TO: MEMBERS OF THE FASB EMERGING ISSUES TASK FORCE …€¦ · eitf 0616fn 2016 07 22 confidential...
Transcript of 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
EITF 0616FN 2016 07 22 CONFIDENTIAL DRAFT
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
EITF 0616FN 2016 07 22 CONFIDENTIAL DRAFT
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)
EITF 0616FN 2016 07 22 CONFIDENTIAL DRAFT
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”).
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June 10, 2016 EITF Meeting Minutes, p. 5 Issue No. 15-F
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.
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June 10, 2016 EITF Meeting Minutes, p. 6 Issue No. 15-F
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
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June 10, 2016 EITF Meeting Minutes, p. 7 Issue No. 15-F
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.
Prior EITF Discussion
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.
Current EITF Discussion
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
June 10, 2016 EITF Meeting Minutes, p. 8 Issue No. 15-F
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
June 10, 2016 EITF Meeting Minutes, p. 9 Issue No. 15-F
Prior EITF Discussion
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).
31. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure 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. Specifically, the payments, or the portion of the payments, up to the
amount of the contingent consideration liability recognized at the acquisition date, including
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June 10, 2016 EITF Meeting Minutes, p. 10 Issue No. 15-F
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.
Current EITF Discussion
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
June 10, 2016 EITF Meeting Minutes, p. 11 Issue No. 15-F
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.
Prior EITF Discussion
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.
Current EITF Discussion
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June 10, 2016 EITF Meeting Minutes, p. 12 Issue No. 15-F
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.
Prior EITF Discussion
Subissue 5b
2 References to COLI also include bank-owned life insurance.
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June 10, 2016 EITF Meeting Minutes, p. 13 Issue No. 15-F
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
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June 10, 2016 EITF Meeting Minutes, p. 14 Issue No. 15-F
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.
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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
63. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure 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.
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
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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.
Current EITF Discussion
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.
Prior EITF Discussion
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
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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
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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.
Current EITF Discussion
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
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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.
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Prior EITF Discussion
Subissue 7a
83. At its September 17, 2015 meeting, the Task Force discussed the following two alternatives
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
86. At its September 17, 2015 meeting, the Task Force discussed the following two alternatives
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
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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
90. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure to
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.
Current EITF Discussion
Subissue 7a
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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.
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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.
Prior EITF Discussion
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
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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
106. At its September 17, 2015 meeting, the Task Force discussed the following two alternatives
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
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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
112. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure 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 shall depend on the activity that is likely to be the predominant source or use of cash
flows for the item.
Subissue 8b
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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.
Current EITF Discussion
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.
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June 10, 2016 EITF Meeting Minutes, p. 27 Issue No. 15-F
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
Prior EITF Discussion
118. At its November 12, 2015 meeting, the Task Force reached a consensus-for-exposure that
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).
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June 10, 2016 EITF Meeting Minutes, p. 28 Issue No. 15-F
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.
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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
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June 10, 2016 EITF Meeting Minutes, p. 30 Issue No. 15-F
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.
Current EITF Discussion
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.
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June 10, 2016 EITF Meeting Minutes, p. 31 Issue No. 15-F
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
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June 10, 2016 EITF Meeting Minutes, p. 32 Issue No. 15-F
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.
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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