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Journal entry — Classification and measurement of financial instruments — FASB makes several tentative decisions

Published on: Sep 07, 2012

At its meetings on August 29 and September 5, the FASB made tentative decisions about:

  • Application guidance related to the business model assessment for classification and measurement of financial assets.
  • Measurement of foreign currency (FX) gains or losses on FX-denominated debt instruments that are classified at fair value through other comprehensive income (FV-OCI).
  • Whether to accelerate the implementation of its June 2012 tentative decision regarding separate presentation, in other comprehensive income (OCI), of changes in fair value related to the entity’s own credit risk for certain financial liabilities.

Application Guidance

The Board tentatively decided to include in application guidance the following concepts related to the business model assessment for classification and measurement of financial assets, as noted in the staff’s summary of board decisions1 for the project:

  • “Sales of financial assets as a result of significant credit deterioration would be consistent with the objective of amortized cost classification if such sales are to maximize the collection of contractual cash flows through sales rather than through cash collection. Sales for other reasons should be very infrequent.”
  • “Sales of financial assets that result from managing the credit exposure due to concentration of credit risk would not be consistent with the primary objective of amortized cost classification.”
  • “Financial assets classified at [FV-OCI] may be held for collection of contractual cash flows or sold. That is, management may hold the assets for an unspecified period of time or sell the assets to meet certain objectives.”
  • “Financial assets that are held for sale at initial recognition would not be consistent with the primary objective of amortized cost or [FV-OCI] classification [and would be measured at fair value through net income].”

The FASB also tentatively decided to provide examples of types of business activities that would be consistent with amortized cost and FV-OCI classifications of financial assets.

Measurement of FX Gains and Losses

The FASB tentatively decided that entities should measure FX gains or losses2 on FX-denominated debt instruments that are classified at FV-OCI by using a method based on the fair value of the debt instrument. Under such a method, entities would, for example, compute FX gains or losses by multiplying the fair value of the debt instrument in FX by the difference between the end-of-period spot exchange rate and the beginning-of-period spot exchange rate.

The Board tentatively decided that other fair-value-based measurement methods would also be appropriate and that such methods should be consistently applied. As noted in the staff’s summary of decisions for the project, investment companies would continue to apply the method described in ASC 946-830.3

Presentation of Changes in Fair Value Related to the Entity’s Own Credit Risk

The FASB also tentatively decided not to accelerate the implementation of its June 2012 tentative decision that entities must separately present, in other comprehensive income, changes in fair value related to the entity’s own credit risk for financial liabilities measured at fair value through net income for which a fair value option has been elected.

 


[1] From the FASB’s August 29, 2012, Board meeting.

[2] At its August 1, 2012, meeting, the Board tentatively decided that FX gains and losses on FX-denominated debt securities classified at FV-OCI should be recognized in earnings.

[3] FASB Accounting Standards Codification Subtopic 946-830, Financial Services — Investment Companies: Foreign Currency Matters.

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