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Journal entry — Classification and measurement of financial instruments — FASB tentatively decides on beneficial interests, core deposits, and scope

Published on: Oct 23, 2012

As part of its project on the accounting for financial instruments, the FASB made several tentative classification and measurement decisions last week related to (1) the application of the cash flow characteristics assessment to beneficial interests in securitized financial assets, (2) required disclosures for core deposit liabilities, (3) the scope of the FASB’s tentative model, and (4) certain specialized industry guidance.

Application of the Cash Flow Characteristics Assessment to Beneficial Interests in Securitized Financial Assets

The FASB tentatively decided to provide implementation guidance on determining whether beneficial interests in securitized financial assets (such as collateralized debt obligations (CDOs) and synthetic CDOs) potentially qualify for a category other than fair value through net income (FV-NI). As they would under IFRS 9, Financial Instruments, entities would “look through” to the underlying pool of financial instruments to determine whether its cash flow characteristics are consistent with contractual terms that give rise on specified dates to payments that are solely payments of principal and interest (SPPI) on the principal amount outstanding. More specifically, the FASB decided that a beneficial interest in a securitized financial asset meets the cash flow characteristics criterion if all of the following three conditions are met:

  • The contractual cash flows of the beneficial interest (without a look-through to the underlying pool) are SPPI.
  • The underlying pool includes instruments that have SPPI cash flows and may also include certain instruments that either reduce cash flow variability or align the cash flows of the beneficial interests with the cash flows of the pool.
  • The beneficial interest’s credit risk exposure is equal to or lower than the credit risk exposure of the related underlying pool.

Beneficial interests that do not meet all of the conditions above and those for which an entity cannot assess the criteria at initial recognition would be accounted for at FV-NI.

Required Disclosures for Core Deposit Liabilities

The FASB tentatively decided that entities should not be required to disclose a present value amount for demand deposit liabilities in the notes to the financial statements. However, the FASB’s Summary of Board Decisions for the October 17 meeting notes that public entities would be required to annually disclose the following information for each significant type of core deposits:

  1. The core deposit liability balance
  2. The implied weighted-average maturity period
  3. The estimated all-in-cost-to-service rate.

Nonpublic entities will not be required to disclose this information.

Scope of the FASB’s Tentative Model for Classifying and Measuring Financial Instruments

The FASB also made the following tentative decisions:

  • To excludethe following from the scope of its tentative model:
    • All employers’ or plans’ obligations and related assets accounted for under ASC 71X1 (compensation) or ASC 96X (plan accounting).
    • All derivatives accounted for under ASC 815 (derivatives and hedging).
    • All acquisition-related contracts and contingent consideration arrangements subject to ASC 805 (business combinations).
    • All financial guarantee contracts.
  • To includethe following instruments in the scope of its tentative model:
    • Interest-only and principal-only strips.
    • Loan commitments issued by a lender.

In addition to those above, the FASB tentatively decided to include several other financial instruments in the scope of the tentative model and to exclude others. The FASB also tentatively clarified the accounting for loan commitments and hybrid instruments, including hybrid nonfinancial instruments. For the complete text of the FASB’s tentative decisions related to the scope of its tentative model, see the FASB’s Summary of Board Decisions for the October 19 meeting.

Specialized Industry Guidance

The FASB decided to retain certain existing specialized industry guidance on measuring investments, such as the following, that are held for the purpose of doing business:

  • Bank investments in Federal Home Loan Bank and Federal Reserve Bank stock.
  • Broker-dealer investments in certain exchange memberships.
  • Farmers’ investments in agricultural cooperatives.
  • Credit union deposits in the National Credit Union Share Insurance Fund.

However, the FASB’s tentative impairment model for nonmarketable equity securities would apply to certain exchange memberships of brokers and dealers and bank investments in Federal Home Loan Bank and Federal Reserve Bank stock.


1 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."

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