Accounting for Financial Instruments — FASB Makes Decisions About Scope Interaction and Transition

Published on: 19 Mar 2010

The FASB met today to continue deliberations on its accounting for financial instruments (AFI) project. Topics discussed at the meeting were (1) scope interaction with existing U.S. GAAP and (2) transition issues. Tentative decisions reached by the Board are discussed below.

Scope Interaction With ASC Topic 815

The Board tentatively decided to carry forward the scope exceptions in ASC Topic 815 (formerly Statement 133) to the AFI project for the following items:

  • Regular-way security trades and trade-date versus settlement date accounting.
  • Contracts that are not traded on an exchange with the following underlyings:
    • A climatic or geological variable.
    • The price or value of a nonfinancial asset or liability of one of the parties to the contract, provided that the asset is not readily convertible to cash.
    • Specified volumes of sales or service revenues of one of the parties to the contract.
  • Derivatives that are impediments to sale accounting (e.g., a call option on transferred financial assets).
  • Investments in life insurance contracts (investments in a life settlement contract are included in the scope of the AFI project).
  • Investment contracts held by entities included in the scope of ASC 960 on defined benefit pension plans.
  • Contracts between an acquirer and a seller to enter into a business combination on a future date.

In addition, the Board discussed whether interest-only (“IO”) strips are eligible for measurement at fair value through OCI (“FV-OCI”). The Board acknowledged that certain IO strips that cannot be prepaid may be classified as FV-OCI but directed the staff to develop guidance for variable-rate IO strips (the variability in the interest rate may result in an IO strip being recognized as fair value through net income (“FV-NI”).

Scope Interaction With Current U.S. GAAP on Contingencies and Guarantees

The Board tentatively decided that (1) registration payment arrangements for financial instruments, (2) financial guarantees that are excluded from the scope or measurement requirements of ASC 4601,  and (3) a seller’s contingent consideration that is not based on financial variables should be excluded from the scope of the AFI project. A seller’s contingent consideration that is based on financial variables would be included in the scope of the AFI project and should be classified as FV-NI.


The Board tentatively is leaning toward requiring an entity to apply the proposed standard to all outstanding instruments as of the proposed standard’s effective date, with no early adoption permitted. The entity would be required to (1) recast the last balance sheet before the year of adoption by using the proposed standard and (2) record a cumulative effect of the change to the new accounting principle.

The Board also suggested that the staff draft potential transition disclosures for discussion at a future meeting.



[1] For more information on financial guarantees that are not included in the scope of ASC 460, see ASC 460-10-15-7.

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