Recording key-person insurance distort the cash from operations and the free cash. The key-person insurance should be recorded as an investing activities instead of an operating activities. Key -person insurance is an investment that is used to protect the corporation if a key executive dies or is killed. Recording the key-person insurance under operating activities is misleading. Investors don’t have a clear perception what portion of the insurance premium is cash related. I would treat the key-person insurance as an investment to the company because of the intent of the insurance. The intent of the insurance to protect the assets of the companies by insuring their key executives lives.
GAAP does not address how key-person insurance should be recorded in the cash flow statements. When companies report it in the operating sections they recorded the gain or loss on the policy and not the full premium payment on the insurance. When the key person insurance is recorded in the operating section, the free cash could be negatively affected. Key-Person Insurance distorts the cash from operation and the free cash. I would classify the key-person insurance in the investment section instead of the operating section because it won’t distort the operating section of the cash flow statement.
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