Cash flow comparability: Accounting for long-term debt under SFAS 95

The statement of cash flows, SFAS 95, classifies interest as an operating activity, and the receipt and repayment of borrowed funds as financing activities. The requirement is subject to a variety of reasonable interpretations. Although several implementation procedures have been proposed since the issuance of SFAS 95, there is no agreement regarding which is best. Because of this uncertainty, firms currently employ at least four methods of classifying the cash flows related to long-term debt. They include: 1. no allocations of individual cash flows, 2. allocation of maturity payment, 3. allocation of interest payments, and 4. allocation of the proceeds. The methods differ with regard to the amounts and timing of cash flows reported in the operating activities section of the statement of cash flows. The differences between the reported amounts can be significant for firms that issue deeply discounted debt. However, because it is impossible to tell from published financial reports which method is employed, interfirm comparability may be impaired.