NEWS RELEASE 02/14/13
FASB Proposes Improvements to Recognition and Measurement of Financial
Assets and LiabilitiesNorwalk, CT, February 14, 2013—The
Financial Accounting Standards Board (FASB) today issued for public comment a proposal
to improve financial reporting by providing a comprehensive measurement
framework for classifying and measuring financial instruments. The FASB
developed Proposed Accounting Standards Update, Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, as part of its broader joint project with
the International Accounting Standards Board (IASB) to improve and converge the
accounting for financial instruments. Stakeholders are asked to provide written
comments on the proposal by May 15, 2013.
"The proposed accounting
standard would measure financial assets based on how a reporting entity would
realize value from them as part of distinct business activities, while the
measurement of financial liabilities would be consistent with how the entity
expects to settle those liabilities," stated FASB Chairman Leslie F. Seidman.
"This revised proposal is responsive to the feedback the FASB received on our
2010 Exposure Draft, it simplifies the multitude of classification methods
currently in use, and it offers an opportunity for convergence with the IASB´s
proposal issued last November."
The Exposure Draft also would narrow the
availability of the existing fair value option for financial assets and
financial liabilities. In those limited cases where the fair value option would
be allowed for financial liabilities, changes in the fair value attributable to
an organization´s own credit risk would be reported in other comprehensive
income (OCI), rather than net income.
"We encourage stakeholders to
review this proposal as well as our companion Exposure Draft on accounting for
credit losses and provide feedback about whether these changes would
cost-effectively improve financial reporting," added Ms. Seidman.
the proposal, the classification and measurement of a financial asset would be
based on the asset´s cash flow characteristics and the entity´s business model
for managing the asset, rather than on its legal form, that is, whether the
asset is a loan or a security. Based on this assessment, financial assets would
be classified into one of three categories:
All equity investments (excluding those
accounted for under the equity method of accounting) would be measured at fair
value with changes in fair value recognized in net income, because such
investments do not have payments of principal and interest. The proposal also
provides a practicability exception to measurement at fair value for equity
investments without readily determinable fair values.
- Amortized Cost–financial assets comprised solely of
payments of principal and interest that are held for the collection of
contractual cash flows
- Fair Value through Other Comprehensive Income
(OCI)–financial assets comprised solely of payments of principal and
interest that are both held for the collection of contractual cash flows and
- Fair Value through Net Income–financial assets that do
not qualify for measurement at either amortized cost or fair value through
other comprehensive income
The proposal also
would require financial liabilities to generally be carried at cost, unless the
reporting organization´s business strategy is to subsequently transact at fair
value or the obligation results from a short sale. The proposal would retain the
embedded derivative requirements for hybrid financial liabilities.
financial assets and financial liabilities measured at amortized cost, public
companies also would be required to disclose their fair values parenthetically
on the face of the balance sheet (except for receivables and payables due in
less than a year and demand deposit liabilities). Nonpublic entities would not
be required to disclose such fair value information either parenthetically or in
In May 2010, the FASB issued its first Exposure Draft on
financial instruments, which proposed a much greater use of fair value
measurement for financial assets and liabilities than exists in current U.S.
GAAP. Through its extensive outreach on that proposal, the FASB learned that a
significant majority of investors, reporting entities, and other stakeholders do
not believe that fair value information is of primary relevance for some
financial instruments, particularly loans, deposits, and financial liabilities.
Based on that feedback, in the proposed Update, the Board decided to require
amortized cost as a measurement attribute for assets held for collection of cash
flows, because the value is realized over the holding period of the asset.
Assets that might be sold to manage interest rate risk or liquidity risk would
not qualify for cost measurement. In addition, the Board also decided that
financial liabilities would generally be measured at amortized costs unless
certain conditions are met.
The proposed accounting for expected credit
losses on debt instruments carried at amortized cost or fair value through OCI
is addressed in the FASB´s proposed Accounting Standards Update on credit
losses, which was issued in December 2012. Stakeholders are
encouraged to consider both of these proposals concurrently.
2012, the FASB and the IASB decided to jointly redeliberate selected aspects of
their classification and measurement models in an attempt to reduce differences
in several important areas. In November 2012, the IASB issued its proposed
amendments to IFRS 9 Financial Instruments, which, like the FASB´s
proposed Update, would require an entity to classify and subsequently measure
financial assets based on the results of cash flow characteristics and business
model assessments. A brief comparison of the proposals is included in the
The FASB Exposure
Draft, including instructions on how to submit written comments, is
available at www.fasb.org. A
In Focus also is available at the FASB website; a podcast
explaining the key features of the proposal will be available on the website
within the next week.