In Aug. 2016, the FASB issued Accounting Standards Update, or ASU, 2016-15 to provide guidance on certain cash flow classification issues, including whether the payment of contingent consideration after a business combination should be categorized as operating, investing or financing in the statement of cash flows.

The ASU provides that:

  • Cash payments made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability be classified as cash outflows for investing activities. While the ASU does not define the term “soon after,” the Basis for Conclusions in the ASU indicates that the payment must be made within a relatively short period of time after the acquisition date (for example, three months or less)
  • Cash payments not made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be separated and classified as follows:
  • Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date should be classified as financing activities
  • Cash payments in excess of the amount of the contingent consideration liability recognized at the acquisition date should be classified as operating activities

The amendments are effective for public companies for fiscal years beginning after Dec. 17, 2017 and interim periods within those fiscal years.

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