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FASB decision diverges classification and measurement guidance

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Dec 19, 2013

At its meeting yesterday, the FASB decided to abandon the “SPPI test” that would have been required as part of the proposed contractual cash flow assessment for determining the classification and measurement of financial assets.

In joint deliberations at an earlier meeting, the FASB and IASB had proposed classifying and measuring financial assets on the basis of their contractual cash flow characteristics and the business model in which those assets are managed. Under the proposals issued by both boards, a financial asset would meet the requirements of the contractual cash flow characteristics assessment if the contractual terms of the instrument “give rise on specified dates to cash flows that are solely payments of principal and interest [SPPI] on the principal amount outstanding.“

At yesterday’s meeting, however, the FASB discussed the complexity associated with the proposed contractual cash flow test and decided to reject the SPPI assessment. According to Board members, requiring an SPPI test would be swapping known complexity (i.e., the bifurcation guidance in ASC 815-15) for unknown complexity (SPPI). Instead, in a 5 to 2 decision, the FASB voted to retain the requirement to bifurcate financial assets under the “clearly and closely related” guidance in ASC 815-15 on assessing whether an embedded derivative feature should be bifurcated from a hybrid financial asset. The FASB directed the staff to analyze whether the contractual cash flow characteristics test should be based solely on the “clearly and closely related” criterion in ASC 815-15 or whether to use that criterion to further develop the test. The FASB will consider the results of the staff’s analysis at a future meeting.

For more information on the classification and measurement discussion, see Deloitte's Accounting Journal Entry or the meeting minutes on the FASB's Web site. For details on the other topics discussed at the December 18 FASB meeting, see our previous story.

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