Is your company aware of the new cash flows accounting standards?

Cash flow is the lifeblood of a business. Unfortunately, according to a U.S. Bank study, 82 percent of businesses that fail do so because of cash flow problems. A statement of cash flows tracks the inflow of revenue and outflow of expenses.

While a statement of cash flows has been a mandatory part of a company’s financial reports since 1987, the Financial Accounting Standards Board recently issued two accounting standard updates that impact the presentation of the statement of cash flows. Accounting standard updates 2016-15 and 2016-18 are effective in 2019 for non-public entities with fiscal years beginning after Dec. 15, 2018. Public entities are required to apply the standard one year earlier.

The goal of both is to establish a consistency of practice on how cash receipts, cash payments and restricted cash are presented and classified in the statement of cash flows.

The first requires debt prepayment or debt extinguishment costs to be classified as cash outflows for financing activities. It also states that cash receipts from payments on a transferer’s beneficial interest would be classified within investing activities. There are several considerations for this standard concerning the proper classification of cash flows — whether operating, financial or investing activities.

The second accounting standard update wants businesses to include restricted cash within the cash amount when reconciling the beginning-of-period and end-of-period total cash amounts. It also requires the balance sheet cash line items to be reconciled to the cash totals in the statement of cash flows.

While early adoption is permitted for both, if an organization is issuing comparative reports, the changes should be applied to all periods presented.

These are just highlights, so it is important that your financial team is aware of these updates to help maintain good financial reporting practices.