Classification and measurement of financial instruments — FASB abandons “SPPI test”

Published on: 19 Dec 2013

At its meeting yesterday, the FASB decided to abandon the “SPPI test” that would have been required as part of the proposed contractual cash flow assessment for determining the classification and measurement of financial assets. Under the proposals issued by the FASB and IASB, financial assets would be classified and measured on the basis of their contractual cash flow characteristics and the business model in which those assets are managed. A financial asset would meet the requirements of the contractual cash flow characteristics assessment if the contractual terms of the instrument “give rise on specified dates to cash flows that are solely payments of principal and interest [SPPI] on the principal amount outstanding.”

At yesterday’s meeting, however, the FASB discussed the complexity associated with the proposed contractual cash flow test and decided to reject the SPPI assessment. According to Board members, requiring an SPPI test would be swapping known complexity (i.e., the bifurcation guidance in ASC 815-151) for unknown complexity (SPPI). In a 5 to 2 decision, the FASB voted to retain the requirement to bifurcate financial assets under the “clearly and closely related” guidance in ASC 815-15 on assessing whether an embedded derivative feature should be bifurcated from a hybrid financial asset. The FASB directed the staff to analyze whether — in the determination of the classification and measurement of (1) a host contract that remains after bifurcation of embedded features, (2) hybrid financial assets with embedded features that do not require bifurcation, and (3) financial assets that do not fall within the scope of ACS 815 — the contractual cash flow characteristics test should be based solely on the “clearly and closely related” criterion in ASC 815-15 or whether the staff should use that criterion to further develop the test. The FASB will consider the results of the staff’s analysis at a future meeting.

Editor’s Note: As a result of yesterday’s decision and the boards’ earlier joint deliberations, the boards’ models for the classification and measurement of financial instruments are substantially diverged.


1 FASB Accounting Standards Codification Subtopic 815-15, Derivatives and Hedging: Embedded Derivatives.

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