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FASB’s Deliberations of Classification and Measurement Continue

Published on: 22 Jun 2011

Today, the FASB made a number of tentative decisions regarding the following two aspects of the classification and measurement component of its project on accounting for financial instruments: (1) disclosures about financial instrument risks and (2) an issuer’s classification and measurement of loan commitments and standby letters of credit.

Disclosures About Financial Instrument Risks

The Board tentatively decided to improve disclosures about the liquidity risk and interest rate risk of entities that have significant financial assets or financial liabilities by requiring, in the notes to the financial statements, additional tabular risk disclosures similar to those required under IFRS 7;1 however, such disclosures would be more standardized to assist comparability between entities.

The Board requested the staff to further define “significance” in the context of the above decision and to perform additional outreach to determine which types of entities should be required to provide additional risk disclosures. The Board plans to address the scope of these disclosures at future meetings.

Editor’s Note: The Board’s request to perform additional outreach is in response to a concern from some board members that a focused scope, concentrating on banks and insurance companies, may be too narrow; however, one member commented that the phrase “entities that have significant financial assets [or financial liabilities]” may be too broad.

Issuer’s Classification and Measurement of Loan Commitments and Standby Letters of Credit

The FASB’s original exposure draft2 proposed that the accounting for loan commitments and standby letters of credit should be based on the accounting for funded loans, which may result from the exercise of such loan commitments or standby letters of credit. However, the Board voted today for a new model that would require an issuer to first assess its business strategy for issuing loan commitments and standby letters of credit. If an entity’s business strategy is to hold the potential loan (when funded) as held for sale, the entity would be required to measure the loan commitment and standby letters of credit at fair value, with changes in fair value recognized through net income. However, if the business strategy was not to hold the funded loan for sale, the entity would need to assess whether the likelihood to fund the potential loan (from loan commitments or standby letters of credit) was “remote.” If so, the entity would account for the fees earned (i.e., commitment fees) as fee income. If the likelihood was not remote, the commitment fee would be treated as a yield adjustment and recognized over the life of the funded loan. The Board requested the staff to further refine the wording. The Board also noted that the cash flow characteristics criterion would not apply to loan commitments and standby letters of credit and that the Board would also need to address the potential impairment model for such instruments.

Editor’s Note: The model proposed by the Board retains the current GAAP requirements for recognition of commitment fees.

For information about the Board’s previous tentative decisions on the classification and measurement of financial instruments, see Deloitte’s May 10, 2011, Heads Up newsletter and May 27, June 1, and June 13, 2011, journal entries.


[1] IFRS 7, Financial Instruments: Disclosures.

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

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