The FASB met yesterday to continue deliberations on its accounting for financial instruments (AFI) project. Topics discussed at the meeting were (1) the amortized cost measurement election for certain liabilities, (2) loan commitments, and (3) additional scope issues for specialized entities. Tentative decisions reached by the Board are discussed below.

Amortized Cost Measurement Election

The Board tentatively decided that entities should have the option to measure a financial liability at amortized cost provided it meets the proposed conditions to be recognized as fair value through other comprehensive income (“FV-OCI”).¹ In addition, the amortized cost measurement method is permitted for financial liabilities that are otherwise required to be measured at fair value with changes in fair value recognized in net income if measuring those liabilities at fair value would “create or exacerbate a measurement attribute mismatch.”

The Board also tentatively agreed that:

• The election to measure a specific liability by using the amortized cost measurement method is irrevocable.
• When some instruments are settled before maturity, applying a tainting notion is not appropriate.
• Additional guidance will not be provided on the evaluation of the business strategy for financial liabilities.

The Board discussed, but did not conclude on, (1) the level of evaluation of a measurement attribute mismatch (e.g., an entity-wide, business-unit, operating-segment, or instrument-by-instrument basis) or (2) whether the measurement attribute mismatch could be met on the basis of specific identification or linkage of assets and related funding.

Loan Commitments

The Board tentatively decided that the classification of loan commitments should be based on the business strategy related to the funded loan. Accordingly, if the funded loan will be classified as FV-OCI, the loan commitment would also be classified as FV-OCI. In addition, the Board tentatively decided that commitment fees would be recognized as follows:

1. If the loan commitment and the funded loan are classified as FV-OCI, the original commitment fee would be recognized in other comprehensive income, together with all other changes in fair value of both the loan commitment and the funded loan. The commitment fee would then be recognized in net income as a yield adjustment of the related loan.
2. If the loan commitment and the funded loan are recognized as fair value through net income (“FV-NI”), the commitment fee would not be recognized separately from other changes in fair value of the loan commitment.

The Board also tentatively decided to:

• Provide scope exceptions for (1) potential borrowers under loan commitments because it may be impracticable for many borrowers to measure loan commitments at fair value and (2) loan commitments that (a) generally have small balances and high volume and (b) are of a revolving nature (e.g., lines of credit that are part of credit card arrangements).
• Provide a scope exception in ASC Topic 815 (formerly Statement 133) for all loan commitments. Accordingly, no loan commitments would be accounted for as derivatives under ASC 815.
• Clarify that entities with less than $1 billion in total consolidated assets that have a delayed effective date must apply current U.S. GAAP to loan commitments issued or held during the period before the effective date.

Additional Scope Issues — Specialized Entities

The Board tentatively decided to:

• Clarify that the four-year deferral of the effective date of certain loans and core deposits of nonpublic entities with less than $1 billion in consolidated net assets also applies to conduit bond obligors for conduit debt securities that are traded in a public market.
• Provide a scope exception for pledges receivable that arose from a voluntary nonreciprocal transfer to the reporting entity.
• Require all financial instruments of investment companies to be reported at fair value with changes in fair value included in the net increase (decrease) in net assets resulting from operations.
• Require all assets of brokers and dealers in securities to be reported as FV-NI and require liabilities of such entities to be reported as either FV-NI or FV-OCI.

1 The Board meeting handout notes that the “financial liability meets the conditions for the FV-OCI category if: (i) the entity’s business strategy is to hold the financial liability with principal amounts for payment(s) of contractual cash flows rather than to settle the financial liability with a third party and (ii) if a hybrid financial liability, the embedded derivative is clearly and closely related to the host contract.”