Statement of Cash Flows – Refreshed After 3 Decades

Diversity in practice led the FASB to revisit the GAAP guidance for the Statement of Cash Flows that has been around since 1987 with the issuance FASB No. 95. Many people thought aspects of these rules were confusing (and contradictory, at times), or even missing entirely. In fact, restatements of public company financial statements often relate to issues with the Statement of Cash Flows (as noted in an earlier post).

Originally planned as a comprehensive project, the FASB altered course to focus efforts on just the most confusing areas, resulting in new guidance covering nine specific issues. The good news is that most of these issues rarely apply to nonpublic tech companies in the Silicon Valley. Eight issues are covered in ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments issued in August 2016. Several of the issues that might be encountered include handling proceeds from insurance claims, distributions from equity method investees, and contingent consideration payments made after a business combination. Mid-sized companies outside of specific industries would rarely run into the remaining issues.

Likely the most common (and 9th) issue is included in a separate ASU – No. 2016-18  – “Restricted Cash” issued in November 2016. While GAAP does not actually define “restricted cash”, which likely contributed to inconsistent treatment in the Statement of Cash Flows, the ASU does address how the amounts presented on the balance sheet titled “restricted cash” should be handled in the cash flows statement.

Examples of amounts that might be included in “restricted cash” are refundable deposits, minimum required balances for bank accounts, funds held in escrow, and cash collateral accounts securing such instruments as letters of credit.

ASU No. 2016-18 requires that the Statement of Cash Flows explain the change during the period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. Until the issuance of this ASU, companies were generally expected to consider changes in restricted cash an Investing Activity. In other words, the total “cash” amounts at the bottom of the Statement of Cash Flows at the beginning and ending of the period will now include any restricted cash balances reported on the balance sheet, when previously they did not.

Both of these new ASUs are first effective for private company calendar year-ends 2019, and must be adopted retrospectively, but can be adopted early. All of the 8 issues in ASU No. 2016-15 must be adopted in the same period.