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Journal entry — Classification and measurement of financial instruments — FASB and IASB tentatively agree to converge certain guidance

Published on: Apr 18, 2012

At their joint meeting yesterday, the FASB and IASB tentatively decided to converge the following two aspects of their respective models for the classification and measurement of financial instruments:

  • The business model assessment for classifying financial assets at amortized cost.
  • The requirements related to the bifurcation of financial instruments.

Business Model Assessment

An entity assesses both the cash flow characteristics of financial assets1 and its business model to determine which financial assets will be classified and measured at amortized cost. The boards tentatively agreed that, in a manner consistent with the guidance in IFRS 9,2 financial assets would qualify for amortized cost if the assets are held within a business model whose objective is to hold the assets to collect contractual cash flows. The boards also tentatively decided to provide guidance on (1) determining when sales are consistent with the “hold to collect” business model and (2) other components of the business model.

Bifurcation of Financial Instruments

The boards tentatively decided that entities should account for an embedded feature separately from a financial liability host if the feature is not “closely related”3 to the host. Under this approach, the cash flow characteristics assessment would not be applied to financial liabilities. The boards also tentatively decided not to permit the bifurcation of financial assets. This tentative decision is consistent with the current classification and measurement model in IFRS 9 but eliminates the bifurcation requirements for financial assets in the FASB’s tentative model.


[1] For information about tentative decisions the boards made on the cash flow characteristics test at their February 2012 joint meeting, see Deloitte’s March 1, 2012, journal entry.

[2] IFRS 9, Financial Instruments.

[3] The term “clearly and closely related” is used in FASB Accounting Standards Codification Topic 815, Derivatives and Hedging.

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