Yesterday, the FASB continued its discussions of the classification and measurement portion of its project on accounting for financial instruments, reaching tentative decisions about the following: (1) the accounting for financial assets classified and measured at amortized cost at initial recognition that are subsequently identified for sale and (2) the classification and measurement at initial recognition of financial assets (originated and purchased) in circumstances in which an entity anticipates selling some of the financial assets but specific assets have not yet been identified.

Financial Assets Measured at Amortized Cost That Are Subsequently Identified for Sale

The Board tentatively decided that financial assets classified and measured at amortized cost at initial recognition that are subsequently identified for sale would be measured at amortized cost subject to an impairment approach. The Board will develop the impairment approach as part of the impairment project; however, the Board noted that such assets would be marked down to fair value if fair value is lower than amortized cost. The adjustments necessary to report such a financial asset at fair value (when fair value is lower than amortized cost) would be recognized in earnings.

The Board also requested that the staff further develop disclosure alternatives (including rollforward disclosures) that would convey the amount and nature of, and reasons for, subsequent sales of financial assets initially classified and measured at amortized cost that are subsequently identified for sale.

Financial Assets for Which an Entity Anticipates Selling Some of the Assets but Specific Assets Have Not Yet Been Identified

The Board acknowledged that there may be circumstances in which an entity originates or purchases a pool of financial assets, anticipating that some assets will be sold while others will be managed through its lending or customer financing activities. However, at the time the assets are originated or purchased, the entity may not know which specific assets will be sold or held for the collection of contractual cash flows. The Board discussed how such a pool of assets should be classified and measured at initial recognition.

The Board noted that in a manner consistent with the business strategy criteria (see Deloitte’s April 8, 2011, Accounting Journal Entry), an entity would, at initial recognition, assess its classification and measurement of financial assets. If a financial asset is classified as fair value through net income (FV-NI) at initial recognition, it cannot be subsequently reclassified to amortized cost if the entity decides that it plans to hold the financial asset for collection of contractual cash flows. The Board also noted that for financial assets classified and measured at amortized cost at initial recognition, if an entity subsequently identifies any assets for sale, such an asset would be accounted for in a manner consistent with the Board’s tentative decisions about financial assets measured at amortized cost that are subsequently identified for sale (as discussed in the previous section).

For additional information about the previous tentative decisions the Board has reached during its redeliberations of the classification and measurement of financial instruments, see Deloitte’s January 25, March 3, and April 8, 2011, journal entries and February 8, 2011, Heads Up.