The US Financial Accounting Standards Board (FASB) has issued a revised set of proposals for the financial instruments accounting standards it has been working to converge with International Financial Reporting Standards (IFRSs) in response to feedback.
The latest standards include a proposal to improve financial reporting by providing a comprehensive measurement framework for classifying and measuring financial instruments.
The latest update, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities forms part of a joint project with the International Accounting Standards Board (IASB) to improve and converge accounting for financial instruments under US GAAP with IFRS. This work has seen a number of disagreements between FASB and IASB over issues such as the impairment of bank loans and hedging and offsetting activities.
FASB chair Leslie F. Seidman said: 'The proposed accounting standard would measure financial assets based on how a reporting entity would realise 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. 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.'
Under 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: amortised cost; fair value through other comprehensive income (OCI); or fair value through net income.
The proposal also would require financial liabilities to generally be carried at cost, unless the reporting organisation's business strategy is to subsequently transact at fair value or the obligation results from a short sale. For financial assets and financial liabilities measured at amortised 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 the notes.
FASB said the proposal is open for comment until 15 May 2013.
