Statement of Cash Flows to be Narrowly Reorganized for Financial Institutions, FASB Says

The FASB on November 8, 2023, voted to add a rulemaking project to its agenda to reorganize the statement of cash flows to address items that are core to the operations of banks and other financial institutions, agreeing to keep the project narrow—for now.

The effort will revise ASC 230, Statement of Cash Flows so that it does a better job of telling a bank’s story, according to the discussions.

“When you think about it, we don’t require a single format for balance sheets, we don’t make financial institutions do classified balance sheets, we don’t have a single format for income statements, but we’ve stuck with this over 30 years – a single format to the statement of cash flows as if ‘that one there’s no variance by industry,’ and I think at the end of the day there is,” FASB Chair Richard Jones said. “And I think we’ve heard that pretty loudly from our customers who say they don’t use our product in certain industries and so I think it’s incumbent upon us to see if there’s improvements we can make to the statement of cash flows.”

The statement of cash flows is one of three statements that public companies are required to file with the SEC, revealing what happened to a businesses cash during a reporting period. The statement has three sections: cash flows from operating activities; cash flows from investing activities; and cash flows from financing activities.

At the crux of the matter: financial statement preparers and investors have said that many of the activities that are classified as “investing” or ”financing” for a nonfinancial institution are viewed as “operating activities” for a financial institution such as accepting deposits and making loans. This in turn reduces the usefulness of the statement to users of the information who study financial institutions. In general, the planned changes would fix those issues in a manner that is operable at low cost, staff said.

Specifically, the project will revise ASC 230 to:

• require a disclosure of cash interest received on the cash flow statement similar to the current disclosure that is already required for cash interest paid. This would be a new single-number disclosure presented at the bottom of the cash flow statement. Staff said that a majority of investors support this disclosure because they believe it could encourage more banking investors to utilize the cash flows statement in their analyses. Most investors emphasized that “cash interest received” would be an important disclosure and that it would be useful to see the amount of cash interest inflows versus accrued and accreted interest, especially for financial assets acquired in a business combination “because investors would like to understand the interest earnings from noncash accretion versus natural cash received.” Additionally preparers said this would be operable, said staff.
• reorganize the statement for financial institutions. This would revise the statement of cash flows to expand the operating cash flows section to include additional items that are core to the operations of a financial institution. Additionally, the operating section would include a subtotal for net interest income related adjustments. Staff said that the majority of investors agree that the subtotal within the operating section related to net interest income could allow for a further breakdown to amortization and other line items which would provide more insight into adjustments for noncash accretion of interest income. “All preparers said it would be operable,” said staff. “They agree that it would be more intuitive for certain line items that are currently presented in the ‘investing’ and ‘financing’ sections to be in the ‘operating’ sections for financial institutions and that the potential for additional subtotals and breakouts within the operating section would be operable to disclose.”

Two Issues Remain on Research Agenda

The FASB also voted 6 to 1 against adding two other issues to its technical agenda, but agreed to keep them on the research agenda to study “disclosure that reconciles the period-to-period changes in revenue-related line items on the balance sheet and the statement of cash flows,” and a “disclosure of cash received from revenue-related transactions.”

Discussions will continue at a future meeting.