Accounting for financial instruments has been deemed the highest priority of both the FASB and IASB because of the role it played in the recent financial crisis. However, it is an extremely complex area without an easy solution making it difficult to predict what may happen and when. All entities that have financial instruments would be affected by the proposed standard. However, the extent of the effect would depend upon the relative significance of financial instruments to an entity’s operations and financial position as well as the entity’s business strategy. While this initially started out as a convergence project, this has not been achieved. The FASB and the IASB continue to have regular discussions to achieve convergence in most areas, however, in spite of their efforts, there will be some differences between the two standards. In July 2014, the IASB published the final version of IFRS 9 Financial Instruments. The FASB has not yet issued their final standards. For FASB, the project has been divided into the following parts:
Classification and Measurement
This FASB project reconsiders the classification and measurement of financial instruments. The objective of this project is to significantly improve the decision usefulness of financial instrument reporting for users of financial statements. The Board believe that simplification of the accounting requirements for financial instruments should be an outcome of this improvement. On February 2013, FASB proposed Accounting Standards Update, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The classification and measurement standards is scheduled to be released in late summer.
FASB Recent Meeting Discussion on classification and measurement:
At the January 14, 2015 FASB meeting, the Board discussed disclosures about core deposit liabilities and hybrid financial instruments containing bifurcated embedded derivatives, the benefits, costs, and complexity of the decisions reached to date, and the transition method.
Disclosures about Core Deposit Liabilities
The Board decided not to retain the proposed disclosures about core deposit liabilities. The proposal would have required public business entities to disclose, for each annual period, the balance of its core deposit liabilities, the weighted-average life of the core deposit liabilities based on the entity's historical experience, and a qualitative description of what management considers to be core deposits.
Disclosures about Hybrid Financial Instruments Containing Bifurcated Embedded Derivatives
The Board decided that entities should be required to disclose the carrying amount, measurement attribute, and line item within the financial statements in which bifurcated embedded derivatives and related host contracts are presented and that the disclosure should be provided in financial statements issued after the change is effective (prospective transition).
The Board decided to expose that proposed disclosure for public comment and directed the staff to draft a proposed Accounting Standards Update with a comment period ending April 30, 2015, for vote by written ballot. The Board will decide whether and how to finalize that change after it considers the stakeholder feedback received.
Benefits and Costs
The Board discussed a staff analysis of the benefits, costs, and complexity of the proposed changes to generally accepted accounting principles. A majority of the Board believe that the expected benefits of those changes justify the perceived costs of providing and using the information.
The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.
The Board affirmed its decision in the February 2013 proposed Update to require a modified retrospective transition approach that will require a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. The Board also decided that the guidance for the practical expedient related to nonmarketable equity securities and the disclosure requirements should be effective prospectively.
This FASB project addresses issues related to the impairment of financial assets. The objective of this project is to significantly improve the decision usefulness of financial instrument reporting for users of financial statements. The Boards believe that simplification of the accounting requirements for financial instruments should be an outcome of this improvement. The Boards’ goal is to develop a single credit loss model for financial assets that enables more timely recognition of credit losses. On January 31, 2011, the FASB and the IASB proposed a common solution for impairment accounting, Supplementary Document—Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Impairment. However, despite, their best efforts the two Boards could not agree on key aspects of the converged model. On December 20, 2012, the FASB issued a separate proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15). The impairment standards is scheduled to be released toward the end of year 2015.
FASB Recent Meeting Discussion on Impairment:
At the March 11, 2015 FASB meeting, the following decisions were reached:
Other Than Temporarily Impaired Debt Securities
The Board decided that an entity would be required to adopt the new requirements for other than temporarily impaired debt securities prospectively as of the effective date. Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to significant improvements in cash flows would continue to be accreted to interest income over the remaining life of the debt security on a level-yield basis, consistent with the guidance in paragraph 320-10-35-35. Any improvements in cash flows of a security due to improvements in credit after the date of adoption would be recorded as a reduction in allowance for credit losses.
Purchased Credit Impaired (PCI) Assets and Certain Beneficial Interests
The Board decided that all assets accounted for under Subtopic 310-30 on loans and debt securities acquired with deteriorated credit quality would be classified as PCI assets at the date of adoption, including those acquired assets for which Subtopic 310-30 has been applied by analogy. An entity would not be permitted to perform further assessments to determine other acquired assets that may meet the revised definition of a PCI. The Board decided that entities would be required to gross up the allowance for expected credit losses for all PCI assets at the date of adoption and would continue to recognize interest income based on the yield of such assets as of the adoption date. Subsequent changes in the expected credit losses on such assets would be recorded through the allowance for credit losses, with a corresponding adjustment to the current-period provision for credit losses.
In a previous Board decision, the Board decided to apply the PCI guidance to certain beneficial interests. The Board decisions on transition for PCI assets will also be extended to those beneficial interests.
All Other Assets
For all other assets, the Board affirmed the proposal to require transition to the new requirements by recognizing a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective.
Transition Disclosures and Next Steps
The Board affirmed the transition disclosure requirements included in the proposed Update and discussed the next steps in the preparation of a staff draft of the final standard.
During drafting of the Accounting Standards Update, the staff will perform outreach with preparers and users on the disclosure requirement to disaggregate credit quality disclosures by vintages, share the staff draft of decisions with the Board for feedback and with stakeholders as part of an external review process, gather information on any “sweep” issues, and seek feedback on the effective date.
The staff will then discuss with the Board at a future public meeting any sweep issues identified, cost-benefit and complexity of the decisions reached to date, effective date, and permission to ballot.
This project addresses issues related to hedge accounting for financial instruments and non-financial items. The objective of this project is to make targeted improvements to the hedge accounting model based on the feedback received from preparers, auditors, users and other stakeholders. The Board began redeliberations on February 25, 2015, but no technical decisions have been made. However, the following proposed ASU have been exposed for public comment for clarifying FASB’s existing accounting methodology: Proposed Accounting Standards Update—Derivatives and Hedging (Topic 815): Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives Proposed Accounting Standards Update—Derivatives and Hedging (Topic 815): Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives
The Board invites comments on all matters in this Exposure Draft and is requesting comments by April 30, 2015.