EITF Issue No. 15-F, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments Private Company Council Meeting September 25, 2015 Topic 3 1
EITF Issue No. 15-F Cash Flow Classification Issues Tentative Conclusions Reached (September 2015) Proceeds from the settlement of corporate-owned life insurance policies Distributions received from equity method investees Beneficial interests in securitization transactions Application of the predominance principle Tentative Conclusions Reached (June 2015) Debt prepayment or extinguishment costs Settlement of zero-coupon bonds Proceeds from the settlement of insurance claims Contingent consideration payments made after a business combination Issue to be Discussed at a Future EITF Meeting Restricted cash 2
Proceeds from the Settlement of Corporate Owned Life Insurance (COLI) Policies Issue Description Policies are purchased for a variety of purposes, including: - Funding the cost of employee benefits and protecting the loss of key persons - As a funding mechanism investment income accumulated tax-free through the buildup of a cash surrender value (an investment) and death benefits received tax-free Two primary issues: - Classification of proceeds received from the settlement of a COLI policy (Subissue 1) - Aligning the classification of both premiums paid and proceeds received related to COLI policies (Subissue 2) 3
Proceeds from the Settlement of COLI Policies Subissue 1 Description At its June 18, 2015 meeting, the Task Force requested that the FASB staff perform additional outreach and research on the following: Feedback from financial statement users about whether the proceeds received from the settlement of COLI policies provide meaningful cash flow information Cash flow classification of proceeds received from the settlement of COLI policies to affirm that entities acquire COLI policies for multiple purposes. Tentative Conclusion Reached Cash proceeds received from the settlement of COLI policies should be classified as cash inflows from investing activities. 4
Proceeds from the Settlement of COLI Policies Subissue 2 Description At its June 18, 2015 meeting, the Task Force requested that the FASB staff perform additional outreach and research on the following: Cash flow classification of premiums paid on COLI policies An alternative that would align the classification of premiums paid with proceeds received. Tentative Conclusion Reached Do not require premiums paid and proceeds received related to COLI policies to be classified in the same cash flow category. In the Codification, include guidance that the premium payments would be permitted, but would not be required to align with the cash flow classification of proceeds received. 5
Distributions Received from Equity Method Investees Issue Description How to determine whether the cash receipts from an equity method investee represent a return on investment (operating activity) or a return of investment (investing activity) Tentative Conclusion Reached Cumulative earnings approach - To determine cash flow classification, an investor would compare its cumulative distributions received to its cumulative equity in earnings, from an inception-to-date basis from when the equity investment was made. - When an investor s cumulative distributions (less prior year distributions that were determined to be returns of investment) exceed cumulative equity in earnings, the current period distribution (less the cumulative equity in earnings) is considered a return of the investment and classified as cash inflows from investing activities. - The current period distribution, up to the amount of cumulative equity in earnings, is considered a return on the investment and classified as cash inflows from operating activities. 6
Beneficial Interests in Securitization Transactions Issue Description Diversity in practice exists with the presentation and classification of beneficial interests in certain securitized financial assets in the statement of cash flows. Topic 860, Transfers and Servicing, establishes accounting and reporting standards for the transfers of financial assets. Two primary issues: - Presentation of a transferor s beneficial interests obtained in securitized financial assets at the inception of the securitization (Subissue 1) - Classification of cash receipts from subsequent collections of a transferor s beneficial interests in securitized trade receivables (Subissue 2) 7
Beneficial Interests in Securitization Transactions Subissue 1 Description An entity that sells financial assets in a securitization transaction typically retains a beneficial interest in those assets. At inception, the transferor does not receive the cash for the full fair value of the financial assets transferred. The transferor receives an amount of cash net of the beneficial interest obtained by the transferor. Tentative Conclusion Reached Disclose the transferor s beneficial interest obtained in a securitization of financial assets as a noncash activity. 8
Beneficial Interests in Securitization Transactions Subissue 2 Description Subsequent to the initial 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 after the amounts are paid to other interest holders in the securitization entity. Diversity in practice exists on the classification of the cash receipts from payments on a transferor s beneficial interest. Tentative Conclusion Reached The cash receipts from payments on the transferor s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities. 9
Application of the Predominance Principle Issue Description Topic 230 recognizes that the most appropriate classification will not always be clear, particularly when cash receipts and payments have aspects of more than one class of cash flows - In those situations, the appropriate classification depends on the activity that is likely to be the predominant source of cash flows. Stakeholders have raised three primary issues: - When to separate cash flows and when to use predominance (Subissue 1) - The need for illustrative examples to assist reporting entities in determining the predominant cash flow (Subissue 2) - The need for disclosures when classification is based on the predominant source of cash flow (Subissue 3). 10
Application of the Predominance Principle Subissue 1 Description Stakeholders indicated that there is a lack of clarity about 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. Tentative Conclusion Reached Provide additional guidance that clarifies when to 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 to classify the aggregate of those cash receipts and cash payments into one class of cash flows based on predominance. 11
Application of the Predominance Principle Subissue 2 Description Paragraph 230-10-45-22 states, in part, that the acquisition and sale of equipment to be used by the entity or rented to others generally are investing activities. However, equipment sometimes is acquired or produced to be used by the entity or rented to others for a short period and then sold. In those circumstances, the acquisition or production and subsequent sale of those assets shall be considered operating activities. It is unclear to stakeholders whether determining the predominant cash flow should always be based on the short period example or whether other examples should be provided to assist in determining the predominant cash flow. Tentative Conclusion Reached Provide implementation guidance and illustrations that include the short period example and additional examples to assist a reporting entity in determining the predominant cash flow. 12
Application of the Predominance Principle Subissue 3 Description The use of judgment can lead to different classifications for similar cash flows based on predominance, which makes it difficult for financial statement users to develop comparable metrics. It is not always apparent from a single line item on the statement of cash flows that predominance is being used as a basis for determining classification. Tentative Conclusion Reached Do not require specific disclosures when classification is based on the predominant cash flow. 13
Tentative Conclusions Reached June 2015 Cash Flow Issue Debt prepayment or extinguishment costs Settlement of zero-coupon bonds Proceeds from the settlement of insurance claims Tentative Conclusion Cash payments for debt prepayment or extinguishment costs should be classified as cash outflows for financing activities. 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. Cash proceeds received from the settlement of insurance claims should be classified based on the insurance coverage (that is, the nature of each loss). 14
Tentative Conclusions Reached June 2015 Cash Flow Issue Contingent consideration payments made after a business combination Tentative Conclusion Cash payments made for a contingent consideration liability should be separated and classified as cash outflows for financing and operating activities: Financing activity, for portion not to exceed the amount of the liability recognized at acquisition-date fair value Operating activity, for portion in excess of the amount of the liability recognized at acquisition-date fair value 15
Questions or Comments? 16