The Financial Accounting Standards Board has asked its Emerging Issues Task Force to dig into some of the complexities around cash flow classifications to see if it can suggest some changes to existing guidance to make this area of accounting more straightforward.
FASB opened a project in spring 2014 to see what can be done to clarify the principles in Accounting Standards Codification Topic 230, which governs the statement of cash flows, to reduce the diversity in practice in how companies classify cash receipts and cash payments. FASB staff performed research into possible additional guidance on how and what an entity should consider in determining classifications, and some possible additional disclosures.
Cash-flows are classified in the statement of cash-flows into three categories based on how they arise: operating, investing, and financing activities. Classification is a regular topic of discussion between regulators and the profession, with the SEC often commenting on areas where it sees need for improvement. A search through Audit Analytics shows more than 600 companies have filed restatements in the past five years that somehow involved problems with cash- flow classifications, with the number of restatements rising steadily since 2009.
After reviewing the research, FASB determined clarifications to existing guidance would not be adequate to address the issues. The staff proposed the board consider defining and clarifying some principles in existing guidance but board members weren’t sure it could work. “When we discussed this originally, I was hopeful we could come up with a higher-level objective principles or piece of guidance that might be useful in broadly answering more than just the 30 questions we have, or whatever the number of questions is,” said Jim Kroeker, vice chairman of FASB. “I’m struggling with whether this will do this.”
Ultimately, the board asked its EITF to look at nine specific cash flow issues that seem to present the biggest challenges in practice, while also continuing research into whether other changes should be made to address issues more broadly. The EITF agenda will now include looking into: classification of cash flows related to settlement of insurance claims, debt prepayment or extinguishment costs, restricted cash, settlement of zero coupon bonds, distributions received from equity method investees, settlement of life insurance contracts, contingent consideration payments made after a business combination, beneficial interests in securitization transactions, and application of the predominance principle.
“We’re going to continue with the project, but change the dynamic,” said FASB Chairman Russ Golden.