Financing activities are the class of cash flows covering dealings with the people who fund a business: obtaining resources from owners and providing them with a return on, and a return of, their investment, borrowing money and repaying amounts borrowed or otherwise settling the obligation, and obtaining and paying for other resources obtained from creditors on long-term credit (FASB, Statement of Financial Accounting Standards No. 95, paragraph 18). It is a rule about where a cash movement is reported in the statement of cash flows, not a description of how a business is funded, so a company that borrows nothing all year still has a financing section if it paid a dividend.
That Statement is the origin of the wording rather than its live address, having been superseded on the effective date of Statement No. 168, which kept only a short list of named Statements authoritative until each was integrated into the Codification (FASB Statement of Financial Accounting Standards No. 168, paragraph 15). The live address is Topic 230, and how the three classes sit against each other is set out in operating, financing and investing activities.
What Counts as a Financing Receipt
The inflow list is short. Proceeds from issuing equity instruments come first, then proceeds from issuing bonds, mortgages, notes and other short-term or long-term borrowing. For a not-for-profit client the list also reaches receipts from contributions and investment income that by donor stipulation are restricted to acquiring, constructing or improving property, plant, equipment or other long-lived assets, or to establishing or increasing a donor-restricted endowment fund (FASB Accounting Standards Update 2016-14, ASC 230-10-45-14).
The fourth item is the one nobody expects to find on a cash flow list. Proceeds received from derivative instruments that include financing elements at inception are financing inflows, whether the proceeds arrive at inception or over the term of the instrument, and the carve-out is narrow: a financing element inherently included in an at-the-market derivative instrument with no prepayments does not count (FASB Accounting Standards Update 2016-14, ASC 230-10-45-14). An upfront payment received on an off-market swap is therefore a borrowing in cash flow terms, whatever the contract calls it.
What Counts as a Financing Payment
The outflow list runs to seven items and it is where the classification work actually happens (FASB Accounting Standards Update 2016-15, ASC 230-10-45-15).
Payments of dividends or other distributions to owners open it, including outlays to reacquire the entity’s equity instruments, a phrase that also picks up the cash an employer remits when it withholds shares from an employee’s award, as operating activities works through. Then repayments of amounts borrowed, then other principal payments to creditors who have extended long-term credit. Then distributions to counterparties of derivative instruments that include financing elements at inception, the mirror of the inflow item above, with the same at-the-market carve-out. Then payments for debt issue costs, and payments for debt prepayment or debt extinguishment costs, which are also covered there.
The remaining item is the contingent consideration split. Payments not made soon after the acquisition date of a business combination to settle a contingent consideration liability are financing outflows up to the amount recognized at the acquisition date, and that split is worked through from the buying side in investing activities.
Reading the seven together, what is missing is as telling as what is there. No item on the list is interest, however plainly the interest attaches to a borrowing.
Zero-Coupon Debt Splits, and Nothing Else Does
Settling a zero-coupon note pays back more cash than was borrowed, and the excess is interest that accreted over the term rather than principal. The standard splits the payment. The portion attributable to the principal is a financing outflow, and the same applies to any debt instrument whose coupon rate is insignificant in relation to the effective interest rate of the borrowing (FASB Accounting Standards Update 2016-15, ASC 230-10-45-15). The portion attributable to the accreted interest related to the debt discount is an operating outflow (FASB Accounting Standards Update 2016-15, ASC 230-10-45-17).
Then comes the sentence that closes the door. For all other debt instruments an issuer does not bifurcate cash payments to lenders and other creditors at settlement for amounts attributable to accreted interest related to the debt discount, and does not classify such amounts as cash outflows for operating activities (FASB Accounting Standards Update 2016-15, ASC 230-10-45-17).
Read those together and the rule is narrow on purpose. A note issued at a discount with an ordinary coupon settles as one financing outflow, discount and all. Only the zero-coupon case, and the case where the stated coupon is insignificant against the effective rate, gets carved apart. A preparer who generalises the split to every discounted note has invented a policy the standard specifically refused.
What Financing Activities Is Not
Financing in the ordinary business sense means raising money, and this class is narrower than that. A capital lease of equipment funds the business and produces no financing inflow at all, because no cash arrived; the noncash side is disclosed rather than presented.
The section is also not a home for everything attached to debt. Interest paid to a lender is an operating outflow even though the liability behind it is long-term, which is the shortcut failure set out in operating, financing and investing activities.
Common Questions
Issuing shares, issuing bonds or notes, drawing on a line of credit, repaying loan principal, paying dividends, buying back stock, paying debt issue costs and paying prepayment penalties on an early payoff (FASB Accounting Standards Update 2016-14, ASC 230-10-45-14; FASB Accounting Standards Update 2016-15, ASC 230-10-45-15).
Who the cash moved to or from. Financing is dealings with owners and long-term creditors, the people funding the business. Investing is dealings in loans the business makes, in other entities’ debt and equity instruments, and in its own productive assets, which investing activities works through. Borrowing to buy a building produces a financing inflow and an investing outflow in the same period, and reporting only the net movement in cash would hide both.
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