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Journal entry — Classification and measurement of financial instruments — FASB abandons converged approach to business model assessment

Published on: Jan 29, 2014

At its meeting today to discuss the classification and measurement of financial instruments, the FASB tentatively decided not to pursue the converged approach jointly developed by the FASB and IASB (the “boards”) for assessing the business model in which a financial asset is managed.

Editor’s Note: Under the boards’ converged approach, the classification and measurement of financial assets would have been determined on the basis of an asset’s contractual cash flow characteristics (the so-called “solely payments of principal and interest” test) and the business model under which the asset is managed. At its December 2013 meeting, the FASB abandoned the development of a converged approach for assessing an asset’s contractual cash flow characteristics.

The FASB discussed and directed the staff to further research the following two alternatives:

  • Retain existing guidance in U.S. GAAP on classifying and measuring investments in debt securities and loans. Under this alternative, the FASB would consider potential refinements to the tainting guidance in ASC 3201 on investments in held-to-maturity securities.
  • Develop a single classification and measurement model for both loans (including trade receivables) and investments in debt securities. That model would be based on the existing classification and measurement guidance in ASC 320 on investments in securities, except for potential refinements to the tainting guidance.

Editor’s Note: Under ASC 320 in current U.S. GAAP, entities use one of three categories to classify and measure investments in securities: trading (fair value through net income), available for sale (fair value through other comprehensive income), and held to maturity (amortized cost). Under ASC 310,2 entities use one of two categories to classify and measure loans: held for investment (amortized cost) and held for sale (lower of cost or fair value). Some Board members expressed the view that loans and debt securities are economically similar instruments and should not be subject to different accounting models because of their legal form.

The FASB will consider the results of the staff’s analysis at a future meeting.

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1 FASB Accounting Standards Codification Topic 320, Investments — Debt and Equity Securities.

2 FASB Accounting Standards Codification Topic 310, Receivables.

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