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Journal entry — Accounting for financial instruments — February 9 FASB education session

Published on: Feb 09, 2010

Today, the FASB staff held an education session for the Board to discuss the scope of the Accounting for Financial Instruments project. The discussion primarily focused on investments in equity securities (under the current proposal, cost method will be eliminated). The staff presented five alternatives to the Board:

  • Strategic — If investments are not strategic, they will be carried at fair value through earnings. Alternatively, if the investments are deemed strategic (i.e., related to core operations of the investors consolidated operations), existing equity method accounting will be applied.
  • Veto — Investments will be carried at fair value, unless the entity has veto rights or direct control.
  • Trading — If the investment is classified as trading (to generate an investment return), it will be carried at fair value.
  • All equity investments will be carried at fair value.
  • Retain existing equity method, but provide fair value disclosures.

The staff noted that the audit firms favored the first three alternatives, whereas investors would like to see fair value information of the investment and the underlying balance sheet and income statement of the investee. Although no decisions were reached at the meeting, the majority of the Board members seem to favor the first alternative (strategic) as it was more in line with the business model objective in the classification/measurement phase of the project. The Board did note that additional guidance would need to be provided, such as indicators/examples of when something would be considered strategic. The Board requested that the staff reach out to the SEC staff to discuss how this alternative may impact existing SEC disclosure requirements for furnishing an equity method investee’s financial statements in the entity’s Form 10-K if the disclosure criteria are met. The Board also recommended that the fair value option for such investments should be proposed as a separate question at a future Board meeting, i.e., whether the fair value option should be retained for equity method investments.

The Board plans to deliberate on the scope of the project at a Board meeting later this month.

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