jan. 29 — Companies that are required to present a cash flow statement will now have specific guidance on eight cash flow issues that currently cause industry confusion, according to a proposal issued by the Financial Accounting Standards Board.

FASB issued the proposal Jan. 29 to obtain public comment on what would be amendments to the statement of cash flows under Topic 230.

The statement of cash flows provides details on changes in cash and cash equivalents during a period. It's separated into three sections: cash flows from operating activities, investing, and financing.

Investors find this statement especially meaningful because it provides information that reveals a company's financial health, including the ability to cover its payroll and other immediate expenses.

Introduces Specific Guidance

Currently there's diversity in practise in how some cash receipts and cash payments are presented and classified in the statement of cash flows because of a lack specific guidance under U.S. generally accepted accounting principles (GAAP), FASB said.

To eliminate that diversity, the board proposed specific guidance on the following:

  • Cash payments for debt prepayment or extinguishment costs;
  • The cash payment made by a bond issuer at the settlement of a zero coupon bond;
  • Cash payments made by an acquirer after a business combination for the settlement of a contingent consideration liability;
  • Proceeds received from corporate-owned life insurance policies;
  • Distributions received by an investor from an equity method investee; and
  • Beneficial interests in securitization transactions.
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    New Clarifications

    The proposal also introduces clarifications about cash proceeds from the settlement of insurance claims. In addition, it would clarify whether and when cash receipts and payments should be classified into more than one class of cash flows and when classification should be based on the predominant cash flow .

    If finalized, companies would be required to apply the guidance retrospectively to all prior periods presented, unless impractical.

    FASB said it is seeking comments by March 29 on the proposal, titled Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force.

    To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

    To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com

    For a copy of the proposal, including how to submit comment, go to http://src.bna.com/cjb.

    For a discussion on preparing cash flow statements, see 5121-3rd, The Cash Flow Statement.