FASB Reaches Tentative Decisions on the Classification and Measurement of Certain Equity Securities and Certain Financial Liabilities

Published on: 03 Mar 2011

At yesterday’s Board meeting, the FASB continued its discussions of the classification and measurement portion of its project on accounting for financial instruments, reaching tentative decisions on classification and measurement of certain (1) equity securities and (2) financial liabilities.

Equity Securities

The Board’s discussion of equity securities focused on both marketable and nonmarketable equity securities but excluded equity instruments that can be redeemed only for a specified amount and equity investments accounted for under the equity method. The classification and measurement of those instruments will be discussed at a later date.

The Board unanimously agreed that marketable equity securities should be measured at fair value, with changes in fair value recognized in net income (FV-NI). This tentative decision is consistent with the Board’s original proposal.1

The staff then provided the Board with an overview of constituents’ feedback on nonmarketable equity securities, noting that there were mixed views on the measurement attribute for nonmarketable equity securities held by public entities versus nonpublic entities. Feedback generally favored measurement of nonmarketable equity securities at FV-NI for public entities but not for nonpublic entities. The Board tentatively decided that nonmarketable equity securities should be measured at FV-NI; however, a practicability exception would be permitted under certain circumstances.

The Board tentatively concluded that when the practicability exception is used, a nonmarketable equity security would be (1) measured at cost less any other-than-temporary impairments and (2) adjusted for any observable changes in the price of the instrument. Most Board members supported limiting the practicability exception to nonpublic entities but, in further developing the exception, instructed the staff to explore other potential circumstances in which the exception would be appropriate (e.g., for public entities) or, conversely, whether the scope should be further refined (e.g., by limiting the exception to nonfinancial, nonpublic entities). The Board also instructed the staff to further develop the concept of an observable change in the price of an instrument as well as the impairment model to use for the exception. One Board member indicated that the current impairment model for cost method investments may be appropriate for nonmarketable equity securities measured at cost; however, no decision was made on the impairment model for nonmarketable equity securities.

Editor’s Note: The FASB’s tentative decisions, including the use of a practicability exception for nonpublic entities, did not take into account the application to entities subject to specialized industry accounting guidance, such as broker-dealers, investment companies, sponsors of defined benefit plans, and insurance companies. The staff indicated to the Board that accounting issues related to entities subject to specialized industry accounting will be addressed at a later date.

Financial Liabilities

The Board’s discussion of financial liabilities focused on “plain vanilla” instruments, including core deposit liabilities and an entity’s own debt. Hybrid financial instruments and liabilities subject to the fair value option will be discussed at a later date.

By a vote of 6 to 1, the Board determined that amortized cost should be a primary measurement attribute for certain financial liabilities. In addition, the Board tentatively decided that the same classification criteria used for financial assets should be applied to the classification of financial liabilities. Board members noted that financial liabilities would not qualify for classification at fair value through other comprehensive income (FV-OCI), since FV-OCI classification applies to instruments that are considered investing activities. The Board also noted that its tentative decisions may be subject to further revision or change, depending on future redeliberations of hybrid instruments and on how the classification criteria for financial assets and financial liabilities are drafted.

Editor’s Note: This tentative decision represents a change from the Board’s original proposal. We believe that core deposit liabilities that were subject to a “remeasurement” attribute under the original proposal may now qualify for cost measurement. In addition, financial liabilities that are held for trading will be measured at FV-NI. Note, however, that the classification of financial liabilities will be subject to the same criteria as the classification of financial assets; the Board will finalize these classification criteria at future meetings.



[1] Proposed FASB Accounting Standard Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.

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