Board Makes Tentative Decisions Related to Classification and Measurement Portion of Financial Instruments Project

Published on: 05 May 2011

At its meeting yesterday, the FASB continued its discussions on the classification and measurement portion of its project on accounting for financial instruments. The Board tentatively decided to (1) amend the cash flow characteristics criterion for classifying debt instruments and (2) allow amortized cost measurement for certain convertible debt instruments (issuer’s accounting only).

Cash Flow Characteristics Criterion

The Board tentatively concluded that the cash flow characteristics criterion proposed in paragraph 21(a) of the exposure draft1 should be amended to (1) clarify that derivative instruments accounted for under ASC 8152 are excluded from the cash flow characteristics test (i.e., derivative instruments are classified and measured at fair value through net income) and (2) include other minor changes. The revised criterion (as specified in the meeting handout) is as follows (added text is underlined and deleted text is struck out):

a.   It is a debt instrument held or issued with all of the following characteristics:

1.     It is not a financial derivative instrument subject to the guidance in Topic 815.

2.     There is an amount transferred to the debtor (issuer) at inception that will be returned to the creditor (investor) at maturity or other settlement, which is the principal amount of the contract adjusted by any original issue discount or premium at acquisition.

The contractual terms of the debt instrument identify any additional contractual cash flows to be paid to the creditor (investor) either periodically or at the end of the instrument’s term.

3.     The debt instrument cannot contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its initial investment, other than through its own choice.

Editor’s Note: The exposure draft defines a debt instrument as “[a] receivable or payable that represents a contractual right to receive cash (or other consideration) or a contractual obligation to pay cash (or other consideration) on fixed or determinable dates, whether or not there is any stated provision for interest.” The Board requested that the staff further consider what the term “other consideration” means in the definition of a debt instrument and present its analysis at future Board deliberations. In addition, the Board noted that trade receivables and trade payables generally would meet the cash flow characteristics criterion (as noted above) and would be measured at either fair value through other comprehensive income or amortized cost on the basis of the entity’s business strategy.


Measurement of Certain Convertible Debt

The Board also reached a decision on how an issuer should account for certain convertible debt instruments. By a slim 4 to 3 margin, the Board voted that if the conversion feature (1) qualifies for the scope exception in ASC 815-10-15-74(a) (formerly paragraph 11(a) of Statement 1333) and (2) meets the requirements in ASC 470-20-25-10 through 25-16 related to conversion features that are nonbeneficial, the issuer should classify and measure such instruments at amortized cost in their entirety.

Editor’s Note: The Board’s decision is limited specifically to convertible instruments that meet the conditions noted above. The decision retains current U.S. GAAP for such instruments, which include convertible instruments (1) that are not considered derivative instruments because they meet the scope exception in ASC 815-15 (i.e., indexed to an entity’s own stock and classified in shareholder’s equity) and (2) for which no portion of the proceeds (from issuance) is attributable to the conversion feature. The Board instructed the staff to determine how the business strategy criterion should be amended to reflect the accounting for such instruments.

For information about previous tentative decisions the Board reached during its redeliberations of the classification and measurement of financial instruments, see Deloitte’s January 25, March 3, April 8, and April 21, 2011, journal entries and February 8, 2011, Heads Up.



[1] FASB Proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities — Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815).

[2] For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."

[3] FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

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