The Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) are taking a closer look at cash-flow statements, The Wall Street Journal reported. These statements can indicate to investors where companies are receiving money, how they are using it and whether they are on solid footing for survival.

The SEC is focusing more on how companies determine whether errors made in the overlooked financial statement are material to investors, while the FASB is considering whether to require expanded disclosure on the cash-flow statement for financial institutions.  

The SEC has observed that some companies “don’t dedicate the same level of rigor and attention” to the cash-flow statement compared with other statements, said Anita Doutt, a senior associate chief accountant at the SEC, at conferences in New York in recent weeks, the Journal reported. “The statement of cash flows is a statement we have observed as often overlooked and could really benefit from a more skillful approach.” 

Companies can make one of two types of restatements to correct errors, the Journal reported. In a “big R” restatement, a company reissues financials to reflect the correction of one or more errors that materially affect those statements. In a “little r” restatement, a company addresses more minor problems by correcting the error in future financial statements.

Companies have recently been making a lot of “little r” revisions to their cash-flow statements, meaning they are routinely determining that their errors are immaterial and don’t warrant a reissuing of past financials, Doutt said. 

Among cash flow-related restatements, the number of minor revisions by U.S. public companies has exceeded that of major fixes annually for at least the past decade, according to research firm Ideagen Audit Analytics. One common issue is misclassification, in which companies routinely check the wrong box when labeling a type of cash flow as investing, financing or operating activities.

Many companies say this isn’t material because it is a classification error only, but Doutt said that the SEC does not find this argument persuasive. “The classification itself is the foundation of the statement of cash flows,” she said. 

The FASB recently added cash-flow-related disclosures from banks and other financial firms to its standard-setting agenda, which could result in a new mandatory standard. 

“There’s been more of a regulatory focus on the statement of cash flows recently and so I do think that there’s a likelihood of some classification matters that possibly could be assisted,” FASB Chairman Rich Jones said at a Nov. 8 meeting, according to the Journal. The FASB doesn’t expect to address other classification issues for this project, a spokeswoman said.

Paul Munter, the SEC’s chief accountant, encouraged companies, auditors and other stakeholders to provide constructive feedback on the FASB’s project. “Such stakeholder observations could include … specific, detailed suggestions that could help the FASB identify other timely and cost-effective solutions that would further enhance the decision-usefulness of the statement of cash flows,” he said in a recent statement.

To stay up to date on recently issued accounting guidance issued by the FASB, attend the Foundation for Accounting Education's FASB Accounting Update with Renee Rampulla Webcast on Dec. 19.