to: members of the fasb emerging issues task force …€¦ · eitf 0616fn 2016 07 22 confidential...

EITF 0616FN 2016 07 22 CONFIDENTIAL DRAFT

June 10, 2016 EITF Meeting Minutes

July 22, 2016

TO: MEMBERS OF THE FASB EMERGING ISSUES TASK FORCE

Included are the final minutes of the June 10, 2016 meeting of the FASB Emerging Issues Task

Force and an inventory of open issues for future EITF meetings.

On June 29, 2016, the Board ratified the Task Force consensus on Issue 15-F and the consensus-

for-exposure on Issue 16-B. The Accounting Standards Update and the proposed Update are

expected to be posted to the FASB website within the next month.

The next regular EITF meeting will be held on September 22, 2016. The extra EITF meeting date

reserved for July 21, 2016, was not utilized.

Please call me if you have any questions.

Sincerely,

Robert Moynihan FASB Practice Fellow

Financial Accounting Standards Board

401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856

T: 203.956.5239

[email protected]

mailto:[email protected]


June 10, 2016 EITF Meeting Minutes

Emerging Issues Task Force

Meeting Minutes

June 10, 2016

Pages

Attendees 1–2

Administrative Matters 3

Discussion of Agenda Technical Issues 4–32

1. Issue No. 15-F, “Statement of Cash Flows: Classification of Certain

Cash Receipts and Cash Payments” 4–28

2. Issue No. 16-B, “Employee Benefit Plan Master Trust Reporting” 29–32

Status of Open Issues and Agenda Committee Items 33


June 10, 2016 EITF Meeting Minutes, p. 1 Attendees

MINUTES OF THE JUNE 10, 2016 MEETING

OF THE FASB EMERGING ISSUES TASK FORCE

Location: FASB Offices

401 Merritt 7

Norwalk, Connecticut

Thursday, June 10, 2016

Starting Time: 8:30 a.m.

Concluding Time: 12:04 p.m.

Task Force Members Present:

Susan M. Cosper (Chair)

John M. Althoff

Paul Beswick

James G. Campbell

Terri Z. Campbell (by telephone)

Alexander M. Corl

Bret Dooley

Carl Kampel

Mark LaMonte

Robert B. Malhotra

Lawrence J. Salva

Mark Scoles

Ashwinpaul C. (Tony) Sondhi (by telephone)

Robert Uhl

Eric West (SEC Observer)

James A. Dolinar (FinREC Observer)

Task Force Members Absent:

Thomas Groskopf (PCC Observer)


June 10, 2016 EITF Meeting Minutes, p. 2 Attendees

Others at Meeting Table:

Russell G. Golden, FASB Board Member

James L. Kroeker, FASB Board Member

Daryl E. Buck, FASB Board Member

Marc A. Siegel, FASB Board Member

Larry W. Smith, FASB Board Member

Mark A. Pollock, EITF Coordinator

Robert O. Moynihan, FASB Practice Fellow

*Peter C. Proestakes, FASB Assistant Director

*Jenifer J. Wyss, FASB Supervising Project Manager

*Jin Koo, FASB Practice Fellow

*Lisa A. Kaestle, FASB Assistant Project Manager

*Andrew W. McClaskey, FASB Postgraduate Technical Assistant

* For certain issues only.

CONFIDENTIAL DRAFT

June 10, 2016 EITF Meeting Minutes, p. 3 Administrative Matters

ADMINISTRATIVE MATTERS

An FASB staff member announced that any consensus-for-exposure reached at this meeting

will be considered by the Board for ratification and exposure for public comment at the June

29, 2016 Board meeting.

An FASB staff member announced that the next regular EITF meeting will be held on

September 22, 2016. The extra EITF meeting date reserved for July 21, 2016, will not be

utilized.

The EITF Chair announced that Robert Moynihan, FASB Practice Fellow, has been appointed

to the position of EITF Coordinator replacing Mark Pollock, FASB Practice Fellow. The EITF

Chair thanked Mr. Pollock for his contribution.

The EITF Chair announced the departure of the following FASB Fellows whose terms will

be coming to an end in the upcoming months: Jack Pohlman, Mark Barton, Nick Burgmeier,

and Mark Pollock.

CONFIDENTIAL DRAFT

June 10, 2016 EITF Meeting Minutes, p. 4 Issue No. 15-F

DISCUSSION OF AGENDA TECHNICAL ISSUES

Issue No. 15-F

Title: Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

Dates Discussed: June 18, 2015; September 17, 2015; November 12, 2015, June 10, 2016

Background

1. In April 2014, the Board decided to add a statement of cash flows project to the FASB’s

technical agenda. The project, Clarifying Certain Existing Principles on Statement of Cash Flows,

was intended to reduce diversity in practice in financial reporting by clarifying certain existing

principles in Topic 230, Statement of Cash Flows.

2. At its April 1, 2015 meeting, the Board decided that clarifying certain existing principles

within Topic 230 only would incrementally reduce diversity in practice about the classification of

cash receipts and cash payments. Therefore, the Board decided to have the Task Force consider

nine specific cash flow classification issues with the goal of reducing the existing diversity in

practice on those issues on a timely basis. The nine cash flow classification issues are as follows1:

Issue 1 – Debt Prepayment or Extinguishment Costs

Issue 2 – Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with

Coupon Interest Rates That Are Insignificant in Relation to the Effective Rate of

the Borrowing

Issue 3 – Contingent Consideration Payments Made After a Business Combination

Issue 4 – Proceeds from the Settlement of Insurance Claims (Previously Issue 5)

Issue 5 – Proceeds from the Settlement of Corporate-Owned Life Insurance Policies,

Including Bank-Owned Life Insurance Policies (Previously Issue 6)

Issue 6 – Distributions Received from Equity Method Investees (Previously Issue 7)

Issue 7 – Beneficial Interests in Securitization Transactions (Previously Issue 8)

Issue 8 – Separately Identifiable Cash Flows and Application of the Predominance Principle

(Previously Issue 9)

Issue 9 – Restricted Cash (Previously Issue 4)

3. At its June 18, 2015 meeting, the Task Force discussed Issues 1 through 5 and Issue 9 and

reached tentative conclusions on four of them (Issues 1 through 4). The Task Force directed the

FASB staff to perform additional outreach and analysis on the two issues that were discussed with

no tentative conclusions reached, which included Issue 9 on restricted cash. At its September 17,

2015 meeting, the Task Force discussed Issues 5 through 8 and reached tentative conclusions on

all four of them.

4. At its November 12, 2015 meeting, the Task Force discussed the results of additional

outreach and analysis performed by the FASB staff on Issue 9. The Task Force determined that

1 The issues have been re-numbered as result of the Task Force’s decision to separate Restricted Cash into a separate

EITF Issue (Issue No. 16-A, “Statement of Cash Flows: Restricted Cash”).

CONFIDENTIAL DRAFT


there is additional work still to be done on Issue 9, and decided to separate Issue 9 from the other

eight issues in Issue 15-F because doing so will allow for timely progress to be made on the other

eight Issues while the Task Force continues to deliberate Issue 9. The Task Force was then able to

reach a consensus-for-exposure on the other eight issues.

5. At its June 10, 2016 meeting, the Task Force considered the feedback received, including 27

comment letters, on the proposed Update, which was issued for public comment on January 29,

2016, with a comment period that ended on March 29, 2016.

Scope

6. The guidance in Topic 230 applies to all entities, including both business entities and not-

for-profit entities, with specific exceptions noted in paragraph 230-10-15-4 and summarized

below:

a. Defined benefit pension plans that present financial information in accordance with

Topic 960, Plan Accounting—Defined Benefit Pension Plans, and other employee

benefit plans that present financial information similar to that required by Topic 960

b. Investment companies that meet certain conditions

c. A common trust fund, variable annuity account, or similar fund maintained by a bank,

insurance entity, or other entity in its capacity as a trustee, administrator, or guardian for

the collective investment and reinvestment of moneys.

EITF Discussion of Issues

Issue 1—Debt Prepayment or Debt Extinguishment Costs

Introduction

7. Debt prepayment or debt extinguishment costs are paid by a borrower in connection with

settling a debt financing arrangement before the maturity date. A lender often will include a

prepayment penalty provision in the financing agreement that can be based on a number of factors,

including an approximation of the interest that will not be paid as a result of the early settlement.

The absence of specific guidance has resulted in borrowers classifying cash payments for debt

prepayment or extinguishment costs as either financing activities or operating activities.

Issue

8. The issue is how a cash payment made by a borrower for debt prepayment or debt

extinguishment costs should be classified in the statement of cash flows.

Prior EITF Discussion

9. At its June 18, 2015 meeting, the Task Force discussed the following two alternatives about

the classification of a cash payment for debt prepayment or debt extinguishment costs.

Alternative A – Cash payments for debt prepayment or extinguishment costs should be classified

as cash outflows for operating activities.

Alternative B – Cash payments for debt prepayment or extinguishment costs should be classified

as cash outflows for financing activities.

CONFIDENTIAL DRAFT


10. Some Task Force members questioned whether third-party fees and/or a premium paid to

repurchase debt in an open-market transaction would be included in these costs. The Task Force

reached a tentative conclusion that all costs of prepayment or extinguishment of debt (that is, third

party costs, premiums paid, and fees to lender) should be included in the scope of this Issue.

11. Some Task Force members suggested that these cash payments may be consideration for

foregone future interest and, thus, do not have the same characteristics as interest (that is, value

paid for amount of time monies are borrowed). They noted that these payments are associated with

the extinguishment of debt principal and should be classified as financing activities. Some Task

Force members noted that a user would treat those cash payments as financing activities because

they relate to financing transactions. Additionally, some Task Force members believe that those

costs are similar to debt issue costs, which are classified as cash outflows for financing activities.

However, other Task Force members believe that those cash payments include an element of

interest and said that on the basis of the existing guidance in Topic 230, cash payments to lenders

and other creditors for interest should be classified as outflows for operating activities.

12. The Task Force reached a tentative conclusion that cash payments for debt prepayment or

extinguishment costs should be classified as cash outflows for financing activities (Alternative B).

The Task Force also decided that those costs should include all costs for the prepayment or

extinguishment of debt (that is, third-party costs, premiums paid to repurchase debt in an open-

market transaction, and other fees paid to lenders).

13. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure that

cash payments for debt prepayment or extinguishment costs should be classified as cash outflows

for financing activities.

Current EITF Discussion

14. At its June 10, 2016 meeting, the Task Force reached a consensus that cash payments for

debt prepayment or extinguishment costs should be classified as cash outflows for financing

activities. The Task Force also concluded that those costs should include all costs for the

prepayment or extinguishment of debt (that is, third-party costs, premiums paid to repurchase debt

in an open-market transaction, and other fees paid to lenders).

Issue 2—Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon

Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing

Introduction

15. Zero-coupon bonds are a type of debt security that generally are issued or traded at significant

discounts from their face amounts. Interest on zero-coupon bonds is not paid throughout the term

of the bond but, instead, is paid at maturity. Diversity in practice exists in how to classify the cash

payment made by the bond issuer upon settlement of a zero-coupon bond. Specifically, there is

diversity in how to classify the portion of the cash payment attributable to the accreted interest

related to the debt discount.

Issue

CONFIDENTIAL DRAFT


16. The issue is how the cash payment made by a borrower for the settlement of zero-coupon

debt instruments or other debt instruments with coupon interest rates that are insignificant in

relation to the effective interest rate of the borrowing should be classified in the statement of cash

flows.


17. At its June 18, 2015 meeting, the Task Force discussed the following two alternatives about

the classification of a cash payment made at the settlement of a zero-coupon bond.

Alternative A – At settlement, the portion of the cash payment attributable to the accreted interest

should be classified as a cash outflow for operating activities and the portion of the cash payment

attributable to the principal (original proceeds) should be classified as a cash outflow for

financing activities.

Alternative B – At settlement, the entire cash payment should be classified as a cash outflow for

financing activities.

18. Task Force members had differing opinions about whether the tentative conclusions on Issue

1 and Issue 2 should be reached on the same conceptual basis. Some Task Force members

supported Alternative A based on current guidance within Topic 230. That is, a portion of the cash

payment relates to interest and Topic 230 explicitly states that payments related to interest shall be

classified as operating activities within the statement of cash flows. Additionally, a portion of the

cash payment relates to principal and Topic 230 explicitly states that repayments of amounts

borrowed shall be classified as financing activities within the statement of cash flows.

19. Other Task Force members thought that the lack of an interest payment each period

constitutes a refinancing of interest due, believing that the issuer of a zero-coupon bond refinances

its interest every period into additional principal. However, Task Force members who supported

this view as well as some Task Force members who did not support this view acknowledged that

if Alternative B is selected, the issuer of a zero-coupon bond would need to disclose the

reclassification of interest as a noncash transaction each reporting period and would then recognize

the payment at the maturity date entirely as a financing activity.

20. The Task Force reached a tentative conclusion that at settlement, the portion of the cash

payment attributable to the accreted interest should be classified as a cash outflow for operating

activities and the portion of the cash payment attributable to the principal should be classified as a

cash outflow for financing activities (Alternative A).

21. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure that,

at settlement, the portion of the cash payment attributable to the accreted interest should be

classified as cash outflows for operating activities, and the portion of the cash payment attributable

to the principal should be classified as cash outflows for financing activities.


22. At its June 10, 2016 meeting, some Task Force members were concerned that because the

scope of the proposed amendments was limited to zero-coupon bonds, there would be reduced

CONFIDENTIAL DRAFT


comparability with the classification of economically similar instruments, such as deeply

discounted debt instruments with a near zero-coupon interest rate. The Task Force acknowledged

this potential inconsistency and reached a consensus that the guidance should be applied to debt

instruments with coupon interest rates that are insignificant in relation to the effective interest rate

of the borrowing, including debt instruments without a stated coupon interest rate (for example,

commercial paper). In addition, some Task Force members believe that some entities might apply

this guidance to all other debt instruments or apply the guidance on separately identifiable cash

flows and the predominance principle as discussed in paragraph 115 later in these minutes and

reach the same conclusion, while other entities might not apply this guidance, resulting in

inconsistent financial reporting. Therefore, the Task Force reached a consensus to clarify that the

guidance should not be applied to all other debt instruments. That is, for all other debt instruments,

an issuer should not bifurcate cash payments to lenders and other creditors at settlement for

amounts attributable to accreted interest related to the debt discount, nor classify such amounts as

cash outflows for operating activities.

23. On the basis of the current guidance in Topic 230, the majority of Task Force members

supported separating and classifying the cash payment for the settlement of debt instruments within

the scope of the consensus into operating and financing activities. That is, a portion of the cash

payment is attributable to accreted interest related to the debt discount, and Topic 230 explicitly

states that payments related to interest shall be classified as operating activities within the

statement of cash flows. Additionally, a portion of the cash payment is attributable to principal

(amounts borrowed), and Topic 230 explicitly states that repayments of amounts borrowed shall

be classified as financing activities within the statement of cash flows.

24. The Task Force reached a consensus that at the settlement of debt instruments within the

scope of the consensus, the portion of the cash payment attributable to the accreted interest related

to the debt discount should be classified as cash outflows for operating activities and the portion

of the cash payment attributable to the principal should be classified as cash outflows for financing

activities.

Issue 3—Contingent Consideration Payments Made after a Business Combination

Introduction

25. As defined in the Master Glossary, contingent consideration is usually an obligation of the

acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part

of the exchange for control of the acquiree if specified future events occur or conditions are met.

Topic 230 and Topic 805, Business Combinations, do not provide specific guidance on the cash

flow statement classification of cash payments made by the acquirer to settle a contingent

consideration liability after the business combination. The lack of guidance has resulted in

diversity in practice in the cash flow statement classification of cash payments made after a

business combination to settle a contingent consideration liability.

Issue

26. The issue is how the cash payments made by the acquirer after a business combination for

the settlement of a contingent consideration liability should be classified in the statement of cash

flows.

CONFIDENTIAL DRAFT



27. At its June 18, 2015 meeting, the Task Force discussed the following three alternatives about

the classification of contingent consideration payments made after a business combination.

Alternative A – Cash payments made after a business combination for the settlement of a

contingent consideration liability should be classified as cash outflows for investing activities.

Alternative B – Cash payments made after a business combination for the settlement of a

contingent consideration liability should be classified as cash outflows for financing activities if

the amount was not paid at the time of purchase or soon before or after the business combination

occurred.

Alternative C – Cash payments made after a business combination for the settlement of a

contingent consideration liability should be separated and classified as cash outflows for financing

activities and operating activities. Specifically, the portion of the total cash payment not to exceed

the amount of the contingent consideration liability recognized at acquisition-date fair value,

including measurement period adjustments, should be classified as a cash outflow for financing

activities, if the amount was not paid at the time of purchase or soon before or after the business

combination occurred. Amounts paid in excess of the amount of the contingent consideration

liability recognized at acquisition-date fair value, including measurement period adjustments,

should be classified as a cash outflow for operating activities.

28. Many Task Force members favored Alternative C because it is applied most often in practice

today and it is the most closely aligned with the requirements in Topic 230 because the changes

after the acquisition date are reflected in the income statement. Some Task Force members

supported Alternative B because they believe that the entire payment had a financing aspect and it

is more useful to include the entire payment in one place on the cash flow statement.

29. Some Task Force members commented that the changes in contingent consideration

subsequent to the acquisition date are dissociated from the original purchase price for the business

combination. Thus, the cash flows classification of that change also should be dissociated from the

cash flows related to acquisition date fair value. Instead, it would be more appropriate to treat the

contingent consideration payment similarly to a hybrid financial instrument that elects the fair

value option. For hybrid liabilities, fair value changes flow through net income and are an

operating activity, and the repayment of principal is a financing activity.

30. The Task Force reached a tentative conclusion that cash payments made by an acquirer after

a business combination for the settlement of a contingent consideration liability should be

separated and classified as cash outflows for financing activities and operating activities

(Alternative C).


cash payments made by an acquirer after a business combination for the settlement of a contingent

consideration liability should be separated and classified as cash outflows for financing activities

and operating activities. Specifically, the payments, or the portion of the payments, up to the

amount of the contingent consideration liability recognized at the acquisition date, including

CONFIDENTIAL DRAFT


measurement-period adjustments, should be classified as cash outflows for financing activities if

the payment was not made soon after the business combination occurred. Amounts paid in excess

of the amount of the contingent consideration liability recognized at the acquisition date, including

measurement-period adjustments, should be classified as cash outflows for operating activities if

the payment was not made soon after the business combination occurred.


32. At its June 10, 2016 meeting, the Task Force reached a consensus that cash payments not

made soon after the acquisition date of a business combination by an acquirer to settle a contingent

consideration liability should be separated and classified as cash outflows for financing activities

and operating activities. Specifically, the payments, or the portion of the payments, not made soon

after the acquisition date up to the amount of the contingent consideration liability recognized at

the acquisition date, including measurement-period adjustments, less any amounts paid soon after

the acquisition date that were classified as cash outflows for investing activities should be

classified as cash outflows for financing activities. Additionally, the payments, or the portion of

the payments, not made soon after the acquisition date in excess of the amount of the contingent

consideration liability recognized at the acquisition date, including measurement-period

adjustments, less any amounts paid soon after the acquisition date that were classified as cash

outflows for investing activities should be classified as cash outflows for operating activities. In

response to feedback received from respondents on the amendments in the proposed Update, the

Task Force clarified that the acquisition date of the business combination is the date from which

entities should determine when a payment is made soon after and when a payment is not made

soon after a business combination.

33. Many respondents indicated that cash flow classification guidance also is needed to address

situations in which an acquirer makes a cash payment to settle a contingent consideration liability

soon after the business combination to eliminate any ambiguity about the classification and to help

achieve consistency in practice. In response to the feedback, the Task Force reached a consensus

that cash payments made soon after the acquisition date of a business combination by an acquirer

to settle a contingent consideration liability should be classified as cash outflows for investing

activities because such classification most closely aligns with the requirements of Topic 230. The

Task Force considered defining the time period associated with the term soon after. Although the

Task Force decided not to explicitly state a time period, some Task Force members believe that a

payment for contingent consideration that was made soon after a business combination is an

extension of the cash paid for the business acquisition (an investing activity), if that payment for

contingent consideration was made within a relatively short period of time after the acquisition

date (for example, three months or less).

34. The Task Force noted that the consensuses reached on the classification of cash payments

made to settle a contingent consideration liability, including payments made soon after and not

made soon after the acquisition date of the business combination, most closely align with the

requirements in Topic 230. That is, paragraphs 230-10-45-13(c) and 230-10-45-15(c) state that

cash payments made at the time of purchase or soon before or after purchase to acquire property,

plant, and equipment and other productive assets are investing cash outflows. However, incurring

directly related debt to the seller is a financing transaction, and subsequent payments of principal

on that debt are financing cash outflows.

CONFIDENTIAL DRAFT


Issue 4—Proceeds from the Settlement of Insurance Claims

Introduction

35. Diversity in practice exists on how to classify proceeds received from the settlement of

insurance claims. Existing guidance states, in part, that cash inflows from operating activities

include proceeds of insurance settlements except for those that are directly related to investing or

financing activities, such as from destruction of a building. Stakeholders have indicated that it is

unclear what “directly related to investing or financing activities” means and whether it was meant

to relate to the insurance coverage or the planned use of the insurance proceeds.

Issue

36. The issue is how proceeds from the settlement of insurance claims should be classified in the

statement of cash flows.


37. The Task Force discussed the following two classification alternatives about the

classification of proceeds received from the settlement of insurance claims:

Alternative A – Proceeds received from the settlement of insurance claims should be classified

based on the insurance coverage (that is, the nature of the loss), including those proceeds that are

received in a lump-sum settlement for which reasonable judgment is required to determine the

classification based on the nature of each loss.

Alternative B – Proceeds received from the settlement of insurance claims should be classified as

cash inflows from operating activities.

38. Task Force members preferred Alternative A noting that the intent of existing guidance for

proceeds received from the settlement of insurance claims is for those proceeds to be classified

based on the nature of the loss and because the alternative provides more relevant information to

users of financial statements.

39. The Task Force reached a tentative conclusion that a reporting entity should classify the

proceeds received from the settlement of insurance claims based on the insurance coverage (that

is, the nature of the loss), including those proceeds that are received in a lump-sum settlement for

which reasonable judgment is required to determine the classification based on the nature of each

loss (Alternative A).

40. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure that a

reporting entity should classify the proceeds received from the settlement of insurance claims,

excluding proceeds received from corporate-owned life insurance policies and bank-owned life

insurance policies, on the basis of the insurance coverage (that is, the nature of the loss), including

those proceeds that are received in a lump-sum settlement for which reasonable judgment is

required to determine the classification on the basis of the nature of each loss.


CONFIDENTIAL DRAFT


41. At its June 10, 2016 meeting, the Task Force reached a consensus that a reporting entity

should classify the proceeds received from the settlement of insurance claims, excluding proceeds

received from corporate-owned life insurance policies and bank-owned life insurance policies, on

the basis of the insurance coverage (that is, the nature of the loss), including those proceeds that

are received in a lump-sum settlement in which judgment is required to determine the classification

on the basis of the nature of each loss.

Issue 5— Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including

Bank-Owned Life Insurance Policies

Introduction

42. Life insurance policies are purchased by entities for a variety of purposes, including funding

the cost of providing employee benefits and protecting against the loss of key persons. These types

of policies have generally been known as corporate-owned life insurance (COLI) or bank-owned

life insurance.2 One of the primary benefits of using an insurance policy as a funding mechanism

is the ability for an entity to receive the death benefits tax-free. Investment income is accumulated

tax-free through the internal buildup of the cash surrender value.

43. At the June 18, 2015 EITF meeting, several Task Force members acknowledged that there is

diversity in practice on the classification of the proceeds received upon settlement of COLI policies

resulting from differing intended objectives or purposes for acquiring the COLI policy.

Additionally, multiple Task Force members expressed interest in also considering the

classification of premiums paid on COLI policies.

44. Stakeholders have indicated that entities classify premium payments on COLI policies in

investing activities, or operating activities, or a combination thereof. Similar diversity in practice

was identified related to the classification of proceeds received from the settlement of COLI

policies.

Issue

Subissue 5a—Aligning the Classification of Premiums and Proceeds for COLI Policies

45. This subissue addresses whether the cash flow classification of COLI premiums and proceeds

should be aligned.

Subissue 5b—Classification of Proceeds Received from the Settlement of COLI Policies

46. This subissue addresses how insurance proceeds received from the settlement of a COLI

policy should be classified in the statement of cash flows.


Subissue 5b

2 References to COLI also include bank-owned life insurance.

CONFIDENTIAL DRAFT


47. At its June 18, 2015 meeting, the Task Force discussed the following three alternatives about

the classification of proceeds received from the settlement of COLI policies (that is, only Subissue

5b was discussed at the June meeting):

Alternative A – Cash proceeds received from the settlement of COLI policies should be classified

as cash inflows from operating activities.

Alternative B – Cash proceeds received from the settlement of COLI policies should be classified

as cash inflows from investing activities.

Alternative C – Cash proceeds received from the settlement of COLI policies should be separated

and classified as cash inflows from operating and investing activities. Specifically, the portion of

the total proceeds received equal to the amount of the insurance premiums attributable to the

buildup of the cash surrender value should be classified as a cash inflow from investing activities

and proceeds received in excess of the insurance premiums attributable to the buildup of the cash

surrender value should be classified as a cash inflow from operating activities.

48. Some Task Force members believe that the nature and the purpose of the proceeds received

from the settlement of COLI policies is an operating activity because its purpose is to fund

employee benefits or other operating-type activities.

49. Other Task Force members believe that a COLI policy is an investment vehicle and should

be classified as an investing activity. Those Task Force members believe that regardless of where

the proceeds are being used, the main advantages of investing in a COLI policy are that the death

proceeds are received tax-free and investment income is accumulated tax-free through the buildup

of the cash surrender value. Furthermore, those Task Force members also believe that the

classification of the premiums paid should not necessarily influence the conclusion on the

classification of the proceeds.

50. Still other Task Force members supported classifying the proceeds as a combination of

operating and investing activities since the proceeds include characteristics of both and because

that conclusion is more consistent with other tentative conclusions reached at this meeting on other

issues.

51. Some Task Force members acknowledged that depending on the intended objective or

purpose for acquiring the COLI policy, the cash flow classification of the proceeds may be

different between entities, thereby resulting in diversity in practice. Because of the current lack of

explicit guidance in GAAP, stakeholders have indicated that entities classify premium payments

on COLI policies in investing activities, in operating activities, or in a combination of those

activities.

52. The Task Force requested that the FASB staff perform further research on the accounting for

and the cash flow classification of premiums paid on a COLI policy.

Subissue 5a

CONFIDENTIAL DRAFT


53. At its September 17, 2015 meeting, the Task Force discussed the following two alternatives

about whether the classification of premiums and proceeds from COLI policies should be aligned:

Alternative A – Require premiums paid and proceeds received related to COLI policies to be

classified in the same cash flow category.

Alternative B – Do not require premiums paid and proceeds received related to COLI policies to

be classified in the same cash flow category.

54. The majority of Task Force members favored Alternative B because they do not think it is

necessary to prescribe alignment for the cash flow classification of premiums paid and proceeds

received. Multiple Task Force members commented that they wanted to allow management

flexibility in determining the most appropriate classification for premium payments. Additionally,

they noted that premium payments generally are insignificant to the financial statements as a

whole. However, several Task Force members commented that they would like to include in the

basis for conclusions of the proposed Update resulting from this Issue or in the Codification that

an entity would not be precluded from aligning premiums paid and proceeds received in the same

cash flow category.

55. The Task Force reached a tentative conclusion to not require premiums paid and proceeds

received related to COLI policies to be classified in the same cash flow category (Alternative B).

However, the Codification would include guidance stating that the classification of premiums paid

would be permitted, but not required, to be aligned with the classification of proceeds received.

56. One Task Force member commented that the current AICPA Technical Practice Aid Section

1300.13, “Classification of Increase in Cash Value of Officers’ Life Insurance in Statement of

Cash Flows,” which provides guidance on the cash flow classification of premiums paid, may need

to be revisited as a result of the tentative conclusion reached by the Task Force on Subissue 5a.

The EITF FinREC Observer stated that the Technical Practice Aid may be reconsidered to avoid

providing conflicting guidance.

Subissue 5b

57. At its September 17, 2015 meeting, the Task Force discussed the following four alternatives

about the classification of proceeds received from the settlement of COLI policies:

Alternative A – Cash proceeds received from the settlement of COLI policies should be classified

as cash inflows from operating activities.

Alternative A’ – Cash proceeds received from the settlement of COLI policies should be classified

as cash inflows from operating activities unless the cash inflows are received as a result of an

entity surrendering its policy rather than an insurable event, in which case the proceeds would be

classified as cash inflows from investing activities.

Alternative B – Cash proceeds received from the settlement of COLI policies should be classified

as cash inflows from investing activities.

CONFIDENTIAL DRAFT


Alternative C – Cash proceeds received from the settlement of COLI policies should be separated

and classified as cash inflows from operating and investing activities. Specifically, the portion of

the total proceeds received equal to the amount of the insurance premiums attributable to the

buildup of the cash surrender value should be classified as a cash inflow from investing activities

and proceeds received in excess of the insurance premiums attributable to the buildup of the cash

surrender value should be classified as a cash inflow from operating activities.

58. The majority of Task Force members favored Alternative B because they believe that COLI

policies are primarily purchased as investment vehicles and, therefore, the proceeds should be

classified as investing activities. Additionally, several Task Force members commented that they

were drawn to the simplicity of classifying the proceeds all in one cash flow category because they

questioned whether the benefit of splitting the cash flows between two categories would justify

the effort.

59. One Task Force member, favoring Alternative C, proposed a modification to Alternative C

whereby the portion of the total proceeds received equal to the cash surrender value would be

classified as a cash inflow from investing activities and the proceeds received in excess of the cash

surrender value would be classified as a cash inflow from operating activities. This modification

was intended to simplify Alternative C because entities would not have to consider the amount of

the premiums attributable to the buildup of the cash surrender value.

60. Multiple Task Force members supported Alternative C or the modified Alternative C because

they believe that COLI policies have both a term insurance and an investment component. In their

view, the proceeds should be bifurcated and classified in both operating and investing activities.

61. The Task Force reached a tentative conclusion that cash proceeds received from the

settlement of COLI policies should be classified as cash inflows from investing activities

(Alternative B).

Subissue 5a

62. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure to

permit, but not require, alignment of the classification of premiums paid with the classification of

proceeds received. Therefore, cash payments for premiums may be classified as cash outflows for

investing activities, operating activities, or a combination of cash outflows for investing and

operating activities.

Subissue 5b


cash proceeds received from the settlement of COLI policies should be classified as cash inflows

from investing activities. The majority of Task Force members believe that COLI policies are

purchased primarily as investment vehicles and, therefore, the proceeds should be classified as

investing activities.

64. The Task Force considered, but ultimately rejected, separating cash proceeds from the

settlement of COLI policies and classifying them as cash inflows from operating and investing

activities. Some Task Force members supported that approach because they believe that COLI

CONFIDENTIAL DRAFT


policies generally have both a term insurance component, which would be an income replacement,

and an investment component, which would facilitate the growth of capital. Furthermore,

separating the proceeds received from the settlement of COLI policies and classifying the

components into more than one class of cash flows would be more consistent with the consensuses-

for-exposure reached on Issues 2, 3, 4, 6, and 8. However, the Task Force decided that the benefit

of splitting the cash flows between two categories would not justify the effort.


Subissue 5a

65. At its June 10, 2016 meeting, the Task Force reached a consensus to permit, but not require,

alignment of the classification of premiums paid with the classification of proceeds received.

Therefore, cash payments for premiums may be classified as cash outflows for investing activities,

operating activities, or a combination of cash outflows for investing and operating activities. Some

Task Force members favored not requiring the alignment of premiums paid and proceeds received

because they wanted to allow management flexibility in determining the most appropriate

classification for premium payments. Additionally, premium payments generally are insignificant

to the financial statements as a whole.

Subissue 5b

66. At its June 10, 2016 meeting, the Task Force reached a consensus that cash proceeds received

from the settlement of COLI policies should be classified as cash inflows from investing activities.

The majority of Task Force members believe that COLI policies are purchased primarily as

investment vehicles and, therefore, the proceeds should be classified as investing activities.

Issue 6—Distributions Received from Equity Method Investees

Introduction

67. Cash receipts from an equity method investee that represent returns on investment typically

are classified as cash inflows from operating activities, consistent with the classification of cash

receipts of interest and dividends. Cash receipts from an equity method investee that represent

returns of investment typically are classified as cash inflows from investing activities, consistent

with the classification of returns of investment in equity instruments of other entities (other than

certain equity instruments carried in a trading account). However, while there is agreement on

these concepts, there is diversity in practice on how they are applied.

Issue

68. The issue is how the statement of cash flows classification of distributions received by an

investor from an equity method investee should be determined.


69. At its September 17, 2015 meeting, the Task Force discussed the following four alternatives

about the classification of distributions received from equity method investees.

Alternative A – Cumulative earnings approach: All distributions from an equity method investee

are presumed to be returns on investment and classified as cash inflows from operating activities

unless the investor’s cumulative distributions received less distributions received in prior years

CONFIDENTIAL DRAFT


that were determined to be returns of investment exceed cumulative equity in earnings recognized

by the investor (as adjusted for basis differences). When the investor’s cumulative distributions

received less distributions received in prior years that were determined to be returns of investment

exceed cumulative equity in earnings, the current period distribution up to this excess is considered

a return of the investment and classified as cash inflows from investing activities.

Alternative B – Look-through approach: Distributions from an equity method investee are

presumed to be returns on investment and classified as cash inflows from operating activities.

However, in the presence of specific facts and circumstances, that presumption can be overcome

for all or a portion of the distribution.

Alternative C – Distributions from an equity method investee are classified using the cumulative

earnings approach (Alternative A) unless specific facts and circumstances of a distribution (or a

portion of a distribution) are known (Alternative B), in which case a distribution that represents a

return of the investment should be classified as cash inflows from investing activities.

Alternative D – All distributions received from an equity method investee should be classified as

cash inflows from investing activities.

70. The majority of Task Force members favored Alternative A because it is applied most often

in practice today, is well understood, and would increase consistency in financial reporting.

Multiple Task Force members commented that the decisions reached resulting in FASB Proposed

Accounting Standards Update, Investments—Equity Method and Joint Ventures (Topic 323):

Simplifying the Equity Method of Accounting, may have an effect on cash flows that will be

classified as operating activities under the cumulative earnings approach.

71. Some Task Force members observed that Alternative A may introduce diversity during

interim periods because there are two approaches that investors use to determine the classification

of distributions (that is, some investors determine classification using actual results through the

end of the reporting period while others use forecasted data through the end of the fiscal year). The

Task Force chose not to specify which approach should be used during interim periods.

72. Multiple Task Force members supported Alternative C because they believe that when an

entity knows that a distribution is a return of capital, it should not be precluded from classifying

those distributions as investing activities. However, the Task Force ultimately rejected that

approach because it could add a layer of complexity to the analysis and would not be a practical

approach for determining the cash flows classification. Additionally, Task Force members believe

that some investors may not be able to obtain the information necessary to assess the specific facts

and circumstances to apply this approach.

73. The Task Force reached a tentative conclusion that distributions received from an equity

method investee should be classified by applying the cumulative earnings approach (Alternative

A). This tentative conclusion does not apply to equity method investments measured using the fair

value option.

74. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure that all

distributions received from an equity method investee are considered to be returns on investment

CONFIDENTIAL DRAFT


and should be classified as cash inflows from operating activities unless the investor’s cumulative

distributions received less distributions received in prior periods that were determined to be returns

of investment exceed cumulative equity in earnings recognized by the investor (as adjusted for

amortization of basis differences). When such an excess occurs, the current-period distribution up

to this excess is considered a return of investment and classified as cash inflows from investing

activities. The consensus-for-exposure did not address equity method investments measured using

the fair value option.


75. At its June 10, 2016 meeting, the Task Force reached a consensus to permit an entity to make

an accounting policy election to classify distributions received from equity method investees using

either the cumulative earnings approach or the nature of the distribution approach. The nature of

the distribution approach is similar to the look-through approach except that it does not include a

presumption that all distributions are returns on investment. Instead, the nature of the distribution

approach requires all distributions to be classified on the basis of the nature of the activity or

activities of the investee that generated the distributions. If an entity elects to apply the nature of

the distribution approach and the information to apply that approach to distributions received from

an individual equity method investee is not available to the investor, the entity should report a

change in accounting principle on a retrospective basis by applying the cumulative earnings

approach for that investee. The Task Force recognized that comparable financial reporting is better

achieved through consistent application of the same guidance by all entities and that the overall

goal of the amendments in the Update resulting from this Issue is to reduce diversity in practice.

However, the Task Force was concerned that for those entities that apply the look-through

approach today, application of the cumulative earnings approach might not provide financial

statement users with the most useful information or the most accurate reflection of the nature of

the distributions received. Additionally, if the Task Force required entities to apply the look-

through approach as it is currently used in practice by some entities, it may not be possible for

some entities to obtain the necessary information about the nature of distributions from some or

all investees, resulting in an operating activities classification for all distributions for which the

specific nature could not be determined by the investor.

76. The Task Force considered whether to require a reporting entity to elect the same accounting

policy for all of its equity method investments or elect an accounting policy on an equity-method-

investment-by-equity-method-investment basis. Some Task Force members noted that there are

differences in the purpose and type of equity method investments that can affect the availability of

information obtained by an investor from its equity method investees. Other Task Force members

believe that an accounting policy election on an equity-method-investment-by-equity-method-

investment basis would create confusion for financial statement users. The Task Force reached a

consensus to require the same accounting policy election for all equity method investments of the

reporting entity. However, as discussed in paragraph 75 above, if an entity elects to apply the

nature of the distribution approach and determines that the necessary information for an individual

equity method investee is not available to the investor, the entity would apply the cumulative

earnings approach for that investee and the nature of the distribution approach for all other equity

method investees. The Task Force concluded that because equity method investments can differ,

allowing application of the cumulative earnings approach if information necessary to apply the

CONFIDENTIAL DRAFT


nature of the distribution approach is not available to the investor provides flexibility to entities to

address the varying levels of information available for different equity method investments.

77. The Task Force also reached a consensus that an entity would be required to comply with

the applicable accounting policy disclosure requirements in paragraphs 235-10-50-1 through 50-

6. The consensus does not address equity method investments measured using the fair value option.

Issue 7—Beneficial Interests in Securitization Transactions

Introduction

78. In a securitization transaction accounted for as a sale under Topic 860, Transfers and

Servicing, the transferor typically sells financial assets to an unconsolidated securitization entity

in return for cash and a beneficial interest. In some instances, the transferor does not receive in

cash the full fair value of the financial assets at the inception of the securitization transaction.

Rather, the transferor receives an amount of cash based on amounts paid by third parties for

interests in the assets (that is, the fair value of the assets net of the beneficial interest obtained by

the transferor).

79. The securitization transaction may involve the transfer of trade receivables. Subsequent to

the transfer of trade receivables in a securitization transaction, the transferor has a right to receive

cash from the securitization entity’s collections on the trade receivables. This right may be

subordinate to the rights of other interest holders in the securitization entity. There is no specific

guidance in Topic 230 about the classification of cash receipts from securitization transactions.

The lack of specific guidance has resulted in entities classifying the subsequent cash receipts from

payments on beneficial interests obtained by the transferor in a securitization of trade receivables

as either operating or investing activities in the statement of cash flows. Diversity in practice has

not been identified for cash receipts from beneficial interests involving financial assets other than

trade receivables (for example, mortgages and commercial loans).

80. In addition, there is no specific cash flow guidance on whether, at inception of a securitization

transaction, the receipt of the beneficial interest by the transferor should be considered a noncash

activity or whether the transaction should be presented on a gross basis as a cash inflow for the

sale of the financial assets and a cash outflow for the purchase of the beneficial interest.

Issue

Subissue 7a—Presentation of Beneficial Interests at Inception of Securitization

81. This subissue relates to the presentation of a transferor’s beneficial interest obtained in

securitized financial assets at the inception of a securitization transaction.

Subissue 7b—Classification of Cash Receipts from Beneficial Interests in Trade Receivables

82. This subissue relates to the statement of cash flows classification of cash receipts from

subsequent collections of a transferor’s beneficial interests in securitized trade receivables. This

subissue does not pertain to cash receipts from beneficial interests in financial assets other than

trade receivables.

CONFIDENTIAL DRAFT



Subissue 7a


for the presentation of beneficial interests at inception of a securitization transaction:

Alternative A – Disclose the transferor’s beneficial interest obtained in a securitization of financial

assets as a noncash activity.

Alternative B – Present the transferor’s purchase of the beneficial interest in a securitization of

financial assets as a cash outflow.

84. The Task Force favored Alternative A because it reflects the actual form of the securitization

transaction. That is, it would be consistent with the form of the securitization transaction because

a transferor of assets does not receive or pay cash to obtain the beneficial interest. The Task Force

also noted that disclosing a transferor’s beneficial interest as a noncash activity is consistent with

the requirement in Topic 230, which states that noncash investing activities shall be disclosed.

85. The Task Force reached a tentative conclusion to require entities to disclose the transferor’s

beneficial interest obtained in a securitization of financial assets as a noncash activity (Alternative

A).

Subissue 7b


for the classification of cash receipts from subsequent collections of a transferor’s beneficial

interests in securitized trade receivables:

Alternative A – The cash receipts from payments on the transferor’s beneficial interests in

securitized trade receivables should be classified as cash inflows from operating activities.

Alternative B – The cash receipts from payments on the transferor’s beneficial interests in

securitized trade receivables should be classified as cash inflows from investing activities.

87. Some Task Force members noted that financial statement users typically view cash receipts

from a transferor’s beneficial interest in securitized trade receivables as an operating activity. As

such, when those cash receipts are classified as investing activities, financial statement users may

adjust the statement of cash flows to classify them as operating activities. One Task Force member

also noted that Alternative B creates a lack of symmetry between sales and operating cash flows.

That is, the sale that created the trade receivable that was securitized will never result in a

subsequent operating cash inflow for the seller under Alternative B. Additionally, that Task Force

member noted that the absence of symmetry raises a broader question about cash flow symmetry

for other fact patterns beyond this subissue.

88. However, the Task Force agreed that current accounting guidance supports treating a

transferor’s beneficial interests like an investment security. Although cash flows from trading

securities that are acquired specifically for resale typically result in an operating activities

CONFIDENTIAL DRAFT


classification, some Task Force members believe that it is unlikely that a beneficial interest in

securitized trade receivables would be acquired specifically for resale. Therefore, an operating

activities classification would also be unlikely even when the beneficial interest is viewed as an

investment security. Furthermore, those Task Force members supported Alternative B because the

transferor’s ability to receive cash from its beneficial interest is sometimes linked to the

performance of third-party trade receivables. That is, this additional exposure to credit risk makes

the transferor’s beneficial interest more akin to an investment in the securitization entity than to

an existing trade receivable. The Task Force also noted that Alternative B is consistent with

existing guidance in Topic 230 when considering its tentative conclusion on Subissue 7a. That is,

Topic 230 requires disclosure of noncash investing activities but does not require the disclosure of

noncash operating activities. In addition, Alternative B is consistent with the structure of

securitization transactions, whereby the trade receivables are transferred to the securitization entity

(that is, the transferor does not retain ownership of the trade receivables, as implied by Alternative

A). Therefore, the Task Force noted that the transferor should not classify cash receipts from its

beneficial interests as if they were collections of trade receivables.

89. The Task Force reached a tentative conclusion that cash receipts from payments on a

transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows

from investing activities (Alternative B).

Subissue 7a


require disclosure of a transferor’s beneficial interest obtained in a securitization of financial assets

as a noncash activity.

Subissue 7b

91. At the November 12, 2015 EITF meeting, the Task Force reached a consensus-for-exposure

that cash receipts from payments on a transferor’s beneficial interests in securitized trade

receivables should be classified as cash inflows from investing activities.

92. In reaching its consensus-for-exposure, the Task Force considered whether the cash receipts

from beneficial interests arising from long-term trade receivables should be bifurcated between

interest and notional components consistent with the consensuses-for-exposure reached on Issues

2, 3, 4, 6, and 8 to separate and classify cash flows into more than one class of cash flows and

consistent with existing guidance that requires receipts of interest to be classified as operating

activities in the statement of cash flows. However, stakeholders have indicated that the interest

component on such transactions is generally insignificant. Therefore, the Task Force does not

believe that the benefits of bifurcating the interest and notional components justify the cost. As

such, the Task Force decided that all cash receipts from payments on a transferor’s beneficial

interest in securitized trade receivables should be classified as investing activities in the statement

of cash flows as a practical expedient.


Subissue 7a

CONFIDENTIAL DRAFT


93. At its June 10, 2016 meeting, the Task Force reached a consensus to require disclosure of a

transferor’s beneficial interest obtained in a securitization of financial assets as a noncash activity.

Subissue 7b

94. The Task Force reached a consensus that cash receipts from payments on a transferor’s

beneficial interests in securitized trade receivables should be classified as cash inflows from

investing activities.

Issue 8—Separately Identifiable Cash Flows and Application of the Predominance Principle

Introduction

95. Topic 230 recognizes that the most appropriate classification of cash flows will not always

be clear, particularly in situations in which cash receipts and payments have aspects of more than

one class of cash flows. In those situations, the appropriate classification depends on the nature of

the activity that is likely to be the predominant source of cash flows for the item. That guidance is

referred to as the predominance principle.

96. Significant diversity in practice exists about how to interpret and apply the predominance

principle. The lack of clear guidance has resulted in some entities applying the predominance

principle narrowly (that is, to only a few cash receipts and cash payments). Other entities apply

the principle more broadly, particularly when there is a lack of specific cash flow classification

guidance in Topic 230 and in other Topics.

97. Paragraph 230-10-45-22 includes an example of how cash flow classification is determined

using the predominance principle, which is based on the period of time that equipment is used or

rented before it is sold (also referred to as the short period example). Stakeholders have indicated

that it is unclear whether determining the predominant cash flow should always be based on this

short period example or whether there are other examples (such as those based on projected or

historical cash flows) that should be provided to help entities determine the predominant cash flow.

Additionally, stakeholders have raised concerns that since short period is not defined, it is unclear

whether entities should consider their operating cycle, industry-specific factors, or other factors

when assessing whether the period of time is short.

Issue

Subissue 8a—When to Separate Cash Flows and When to Use Predominance

98. This subissue relates to determining when to separate cash receipts and cash payments and

classify them into more than one class of cash flows and when to classify the aggregate of those

cash receipts and cash payments into one class of cash flows based on predominance.

Subissue 8b—Illustrative Examples to Assist Reporting Entities in Determining the Predominant

Cash Flow

99. This subissue relates to the need for illustrative examples to assist reporting entities in

determining the predominant cash flow.

CONFIDENTIAL DRAFT


Subissue 8c—Potential Disclosures When Classification is Based on the Predominant Source of

Cash Flow

100. This subissue relates to the need for disclosures when classification is based on the

predominant source of cash flow.


Subissue 8a

101. At its September 17, 2015 meeting, the Task Force discussed the following three alternatives

about when to separate cash flows and when to use the predominance principle.

Alternative A – Provide additional guidance that clarifies when an entity should separate cash

receipts and cash payments and classify them into more than one class of cash flows (including

when reasonable judgment is required to estimate and allocate cash flows) and when an entity

should classify the aggregate of those cash receipts and payments into one class of cash flows

based on predominance.

Alternative B – Remove the predominance principle from GAAP and converge with International

Financial Reporting Standards (IFRS). Specifically, IAS 7, Statement of Cash Flows, which states,

in part:

Cash payments to manufacture or acquire assets held for rental to others and

subsequently held for sale are cash flows from operating activities. The cash

receipts from rents and subsequent sales of such assets are also cash flows from

operating activities.

Alternative C – Remove the predominance principle from Topic 230, and require all cash receipts

and payments that have aspects of more than one class of cash flows to be bifurcated and classified

into more than one category.

102. Task Force members favored Alternative A, noting that they supported the predominance

principle, but insisted that further clarification is needed to assist reporting entities in applying that

principle.

103. The Task Force reached a tentative conclusion to provide additional guidance that clarifies

when an entity should separate cash receipts and cash payments and classify them into more than

one class of cash flows (including when reasonable judgment is required to estimate and allocate

cash flows) and when an entity should classify the aggregate of those cash receipts and payments

into one class of cash flows based on predominance (Alternative A).

104. In applying Alternative A, the classification of cash receipts and payments should be

determined first by applying specific guidance in Topic 230 and other applicable Topics. In the

absence of specific guidance, a reporting entity should determine each separately identifiable

source (for inflows) or each separately identifiable use (for outflows) within the cash receipts and

cash payments based on the nature of the underlying cash flows. A reporting entity should then

classify each separately identifiable source or use within the cash receipts and payments on the

basis of their nature in financing, investing, or operating activities. In situations in which cash

CONFIDENTIAL DRAFT


receipts and payments have aspects of more than one class of cash flows and those aspects cannot

be separately identified by their nature (for example, when a piece of equipment is acquired or

produced by an entity to be rented to others for a period of time and then sold), the appropriate

classification shall depend on the activity that is likely to be the predominant source or use of cash

flows for the item.

105. Some Task Force members noted that an entity should determine each separately identifiable

source or use within cash receipts and cash payments on the basis of the nature of the underlying

cash flows because it is consistent with the principle in Topic 230 that nature is the basis for

determining the classification of all cash flows. Some Task Force members emphasized that the

cash flow statement should not be considered on a standalone basis when applying the clarifying

guidance. Rather, the classification of the cash flows related to an asset or liability should be

consistent with its classification on the statement of financial position. For example, the cash flows

from amounts reported as inventory on the statement of financial position should be classified as

operating activities in the statement of cash flows.

Subissue 8b


about providing implementation guidance and illustrations to assist a reporting entity in

determining the predominant cash flow.

Alternative A – Provide implementation guidance and illustrations that include the short period

example and include additional examples to assist a reporting entity in determining the

predominant cash flow.

Alternative B – Remove the short period example and provide no examples.

107. One Task Force member noted that any examples included in the guidance should clearly

articulate how the principle is applied to a given fact pattern in determining classification based

on the predominant cash flow.

108. The Task Force reached a tentative conclusion to provide implementation guidance and

illustrations that include examples to assist a reporting entity in determining the predominant cash

flow (Alternative A).

Subissue 8c

109. At its September 17, 2015 meeting, the Task Force discussed the following three alternatives

about requiring disclosures when cash flow classification is based on the predominant cash flow.

Alternative A – To the extent material, require a reporting entity to disclose the following when an

entity determines classification based on the activity that is likely to be the predominant source of

cash flows for the item:

a. A description of the transaction giving rise to the cash flows

CONFIDENTIAL DRAFT


b. The nature of activities that are likely to be the predominant and non-predominant

sources of cash flows, and the classification of cash receipts and payments in the

statement of cash flows

c. The amount of cash flows, if not presented on its own line item on the face of the statement

of cash flows.

Alternative B – Require a reporting entity to disclose an accounting policy when classification is

based on the predominant cash flow.

Alternative C – Do not require specific disclosures when classification is based on the

predominant cash flow.

110. Multiple Task Force members stated that classifying cash payments or receipts based on the

predominant cash flow is not an accounting policy election. Those members also stated that

extensive disclosures should not be required by entities that choose to classify cash flows based

on the predominant cash flow. One Task Force member noted that if the determination of the

predominant cash flow requires a material judgment, then that judgment should be disclosed.

However, that Task Force member also stated that the disclosure of material judgements should

not be required for specific issues but should, instead, be considered as a general requirement for

all areas within GAAP.

111. The Task Force reached a tentative conclusion not to require specific disclosures when

classification is based on the predominant cash flow (Alternative C).

Subissue 8a


provide additional guidance that clarifies when an entity should separate cash receipts and cash

payments and classify them into more than one class of cash flows (including when reasonable

judgment is required to estimate and allocate cash flows) and when an entity should classify the

aggregate of those cash receipts and payments into one class of cash flows based on predominance.

In applying the additional guidance, the classification of cash receipts and payments should be

determined first by applying specific guidance in Topic 230 and other applicable Topics. In the

absence of specific guidance, a reporting entity should determine each separately identifiable

source (for inflows) or each separately identifiable use (for outflows) within the cash receipts and

cash payments on the basis of the nature of the underlying cash flows. A reporting entity should

then classify each separately identifiable source or use within the cash receipts and payments on

the basis of their nature in financing, investing, or operating activities. In situations in which cash

receipts and payments have aspects of more than one class of cash flows and those aspects cannot

be separately identified by their nature (for example, when a piece of equipment is acquired or

produced by an entity to be rented to others for a period of time and then sold), the appropriate

classification shall depend on the activity that is likely to be the predominant source or use of cash

flows for the item.

Subissue 8b

CONFIDENTIAL DRAFT


113. At its November 12, 2015 meeting, the Task Force considered, but ultimately rejected,

providing implementation guidance and illustrative examples about how an entity could determine

the predominant cash flow. Some Task Force members noted that the additional guidance on how

to apply the predominance principle is clear and, therefore, illustrative examples are not necessary.

Furthermore, because the Task Force reached a consensus-for-exposure on specific cash flow

classification issues for which stakeholders indicated that the predominance principle is being

applied, there is less need to provide illustrative examples because fewer cash flow classifications

will be determined as a result of applying this additional guidance.

Subissue 8c

114. At its November 12, 2015 meeting, the Task Force also reached a consensus-for-exposure

not to require specific disclosures when classification is based on the predominant cash flow.


Subissue 8a

115. At its June 10, 2016 meeting, the Task Force reached a consensus to provide additional

guidance that clarifies when an entity should separate cash receipts and cash payments and classify

them into more than one class of cash flows (including when reasonable judgment is required to

estimate and allocate cash flows) and when an entity should classify the aggregate of those cash

receipts and payments into one class of cash flows based on predominance. In applying the

additional guidance, the classification of cash receipts and payments should be determined first by

applying specific guidance in Topic 230 and other applicable Topics. In the absence of specific

guidance, a reporting entity should determine each separately identifiable source (for inflows) or

each separately identifiable use (for outflows) within the cash receipts and cash payments on the

basis of the nature of the underlying cash flows. A reporting entity should then classify each

separately identifiable source or use within the cash receipts and payments on the basis of their

nature in financing, investing, or operating activities. In situations in which cash receipts and

payments have aspects of more than one class of cash flows and those aspects cannot be separately

identified by their nature (for example, when a piece of equipment is acquired or produced by an

entity to be rented to others for a period of time and then sold), the appropriate classification should

depend on the activity that is likely to be the predominant source or use of cash flows for the item.

Some Task Force members noted that an entity should determine each separately identifiable

source or use within cash receipts and cash payments on the basis of the nature of the underlying

cash flows because it is consistent with the principle in Topic 230 that nature is the basis for

determining the classification of all cash flows. Some Task Force members emphasized that the

cash flow statement should not be considered on a standalone basis when applying the clarifying

guidance. Rather, the classification of the cash flows related to an asset or liability should be

consistent with its classification on the statement of financial position. For example, the cash flows

from amounts reported as inventory on the statement of financial position should be classified as

operating activities in the statement of cash flows. One Task Force member noted that there could

be situations in which an entity has no basis to reasonably estimate the amount of each separately

identifiable source or use within cash receipts and cash payments, and it is unclear whether the

entity could classify those cash flows on the basis of the predominant cash flow. Some Task Force

members thought that in those situations, an entity would not be precluded from classifying those

cash flows on the basis of predominance when there is a reasonable basis for doing so.

CONFIDENTIAL DRAFT


Subissue 8c

116. The Task Force also reached a consensus not to require specific disclosures when

classification is based on the predominant cash flow. Many Task Force members stated that

classifying cash payments or receipts on the basis of the predominant cash flow is not an

accounting policy election and that entities that choose to classify cash flows on the basis of the

predominant cash flow should not be required to provide extensive disclosures.

Issue 9—Restricted Cash

117. At its December 9, 2015 meeting, the Board decided to separate Issue 9 and address it

separately in EITF Issue No. 16-A, “Statement of Cash Flows: Restricted Cash.” Information

about Issue 16-A can be found in the “Status of Open Issues” at the end of these minutes.

Effective Date and Transition



the amendments resulting from this Issue (that is, Issues 1 through 8) should be applied

retrospectively to all periods presented. The Task Force believes that there will be a significant

benefit to retrospective transition because it would enhance the interperiod consistency and

comparability of financial information. The Task Force also reached a consensus-for-exposure to

provide an impracticability provision similar to that in Topic 250, Accounting Changes and Error

Corrections, in order to alleviate cost and complexity for those entities that lack the information

necessary to apply the proposed amendments or portions of the proposed amendments

retrospectively.

119. The Task Force reached a consensus-for-exposure to require the transition disclosures in

paragraphs 250-10-50-1(a) and 50-1(b)(1), and 250-10-50-2, as applicable, in the interim and

annual period in which the amendments resulting from this Issue are adopted. If retrospective

application to any prior period is impracticable, the Task Force reached a consensus-for-exposure

to also require the disclosures in paragraph 250-10-50-1(b)(4).

Current EITF Discussion 120. At its June 10, 2016 meeting, the Task Force reached a consensus that an entity should apply

the amendments in the Update resulting from this Issue retrospectively to all periods presented.

The Task Force believes that there will be a significant benefit to retrospective transition because

it would enhance the interperiod consistency and comparability of financial information. The Task

Force also reached a consensus to provide an impracticability provision similar to that in Topic

250 in order to alleviate cost and complexity for those entities that lack the information necessary

to apply the amendments or portions of the amendments retrospectively.

121. The Task Force reached a consensus to require the transition disclosures in paragraphs 250-

10-50-1(a) and (b)(1) and 250-10-50-2, as applicable, in the interim and annual period in which

the amendments in the Update resulting from this Issue are adopted. If retrospective application to

any prior period is impracticable, the Task Force reached a consensus to also require the

disclosures in paragraph 250-10-50-1(b)(4).

CONFIDENTIAL DRAFT


122. The Task Force decided that the amendments in the Update resulting from this Issue should

be effective for public business entities for fiscal years beginning after December 15, 2017, and

interim periods within those fiscal years. For all other entities, the amendments are effective for

fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning

after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If

an entity early adopts the amendments in an interim period, any adjustments should be reflected

as of the beginning of the fiscal year that includes that interim period. An entity that elects early

adoption must adopt all of the amendments in the same period.

Board Ratification

123. At its June 29, 2016 meeting, the Board ratified the consensus reached by the Task Force on

this Issue.

Status

124. No further EITF discussion is planned.

CONFIDENTIAL DRAFT

June 10, 2016 EITF Meeting Minutes, p. 29 Issue No. 16-B

Issue No. 16-B

Title: Employee Benefit Plan Master Trust Reporting

Dates Discussed: May 12, 2016 (Education Session); June 10, 2016

Background

1. At its April 20, 2016 meeting, the Board decided to add a project to its agenda to address the

lack of presentation and disclosure guidance for employee benefit plans that have investments held

in master trusts. The Board decided to refer this project to the EITF.

2. Many employee benefit plans hold investments in master trusts. A master trust is a trust for

which a regulated financial institution (bank, trust company, or similar financial institution that is

regulated, supervised, and subject to periodic examination by a state or federal agency) serves as

a trustee or custodian and in which assets of more than one plan sponsored by a single employer

or by a group of employers under common control are held. The regulated financial institution

may or may not have discretionary control over the assets.

3. Current disclosure guidance about an employee benefit plan’s interest in a master trust in

Topic 960, Plan Accounting—Defined Benefit Pension Plans, and Topic 962, Plan Accounting—

Defined Contribution Pension Plans, includes requirements for a plan to disclose the following

items: the fair value of investments held by the master trust by general type of investment; the net

change in the fair value of each significant type of investment of the master trust; the total

investment income of the master trust by type; a description of the basis used to allocate net assets,

net investment income or loss, and gains or losses to participating plans; and the plan’s percentage

interest in the master trust.

4. Each plan’s interest in the net assets of the master trust may be divided or undivided. A plan

has an undivided interest in a master trust when the plan holds a proportionate interest in the net

assets of the master trust but has no specific interest in any of the individual balances of the master

trust. All other interests in a master trust are considered to be divided.

5. Historically, most benefit plans were defined benefit plans in which the sponsor promised to

pay a specific benefit that was determined by specific factors (for example, age, years of service,

and compensation). Under those defined benefit plans, the plan’s investments were typically

directed by the sponsor (otherwise known as nonparticipant-directed investments). When a master

trust was used to hold those investments, the plans typically held an undivided interest in that

master trust. However, employee benefit plans have evolved over time. The vast majority of plans

are now defined contribution plans that involve more participant-directed investments (that is, the

participant can elect specific investments based on options that the plan provides). Today, it is not

uncommon for plans to have divided interests in master trusts. The sum of the individual

participant-directed investments in a master trust establishes the plan’s divided interest in each

general type of investment held by the master trust.

Issue

CONFIDENTIAL DRAFT


6. The issue is whether the evolution of employee benefit plans has resulted in a need to clarify

and improve some of the GAAP requirements relating to master trusts.

Scope

7. This Issue applies to all reporting entities within the scope of Topics 960, 962, or 965, Plan

Accounting—Health and Welfare Benefit Plans.


Presentation

8. At its June 10, 2016 meeting, the Task Force noted that the existing presentation guidance in

Topic 960 relating to master trusts is not consistently provided within each of the plan accounting

Topics. Topic 960 requires that defined benefit pension plans present investments in a master trust

in a single line item in the statement of net assets available for benefits. However, similar guidance

is not included in Topic 962 or 965 for defined contribution pension plans and health and welfare

benefit plans, respectively, and no guidance is included in any of the Topics on how to present a

plan’s changes in interest of the master trust in the plan’s statement of changes in net assets

available for benefits.

9. In addition, based on outreach, the Task Force understands that there is diversity in practice

in the presentation of other master trust balances and activity within the plan’s financial statements

(for example, amounts due from brokers for securities sold, amounts due to brokers for securities

purchased, accrued interest and dividends, and other accrued expenses).

10. The Task Force reached a consensus-for-exposure that all plans should present their interest

in each master trust and the change in interest in the master trust as single line items in the statement

of net assets available for benefits and the statement of changes in net assets available for benefits,

respectively. The Task Force believes that this presentation appropriately reflects the plan’s

interest in the legal structure that is the master trust. That is, the presentation retains a crucial

distinction between an interest in the master trust and all other plan activity and balances (such as

the investments the plan holds directly). Furthermore, while there is some diversity in practice, the

Task Force understands that the majority of plans currently follow a single-line presentation for

purposes of reflecting a plan’s interest in a master trust. The Task Force also notes that this

presentation was supported by the majority of stakeholders during outreach and is more consistent

with regulatory reporting. In reaching this conclusion, Task Force members expressed the view

that the plan’s asset is its interest in the master trust, which is what should be presented in the

statement of net assets available for benefits. Some Task Force members believe that separately

presenting the plan’s interest in the master trust’s assets and liabilities in the plan’s statement of

net assets available for benefits would be presenting items that are not the assets and liabilities of

the plan but those of another unconsolidated entity.

Disclosure

11. At its June 10, 2016 meeting, the Task Force reached a consensus-for-exposure to require

disclosure of the dollar amount of a plan’s interest in each general type of investment held by the

master trust for plans with a divided interest in the master trust, as well as disclosure of the master

trust’s other assets and liabilities and the dollar amount of a plan’s interest in each of those balances

for all plans.

CONFIDENTIAL DRAFT


12. With respect to the plan’s interest in each general type of investment held by the master trust,

the Task Force understands that because today more plans have a divided interest and participant-

directed investments, the current requirement to disclose the plan’s total percentage interest in the

master trust may not appropriately reflect the plan’s interest in each type of investment that is held

by the master trust. As such, some stakeholders have said, and the Task Force ultimately agreed,

that the current disclosure could be improved to provide additional information for plans with a

divided interest and, therefore, proposed providing the dollar amount of the plan’s interest in each

type of investment held by the master trust for plans with a divided interest in the master trust.

13. With respect to disclosing the master trust’s other assets and liabilities and the plan’s interest

in each of those balances, the Task Force understands that the current disclosure requirements do

not provide insight into all of the balances in the master trust’s statement of net assets, which make

up the plan’s interest in the master trust. That is, the current disclosures focus only on the

investments. As such, the Task Force decided that the master trust’s other assets and liabilities and

the dollar amount of the plan’s interest in each of those balances also should be disclosed for all

plans. The Task Force understands that the information is useful at the master trust level, provides

information about the legal structure that is the master trust, and facilitates the regulator’s ability

to reconcile the disclosure with the master trust’s Form 5500 regulatory filing under the Employee

Retirement Income Security Act of 1974. The Task Force also believes that the dollar amount of

the plan’s interest in each of the master trust’s other asset and liability balances is useful because

it helps a user better understand the amounts included in the plan’s interest in the master trust that

is presented in the plan’s statement of net assets available for benefits.

14. The Task Force decided not to require that plans disclose the master trust’s statement of net

assets available for benefits and the statement of changes in net assets available for benefits. The

Task Force believes that much of the same information would be provided through the other asset

and liability disclosure, which would be less costly and provide more targeted information to users.

As such, the Task Force did not think the benefits would justify the costs.

15. The Task Force also decided not to specify in situations in which financial statements were

being prepared for the master trust, rather than for a specific plan, whether master trust financial

statements should follow investment company or employee benefit plan guidance—or some

combination of the two. The Task Force noted that while it agreed that the simplifications provided

for employee benefit plans during the Board’s simplification initiative in 2015 (including

presentation of fully-benefit-responsive investment contracts at contract value, and providing

investment disclosures by general type of investment as opposed to nature, characteristics, and

risks) should be considered for master trusts, it did not think this issue was within the scope of the

proposed Update.

16. The Task Force also decided not to require individual plans to provide GAAP disclosures (for

example, Topic 815, Derivatives and Hedging, and Topic 820, Fair Value Measurement) for the

underlying investments held by a master trust. While some Task Force members noted that the

disclosure requirements (for example, the requirement to disclose the fair value hierarchy of

investments) relate more to the underlying investments held in the master trust (as opposed to the

interest in the master trust), the Task Force ultimately decided that those disclosures would be

CONFIDENTIAL DRAFT


more appropriate within master trust financial statements, when prepared—as opposed to plan

financial statements.

17. Lastly, the Task Force reached a consensus-for-exposure that a health and welfare benefit plan

is not required to provide investment disclosures (for example, the disclosures required by Topics

815 and 820) for 401(h) account assets because those disclosures are required to be provided within

the defined benefit pension plan financial statements. The Task Force understands that the defined

benefit pension plan legally owns the assets within 401(h) accounts. Therefore the health and

welfare benefit plan’s interest is that of a receivable from the defined benefit pension plan, not an

investment. Furthermore, the Task Force also notes that including the investment disclosures with

the defined benefit pension plan financial statements more closely aligns with regulatory reporting

requirements. As such, the Task Force sees no need to require the same investment disclosures

within multiple financial statements; however, the Task Force also reached a consensus-for-

exposure to require disclosure of the defined benefit pension plan name within the health and

welfare benefit plan’s financial statements so that all users can access the disclosure information

relating to the 401(h) accounts if desired.

Effective Date and Transition

18. At its June 10, 2016 meeting, the Task Force reached a consensus-for-exposure that the

amendments in the proposed Update should be applied retrospectively to all periods presented

beginning in a reporting entity’s fiscal year of adoption. The Task Force believes that it is

appropriate for the disclosures to be consistent in all periods presented in a reporting entity’s

financial statements because it would allow for greater comparability.

19. The effective date and the ability to early adopt will be determined after the Task Force

considers stakeholder feedback on the proposed Update.

20. The Task Force considered whether the disclosures related to changes in accounting principle

in paragraphs 250-10-50-1 through 50-3 should apply to the proposed amendments. Many of the

disclosure requirements are not applicable to employee benefit plans because plan financial

statements generally do not contain any of the items referred to in those paragraphs, such as per

share amounts or retained earnings. As such, the Task Force believes that a reporting entity should

be required to only disclose the nature of and reason for the change in accounting principle (that

is, the requirements of paragraph 250-10-50-1(a)).

Board Ratification 21. At its June 29, 2016 meeting, the Board ratified the consensus-for-exposure reached by the

Task Force on this Issue and approved the issuance of a proposed Update for a 60-day public

comment period.

Status

22. Further discussion is expected at a future EITF meeting.

CONFIDENTIAL DRAFT

June 10, 2016 EITF Meeting Minutes, p. 33 Status of Open Issues

Status of Open Issues

The following represents the FASB staff’s assessment of the status and immediate plans with respect to the open Issues on the Task

Force’s agenda. The Issues that will be added to the proposed agenda for the September 22, 2016 meeting will be considered either high

priority issues or issues on which meaningful progress can be made within the staff’s given complement of resources. The staff’s

prioritization of issues is based primarily on the FASB staff’s understanding of the level of diversity in practice created by each respective

Issue, the financial reporting implications of that diversity, the current interaction, if any, of the Issues with active Board projects, and

current resource availability among the staff (with respect to both time and relevant technical expertise).

Issue

No.

Description

Date

Added

Date(s)

Discussed

Next

Meeting

EITF

Liaison

FASB

Staff

Immediate Plans

Next

Deliverable

16-A Statement of Cash Flows:

Restricted Cash

3/15 6/15,

11/15,

3/16

9/16 Uhl Wyss The staff is

preparing an Issue

Summary

Supplement

summarizing

comment letter

feedback.

September

22, 2016

EITF

meeting

materials

16-B Employee Benefit Plan

Master Trust Reporting

4/16 5/16

(education

session),

6/16

11/16 Scoles Kaestle The staff will

prepare an Issue

Summary

Supplement

summarizing

comment letter

feedback once the

comment letter

period closes

November

17, 2016

EITF

meeting

materials

to: members of the fasb emerging issues task force …€¦ · eitf 0616fn 2016 07 22 confidential...

Documents