6.7 Classification of cash flows (2024)

Investing activities include making and collecting loans, purchasing and selling debt or equity instruments of other reporting entities, and acquiring and disposing of property, plant, and equipment and other productive assets used in the production of goods or services.

Following the principles in ASC 230-10-45, the following items should be classified as investing activities:

• Gross cash receipts or cash payments resulting from the acquisition or sale of debt securities (classified as available-for-sale or held-to-maturity) or equity securities of other reportingentities

  However, interest income or dividend income received in cash on such investment securities is an operating cash inflow. Investments accounted for as trading securities under ASC 320-10, when there is a stated intent to buy and sell securities with the objective of generating trading profits, should be classified as operating activities rather than investing activities.

• Distributions received from equity method investees that are deemed a return of investment (see FSP 6.8.3)
• Cash flows frompurchases and sales of property, plant, and equipment and other productive assets, including business combinations(see FSP 6.8.13 and FSP 6.8.20) and successful sale-leaseback transactions
• Even though the gain or loss associated with a disposition could theoretically represent a separately identifiable source or use of cash, ASC 230-10-45-12(c) precludes such bifurcation.
• Insurance proceeds directly attributable to casualty losses related to productive assets (see FSP6.8.21)
• Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies (see FSP 6.8.22)
• Cash outflows and inflows associated with reverse repurchaseagreements (see Question FSP 6-4)
• Cash outflows and inflows resulting from originations, acquisitions, and sales of loans originally classified as loans held for investment

  Cash flows from these loans should continue to be classified as cash flows from investing activities, even if the reporting entity subsequently reclassifies the loans as held for sale (this is a concept known as symmetry).

  
  
• Cash flows resulting from the purchase of receivables from third parties and related collections
• Cash collected subsequent to sales of financial assets from the seller/transferor’s interest in sold trade receivables, commonly referred to as a holdback or deferred purchase price (see FSP 6.8.12)
• The impact on cash and cash equivalents of either consolidating or deconsolidating a variable interestentity

Financing activities include borrowing money and repaying or settling the obligation, obtaining equity from owners, as well as providing owners with a return on, or return of, their investment.

Following the principles in ASC 230-10-45, the following items should be classified as financing activities:

• Payments for debt issue costs (e.g., third-party costs)
• Payments for debt prepayment or debt extinguishment costs (see FSP 6.8.7)
• Proceeds from failed sale-leasebacktransactions
• Proceeds from issuingdebt
• Payments on seller-financed debt related to the purchase of property, plant, and equipment and other productiveassets

  The incurrence of that debt is a noncash financing transaction.

• Stock issuance proceeds, net of stock issuancecosts
• Cash dividends and purchases of treasurystock
• Cash activity related to stock subscriptionsreceivable
• If a reporting entity has a “bank overdraft” at year end, the change in bank overdrafts during the period (see FSP 6.5.1.1)
• Cash proceeds received as collateral under a securities lending program and subsequent repayment of the cash, because the cash received is considered aborrowing
• Cash inflows and outflows associated with repurchase agreements, including transactions accounted for as securitized borrowings

  Net presentation for these cash flows may be permitted.

Cash flows that are not investing or financing activities are operating cash flows. Typically, operating cash flows are receipts and payments that enter into the determination of net income.

ASC 230 defines operating activities.

Following the principles in ASC 230-10-45-16 to ASC 230-10-45-17, the following items should be classified as operating activities:

• Receipts from customers for sales of goods and/or services, as well as receipts from short-term and long-term receivables from customers under normal trade terms that arose from sales of goods and/orservices
• Interest and dividend receipts related to investments in other reporting entities or deposits with financial institutions (i.e., returns on investment)

  Interest income is considered received when the bank posts the entry to a reporting entity’s account. (See FSP 6.8.3 for further discussion of equity method investments.)

• Payments to vendors for inventory or services (including cash expenditures for advertising)
• Payments on short-term or long-term credit extended by the supplier or its affiliate finance subsidiary for the purchase of inventory or other goods and services

  In contrast, payments on credit extended by an entity other than the supplier or its affiliate finance subsidiary are normally a financing activity (see FSP 6.8.10).

• Payments to creditors forinterest
• Insurance proceeds related to operating activities (e.g., inventory losses or business interruption) (see FSP 6.8.21)
• Cash receipts or cash payments resulting from the acquisition or sale of debt or equity securities of other reporting entities classified as trading securities pursuant to ASC 320-10 that are part of an investment strategy to actively buy and sell securities with the objective of generating profits on short-term differences in marketprices
• Payments to governments fortaxes
• Payments made to settle an asset retirement obligation
• Cash receipts and cash payments resulting from acquisitions and sales of loans originally classified as loans held forsale

  Cash flows should continue to be classified as operating activities, even if the reporting entity subsequently reclassifies the loans to be held for long-term investment.

• Restructuring payments, includingseverance
• Cash contributions made to employee benefitplans
• Payments for capitalized implementation costs incurred in a cloud computing arrangement that is a service contract

  ASC 350-40-45-3 requires an entity to classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element, which would typically be operating cash flows.

Figure FSP 6-2 includes common transactions that enter into the determination of net income, but generally are not classified as operating cash flows.

FigureFSP 6-2

Common transactions that enter into the determination of net income, but generally are not classified as operating cashflows