The Financial Accounting Standards Board has approved a new update to accounting standards meant to clear up inconsistencies in how companies present and classify cash flows.

Accounting Standards Update No. 2016-15 is a refresh to Topic 230 of the Accounting Standards Codification to address eight separate cash flow classification and presentation issues. FASB says historic GAAP is either unclear or doesn’t provide specific guidance on the eight separate issues, leading to differences in how companies arrive at their own interpretations.

Cash flow classification is a common cause of restatement and frequent topic of comment by the Securities and Exchange Commission. FASB asked its Emerging Issues Task Force to review the smattering of cash flow classification issues and come up with a recommendation, which FASB adopted.

“The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice,” FASB wrote in its summary of the new guidance. The eight new provisions address:

Debt prepayment or debt extinguishment costs -- Those should be classified as cash flows for financing activities.

Settlement of zero-coupon debt instruments -- If the coupon interest rate is insignificant compared to the effect interest rate, then the portion of the cash payment attributable to the accreted interest rate related to the debt discount should be classified as cash flow for operating activity; the portion attributable to the principal is classified as cash outflows for financing activities.

Contingent consideration payments made after a business combination -- If not made soon after the acquisition date, payments to settle a contingent consideration liability should be separated and classified as cash outflows for financing activities and operating activities. The updates explains how to separate the amounts.

Proceeds from the settlement of insurance claims -- Classification should be based on the nature of the loss, FASB says.

Proceeds from the settlement of corporate-owned life insurance policies -- These should be classified as cash inflows from investing activities. Cash payments for premiums, however, might be classified as investing or operating activities, or a combination of the two.

Distributions received from equity method investees -- Companies need to establish an accounting policy on whether to classification distributions under one of two approaches, either the cumulative earnings approach or the nature-of-distribution approach.

Beneficial interests in securitization transactions -- This should be disclosed as a noncash activity, FASB says, and cash receipts should be classified as cash inflows from investing.

Separately identifiable cash flows and application of the predominance principle -- Following existing GAAP, says FASB. But if there is no specific guidance, then companies should look to the nature of the underlying cash receipts and cash payments.

For public companies, the new cash flow classification guidance takes effect for fiscal years beginning after Dec. 15, 2017, with early adoption permitted.

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