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Journal entry — Financial instruments — FASB and IASB agree to jointly deliberate classification and measurement

Published on: Jan 30, 2012

At last Friday’s meeting, the FASB and IASB tentatively agreed to work jointly to improve the alignment of their respective models for the classification and measurement of financial instruments. Topics they anticipate addressing include:

  • The criteria entities should apply in determining which instruments are eligible for amortized cost measurement.
  • The basis for and scope of a classification category that permits certain investments in debt instruments to be measured at fair value through other comprehensive income (FV-OCI).
  • The need for bifurcating embedded derivatives from a financial asset host and the basis for bifurcation.
  • Any “knock-on” effects resulting from decisions related to the areas above (e.g., disclosures).

Editor’s Note: In 2009, the IASB issued IFRS 9, Financial Instruments, providing guidance on the classification and measurement of financial assets. In 2010, the IASB amended the standard, adding guidance on the classification and measurement of financial liabilities and the derecognition of financial instruments. The IASB recently added a project to its agenda to consider limited changes to the classification and measurement requirements in IFRS 9 to address the interaction with the joint project on insurance contracts, application (e.g., the application of the contractual cash flows characteristics test), and potential convergence with the FASB’s tentative model. Currently, IFRS 9 prohibits both the categorization of investments in debt instruments as FV-OCI and the bifurcation of embedded derivatives from a financial asset host. The FASB’s tentative model does permit certain investments in debt instruments to be classified as FV-OCI and requires bifurcation of embedded derivatives from financial asset hosts when certain criteria are met. IFRS 9 is effective beginning January 1, 2015, for IFRS-applying entities.

The FASB has substantially completed its redeliberations on its model for the classification and measurement of financial instruments. However, earlier this month, the Board signaled that it may revisit certain tentative decisions made to date. Further, the FASB still needs to redeliberate the scope, effective date, and transition method for its model.

For more information about the FASB’s and IASB’s previous tentative decisions on the classification and measurement of financial instruments, see Deloitte’s January 5, 2012, Heads Up.

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