Not all cash flow situations, however, are addressed in the standards

Not all cash flow situations, however, are addressed in the standards

Exhibit 2

Other cash flow reporting issues clarified in the ASU include contingent consideration payments made after a business combination, proceeds from the settlement of corporate-owned life insurance policies, and beneficial interests in securitization transactions. It also provides guidance for the classification of cash receipts and payments that have aspects of more than one class of cash flows.

The amendments in ASU 2016-15 were effective for public business entities for fiscal years beginning after , and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after , and interim periods within fiscal years beginning after . Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented; if it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues should be applied prospectively as of the earliest date practicable.

The classification of cash flows related to interest and dividends received and interest paid as operating activities has been controversial since the statement of cash flows was first introduced. FASB’s recent activities related to NFP reporting suggest changes may be coming regarding the classification of cash flows. Among the proposed changes in ASU 2016-14 was the reclassification of interest and dividends received as investing cash flows and classifying interest paid as a financing cash flow. In addition, cash flows resulting from purchases and sales of long-lived assets would be classified as operating cash flows rather than as investing cash flows. These proposed classification changes were also included in FASB’s 2010 financial statement presentation exposure draft, discussed above. These repeated discussions at the board suggest that classification changes are coming for all entities-the only question being when.

Gross and Net Cash Flows

FASB has always maintained that information about the gross amounts of cash payday advance Lancaster Ohio receipts and cash payments during a period is more relevant than information about net amounts (SFAS 95, paragraph 75). For example, separately reporting the total proceeds from the disposal of plant assets and the cash outlays for their acquisition is more informative than simply reporting the net change in plant assets as a cash flow. A common peer review finding is reporting net, rather than gross, changes in plant assets or long-term debt as cash flows.

Not all reporting situations, however, are clearly defined. There is a common issue over the presentation of what may be called “constructive receipt” (e.g., when a lender or lessor advances loan proceeds directly to the vendor in a finance asset purchase or capital lease). The purchaser/lessee either reports gross as both a cash inflow and outflow or net as a noncash financing and investing activity. The standard is silent on this matter, and practice varies.

Exceptions exist to the gross reporting requirement. Items with large amounts, quick turnovers, and maturities of three months or less may be reported based on their net change. While some exceptions are industry-specific, such as demand deposits of banks or customer accounts of broker-dealers, revolving lines of credit represent a more common reporting situation. To be eligible for the net reporting option, however, the underlying credit agreement must be repayable on demand or related to a note with a term of less than three months. On the other hand, if borrowings and repayments are under an agreement with a term greater than three months, the cash flows must be reported on a gross basis. Accordingly, the proper reporting of the cash flow is contingent on an understanding of the underlying debt agreement.