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ASC 230 identifies three classes of cash flows—investing, financing, and operating—and requires a reporting entity to classify each discrete cash receipt and cash payment (or identifiable sources or uses therein) in one of these three classes. The classification is based on the nature of the cash flow, without regard to whether a cash flow stems from another item (hereafter referred to as the Nature Principle). A cash flow is first evaluated to determine if it meets either the definition of an investing or financing cash flow. If a cash flow does not meet the definition of an investing activity or a financing activity, the cash flow is classified as an operating activity. Cash flows from operating activities are generally the cash effects of events that enter into the determination of net income (see FSP 6.7.3 for a discussion of events that enter into the determination of net income that are not classified as operating cash flows).
The definitions of the activity classes within ASC 230, combined with its waterfall model, results in a bias toward classifying cash flows as operating activities. When determining the appropriate classification, the FASB acknowledged that, in some situations, a reasonable case can be made for alternative classifications. As a result, we believe that a change in classification of a cash flow item represents a reclassification of information and not a change in accounting principle, if both the old and new classifications are acceptable under US GAAP. In such circumstances, all years presented must reflect the reclassification, and the reclassification should be disclosed in the footnotes.
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