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Chapter 1 FASB Accounting Standards Updates — Broad Issues

      Learning objective

      This chapter presents ASUs that are general in nature and typically originated with the input of the full board. The ASUs covered in this chapter are those that have effective dates in 2018 or later. Therefore, several ASUs issued in prior years are included in this chapter. Effective dates for public business entities are frequently different than those for other entities.

FASB ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)

      Why was this ASU issued?

      The original standard on presentation of the statement of cash flows was issued nearly 30 years ago. Over time, diversity in practice on classifying certain cash flows has caused inconsistency in the reporting of cash flows. This update was issued to address the inconsistencies and to provide a framework for determining transactions that do not have specific guidance.

      Who is affected by this ASU?

      The amendments in this update apply to all entities, including business entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows.

      What are the main provisions of this ASU?

      The amendments in this update provide guidance on the following eight specific cash flow issues:

      Issue 1: Debt Prepayment or Debt Extinguishment Costs. Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities.

      Issue 2: Settlement of Zero-Coupon Debt Instruments. At the settlement of zero-coupon debt instruments (or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing), the cash flows must be split into operating and financing activities. The portion of the cash payment attributable to the accreted interest should be classified as operating activities and the portion attributable to the principal as cash outflows for financing activities.

      Issue 3: Contingent Consideration Payments Made after a Business Combination. Cash payments made soon after the acquisition date of a business combination to settle a contingent consideration liability should be classified as cash outflows for investing activities.

Cash payments for contingent consideration that were not made soon after the acquisition date of a business combination should be separated and classified as cash outflows for financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date (including measurement-period adjustments) should be classified as financing activities; any excess should be classified as operating activities. Cash payments made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be classified as cash outflows for investing activities.

      Note that the Emerging Issues Task Force specifically decided not to set a time frame for the term “soon after.” However, some task force members believe that a payment made within a relatively short period of time after the acquisition date (for example, three months or less), would qualify as “soon after.” (paragraph BC 16).

      Issue 4: Proceeds from the Settlement of Insurance Claims. Cash proceeds received from the settlement of insurance claims should be classified on the basis of the nature of the loss. For insurance proceeds that are received in a lump-sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement.

      Issue 5: Proceeds from the Settlement of Corporate-Owned (or Bank-Owned) Life Insurance Policies. Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities.

      Issue 6: Distributions Received from Equity Method Investees. When a reporting entity applies the equity method, it should make an accounting policy election to classify distributions received from equity method investees using either of the following approaches:

      If

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