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Aug. 31, 2016
On Aug. 26, the Financial Accounting Standards Board (FASB or Board) issued Accounting Standards Update, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a consensus of the FASB Emerging Issues Task Force (the ASU). The ASU provides guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Among the eight items identified, the ASU addresses an issue that could impact NAREIT members. The ASU cites the classification of distributions received from equity method investees as an area where there is diversity in practice, and thus provides clarifying guidance in how these distributions should be presented in the statement of cash flows. Consistent with one of NAREIT’s recommendations, the ASU provides companies with an alternative to consider the nature of the source of the distributions that the investor receives from an equity method investment when classifying distributions received in its cash flow statement (the nature of the distribution approach). Alternatively, companies can elect to classify the distributions received from equity method investees based on the cumulative earnings approach.
Background
Under current GAAP, there is no authoritative literature on how to classify distributions received from equity method investments in the cash flow statement. Given the lack of guidance on the issue, the FASB’s Emerging Issues Task Force set out to develop guidance to eliminate the diversity in practice. The Proposed ASU included a presumption that distributions received from an equity method investee be returns on investment and classified by the investor as cash flows from operations in its cash flow statement. However, this presumption would be overturned once the investor’s cumulative distributions received exceed the investor’s cumulative equity in GAAP net earnings of the investee. In this case, the excess cash flows received would be considered a return of investment, and thus would be classified as cash flows from investing activities in the investor’s cash flow statement.
Final Standard
According to the nature of the distribution approach, distributions received should be classified on the basis of the nature of the activity (or activities) of the investee that generated the distribution as either:
- A return on investment, classified as cash inflows from operating activities, or
- A return of investment, classified as cash inflows from investing activities.
According to the cumulative earnings approach, distributions received are considered returns on investment, and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor. When such an excess occurs, the current period distribution up to this excess should be considered a return of investment and classified as cash flows from investing activities.
If a company elects the nature of the distribution approach, and the information to apply that approach to distributions received from an individual equity method investee is not available to the investor, the company should report a change in accounting principle on a retrospective basis by applying the cumulative earnings approach for that equity method investment.
Effective Date
The ASU is effective for public companies for fiscal periods beginning after Dec. 15, 2017, and interim periods within those fiscal periods. For all other companies, the ASU is effective for fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. The FASB will permit early adoption of the ASU, including adoption in an interim period. In the event that companies early adopt the ASU at an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period of adoption.
Transition
The ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments for some of the other issues identified, the ASU for those issues would be applied prospectively as of the earliest date practicable.
Contact: George Yungmann at gyungmann@nareit.com or Christopher Drula at cdrula@nareit.com.
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