Project Update

EITF Issue No. 15-F: Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

Last updated on August 10, 2016. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the FASB (the Board). It was prepared by the staff and is for the information and convenience of the Board’s constituents. All decisions of the Board are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Board become final only after extensive due process.

*Project Objective and Background
Due Process Documents
*Decisions Reached at Last Meeting
*Summary of Tentative Decisions Reached to Date
*Next Steps
*EITF/Board Meeting Dates
*Contact Information

*Project Objective and Background

In November 1987, FASB issued FASB Statement No. 95, Statement of Cash Flows. Statement 95 was later codified in Topic 230, Statement of Cash Flows. The Board has received feedback from constituents indicating that there is diversity in practice regarding the application of Topic 230.

The staff’s research indicated that there was diversity in practice with respect to the classification of certain cash receipts and payments. The staff’s research also indicated that the primary reasons for the diversity in classification is the result of lack of specific accounting guidance and inconsistent application of the existing principles within Topic 230.

At its April 28, 2014 meeting, the Board voted to add a project to its 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 principles in Topic 230.

At its April 1, 2015 meeting, the Board decided that clarifying certain existing principles within Topic 230 would only incrementally reduce diversity in practice about the classification of cash receipts and cash payments. Therefore, the Board decided to have the EITF consider nine specific cash flow issues with the goal of reducing the existing diversity in practice on a timely basis.

The nine specific issues to be addressed by the EITF include the classification of cash flows related to:

Issue 1—Debt Prepayment or Debt Extinguishment Costs
Issue 2—Settlement of Zero-Coupon Debt Instruments and Other Debt Instruments with Coupon Interest Rate That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing
Issue 3—Contingent Consideration Payments Made after a Business Combination
Issue 4—Proceeds from the Settlement of Insurance Claims
Issue 5—Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies
Issue 6—Distributions Received from Equity Method Investees
Issue 7—Beneficial Interests in Securitization Transactions
Issue 8— Separately Identifiable Cash Flows and Application of the Predominance Principle
Issue 9—Restricted Cash

At its November 12, 2015 meeting, the EITF decided to address Restricted Cash in a separate EITF Issue. The Board approved this decision at its December 11, 2015 meeting. For more information please refer to EITF Issue No. 16-A: Restricted Cash.

Due Process Documents

On January 29, 2016, the Board issued proposed Accounting Standards Update, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). The comment deadline is March 29, 2016.

*Decisions Reached at Last Meeting (June 29, 2016)

The Board ratified the consensus-for-exposure reached at the November 12, 2015 EITF Meeting. The Board directed the staff to draft a proposed Accounting Standards Update reflecting the consensus-for-exposure for vote by written ballot. The Board decided to expose the proposed Update for Issue 15-F for public comment for a period of 60 days.

The Board also approved the EITF’s decision to address Restricted Cash in a separate EITF Issue.The Board ratified the consensus reached at the June 10, 2016 EITF Meeting. The Board directed the staff to draft a final Accounting Standards Update reflecting the consensus for vote by written ballot.

*Summary of Tentative Decisions Reached to Date (As of June 29, 2016)

Issue 1: Debt Prepayment or Debt Extinguishment Costs
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 and Other Debt Instruments with Coupon Interest Rate That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing
The Task Force 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). The Task Force also reached a consensus to clarify that the guidance should not be applied to all other debt instruments.

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 accreted interest on 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
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.

The Task Force also 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.

Issue 4: Proceeds from the Settlement of Insurance Claims
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 for which reasonable 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
The Task Force reached a consensus that cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities.

The Task Force also 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.

Issue 6: Distributions Received from Equity Method Investees
The Task Force reached a consensus to permit an entity to make an accounting policy election to classify distributions received from an equity method investee using either the cumulative earnings approach or the nature of the distribution approach. 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 apply the cumulative earnings approach for that investee in all subsequent periods.

The Task Force reached a consensus to require the same accounting policy election for all equity method investments of the reporting entity. However, 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.

Issue 7: Beneficial Interests in Securitization Transactions
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.

The Task Force also 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
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 statement of cash flow 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 in financing, investing, or operating activities the cash receipts and payments for each nature that was separately identified. 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 classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item.

*Next Steps

The staff is in the process of drafting a final Accounting Standards Update, which is expected to be issued in August 2016.

*EITF/Board Meeting Dates

The EITF and Board meeting minutes are provided for the information and convenience of constituents who want to follow the EITF’s and Boards' deliberations. All of the conclusions reported are tentative and may be changed at future EITF or Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*June 29, 2016
Board Meeting
EITF Ratification Minutes
*June 10, 2016
EITF Meeting
EITF Meeting Minutes
Issue Summary No. 1, Supplement No. 4
December 11, 2015
Board Meeting
EITF Ratification Minutes
November 12, 2015
EITF Meeting
EITF Meeting Minutes
Issue Summary No. 1, Supplement No. 2
Issue Summary No. 1, Supplement No. 3
September 17, 2015
EITF Meeting
EITF Meeting Minutes
Issue Summary
June 18, 2015
EITF Meeting
EITF Meeting Minutes
Issue Summary
May 14, 2015
EITF Education Session
EITF Education Session Slides EITF Issue 15-F
April 1, 2015
Board Meeting
Board Meeting—Discussion about the clarification of certain existing principles
April 28, 2014
Board Meeting
Board Meeting—Agenda prioritization meeting about whether to add a project to the Board’s agenda
April 23, 2014
Board Meeting
Education Session—Preliminary research and findings on specific cash flow classification issues within the statement of cash flows

*Contact Information

Rob Moynihan
EITF Coordinator
rmoynihan@fasb.org

Jenifer Wyss
Project Manager
jjwyss@fasb.org

Jin Koo
Practice Fellow
jkoo@fasb.org

Andrew McClaskey
Postgraduate Technical Assistant
awmcclaskey@fasb.org

Aishat Akinwale
Postgraduate Technical Assistant
aakinwale@fasb.org