More Concerns Over Cash Flow Reporting Under FASB Statement No. 95.

Abstract This paper examines the cash flow statement reporting of hedging transactions, sale-leasebacks, rental asset purchases and sales, loan securitizations, and repurchase/reverse repurchase agreements, which varies across companies. We evaluate the cash flow statement classification of these transactions relative to the operating-investing-financing classification guidelines of FASB (1987) Statement No. 95, Statement of Cash Flows (SFAS-95) as amended. Where these guidelines are unclear, we evaluate the cash flow statement classification of these transactions relative to their balance sheet and income statement reporting, and the objectives of enhancing inter-entity comparability and informativeness of reported cash flows. We recommend reporting (1) cash flows from hedging activities as investing cash flows; (2) cash inflows from minor sale-leasebacks as investing cash inflows but cash inflows from major sale-leasebacks as financing cash inflows; and (3) cash flows from buying and selling rental assets as operating activities when the predominant source of cash is from buying and selling but as investing activities when the predominant source of cash is from renting. Differences in classifying similar cash flows from mortgage loan securitizations and repurchase/reverse repurchase agreements are less easily resolved; they may reflect real world differences in how financial institutions manage their portfolios. For all these transactions, disclosing the nature of and reasons for the classification policies and presenting gross rather than net cash flows enhance inter-entity comparability and informativeness of reported cash flows.