The FASB and IASB have been working on a joint project on financial instruments. The project includes classification and measurement of financial instruments and impairment of financial assets. However, the boards have not converged on each element, so there are expected to be differences in the final standards.
Key Developments Related to Classification and Measurement
- The FASB completed redeliberations of its May 2010 proposal for classification and measurement of financial instruments. The FASB's May 2010 exposure draft proposed a full fair value model for all financial instruments. On February 14, 2013 the FASB issued its Proposed Accounting Standards Update (ASU), Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which reflects the FASB’s decision to go back to a mixed measurement model that includes measurement at amortized cost for certain financial assets. The exposure draft comment period ended on May 15, 2013.
- The IASB completed its deliberations on targeted amendments to its classification and measurement standard (IFRS 9) and issued an exposure draft in November 2012. The comment period ended on March 28, 2013.
- The proposed ASU requires debt investments (loans and debt securities) to be evaluated under a cash flow characteristics test and business model assessment. Instruments passing the cash flow characteristics test will be classified and measured at amortized cost or fair value with changes in fair value recognized in other comprehensive income (OCI), depending on the entity’s primary objective for holding the investment. Fair value with changes in fair value recognized in net income will be the default category.
- Equity investments (not accounted for under the equity method) will be measured at fair value with changes in fair value recognized in net income. However, entities other than investment companies and broker-dealers will be afforded a practicability exception for investments that do not have readily determinable fair values. Such investments would be measured at cost less impairment adjusted for observable prices.
- Financial liabilities will generally be recorded at amortized cost with limited exceptions. The fair value option will remain in limited circumstances; if elected, market adjustments related to an entity’s own credit will be recorded in OCI. Separate accounting for embedded derivative features remains, and embedded derivatives will still be measured at fair value with changes in fair value recognized in net income.
- The FASB’s existing guidance that looks to significant influence in determining whether the equity method of accounting should apply will be retained, except that equity method investments held for sale will be measured at fair value with changes in fair value recognized in net income. A practicability exception would apply for equity method investments that do not have a readily determinable fair value; they would be measured at cost less impairment adjusted for observable prices.
- The IASB's classification and measurement standard for debt investments is substantially the same as the FASB model. Differences between the IASB standard and the FASB proposal will remain, specifically in the accounting for equity investments.
- Comment letters summarized by the FASB indicate that a majority of respondents support the goal of reducing complexity in financial instruments accounting but many believe it would not be achieved under the proposal. Many felt that the cash flow characteristics test would inappropriately limit the number of debt investments that would be eligible for amortized cost or fair value through other comprehensive income measurements. While respondents tended to agree with a business model assessment, a majority felt that the restrictions on sales out of the amortized cost category would inappropriately limit companies' ability to manage their credit risk exposures.
- The IASB's proposal, comprising limited amendments to its classification and measurement standard, generally received support. A majority of respondents supported adding a fair value through other comprehensive income category to the amortized cost and fair value through net income categories for debt investments.
- The boards discussed the responses in May and June and joint redeliberations began in September.
- Up until late December, the boards had been jointly redeliberating their original proposals. However, when the boards reconvened in late December, the IASB affirmed its plans to move forward with the existing proposals, while the FASB decided to abandon the cash flow characteristics test for determining the classification of a financial instrument in its entirety. Instead, the FASB reverted to a bifurcation model based on the nature of the components of a hybrid financial instrument.
- The FASB’s recent decision on debt investments represents a major change from its proposed model and is a significant setback to achieving global convergence in the classification and measurement of financial instruments. Prior to this decision, the FASB and IASB’s proposals for debt investments had been substantially converged.
Key Developments Related to Impairment
- In 2012, the FASB and IASB moved in different directions in their approaches to developing a new impairment model for financial assets. The IASB's approach would classify debt investments into categories that reflect the pattern of credit deterioration over time. The categories would determine the amount and timing of when credit losses would be recognized in earnings. Assets would initially be recognized in category one, where a credit loss would be recorded based on the probability of a default in the next twelve months. Assets would move to category two when there has been a significant deterioration in credit risk. At that point an allowance would be recorded to reflect a lifetime of expected credit losses. The IASB issued an exposure draft on its impairment model, referred to as the “credit deterioration model,” in March, 2013.
- The FASB believes that aspects of the IASB's model are difficult to operationalize and would result in a credit allowance that does not fully represent all expected losses on an asset. Prior to experiencing a significant deterioration in credit, the IASB model would only record 12 months of expected losses. Thus, the FASB opted to establish a model that it views as more operational and would result in the full expectation of credit losses being reported on the balance sheet. The FASB's model, referred to as the current expected credit loss (CECL) model, requires an allowance to be recorded to reflect the amount of contractual cash flows not expected to be collected. The FASB issued an exposure draft on the CECL model in the fourth quarter of 2012.
- The comment period for the FASB’s exposure draft ended on May 31, 2013, and the comment period for the IASB’s exposure draft ended on July 5, 2013. Generally, respondents to the IASB model supported the proposed model, but suggested various refinements. The IASB is currently working to address these concerns. With respect to the FASB model, feedback was mixed. Users generally supported the FASB model, as they preferred a model that would require recognition of all credit losses (as opposed to only ‘some’ expected credit losses). Preparers, on the other hand, did not support the FASB’s proposed model. Preparers believed that recognition of a full lifetime of expected credit losses on day 1 would not reflect the economics of lending transactions. Instead, preparers preferred a model that would recognize those losses expected to occur in the ‘foreseeable future’ or some other truncated period.
- Throughout the fall of 2013, the FASB conducted outreach with both preparers and users. Based on feedback received during this outreach as well as the comment letters, the FASB considered various options in terms of a path forward on impairment. On December 18, 2013, the FASB discussed the four main alternatives and voted on a path forward. The alternatives discussed by the FASB were (1) a “gross up” approach, whereby the initial estimate of expected credit losses would be recorded in OCI, (2) a “truncated” approach, whereby losses would be estimated over a shorter period than the proposed lifetime loss model, (3) a deterioration model similar to the IASB’s impairment proposal, and (4) move forward with the CECL model with refinements made where necessary. In weighing the costs and benefits associated with each alternative, as well as user needs, the FASB voted to move forward with the CECL model and refine various aspects, where necessary. It is not clear exactly what refinements will be made at this time.
- Classification and measurement: The FASB will continue redeliberations on this project through the first half of 2014. However, it remains to be seen whether any aspects of the boards’ redeliberations will continue to be conducted jointly with the IASB.
- Impairment: A final standard is expected in the second quarter of 2014.
In briefIn brief: IASB issues IFRS 9 - Financial instruments
7/25/14 | Assurance services
The final version of IFRS 9 has been published introducing a new model on classification and measurement and impairment.
Corporate Governance SeriesThe Quarter close: Directors edition Q2 2014
6/26/14 | Center for Board Governance
The Q2 2014 edition focuses on five IPO reminders for boards, FASB's new guidance on discontinued operations, and the Venezuelan exchange rates.
In briefIn brief: FASB amends repo accounting and enhances disclosures (No. US2014-12)
6/17/14 | Assurance services
FASB amends accounting for repos-to-maturity and repurchase financings. New disclosures required for many transactions.
In briefIn brief: IASB issues discussion paper on macro hedging (No. 2014-06)
4/18/14 | Assurance services
The IASB issued a discussion paper on accounting for dynamic risk management strategies on open portfolios.
DatalineDataline: Simplified hedge accounting approach - New private company alternative for certain interest rate swaps (No. 2014-06)
4/3/14 | Assurance services
The FASB issued a new accounting standard for private companies that is intended to simplify the hedge accounting requirements for certain interest rate swaps.
Corporate Governance SeriesThe Quarter close: Directors edition Q1 2014
3/27/14 | Center for Board Governance
This quarterly publication is designed to keep directors informed about the latest accounting and financial reporting issues.
Quarter closeThe quarter close — First quarter 2014: Publication and new video perspectives
3/17/14 | Assurance services
This edition updates you on recent FASB, SEC and other regulatory and corporate governance topics. Learn what's new now, and what to look for in the near future. We invite you to download our Q1 publication and view our new video perspectives.
PwC comment letter (IVSC)PwC Comments on the International Valuation Standards Council's Exposure Draft: Credit and Debit Valuation Adjustments
3/6/14 | Assurance services
PwC appreciates the International Valuation Standards Council (IVSC) Standards Board (board) efforts and welcomes the opportunity to provide comments on the exposure draft (ED) that sets out the board’s proposals aimed at providing information on credit and debit valuation adjustments. Our comment letter outlines our general comments to the proposal and responds to certain specific questions for comment in the appendix.
WebcastPwC Cash Investment Survey Results Webcast – March 6, 2014
Join us on Thursday, March 6 at 2:00 pm EDT, as we reveal the results from the PwC Cash Investment Survey. The survey was designed to identify leading practices in corporate investment management and provide value-added insight that treasury and finance professionals can apply within their own organizations.
Private company reporterPrivate company reporter - PCC amends, re-approves final VIE alternative for common control leasing arrangements
1/31/14 | Assurance services
In January, the PCC revised, then re-approved an alternative offering private companies an exemption from applying the VIE consolidation model to certain arrangements
DatalineDataline: Accounting for hedging activities - IASB new general hedge accounting requirements (No. 2014-03)
1/30/14 | Assurance services
This Dataline highlights key provisions of the IASB's new guidance.
Setting the standardSetting the standard - January 2014
1/9/14 | Assurance services
Welcome to the latest edition of "Setting the standard." It includes the latest updates on the standard-setting activities of the FASB and IASB. Learn more inside.
Corporate Governance SeriesThe quarter close - Directors edition: A look at this quarter's financial reporting issues - Q4 2013
12/23/13 | Center for Board Governance
This quarterly publication is designed to keep directors informed about the latest accounting and financial reporting issues that impact board decisions and company policies.
In briefIn brief: FASB financial instruments project - Convergence no longer likely (No. 2013-50)
12/23/13 | Assurance services
The FASB has made important decisions related to the classification and measurement, and impairment projects that increase divergence from the IASB.
DatalineDataline: Accounting for centrally cleared derivatives Understanding the accounting implications of Dodd-Frank Title VII (No. 2013-30)
12/20/13 | Assurance services
Dodd-Frank Title VII changed the trading requirements for certain derivatives, raising a number of financial reporting issues related to centrally cleared derivatives.
DatalineDataline: Highlights of the 2013 AICPA National Conference on Banks and Savings Institutions (No. 2013-26)
12/12/13 | Assurance services
At the 2013 AICPA National Conference on Banks and Savings Institutions, regulators and standard setters shared views on top-of-mind issues for financial institutions.
DatalineDataline: Derivative valuation: The transition to OIS discounting (No. 2013-25)
12/10/13 | Assurance services
Derivative pricing practices have evolved in recent years to reflect the funding benefit of collateral when that collateral can be rehypothecated. In fact, some collateralized derivatives may now need to be valued based on discounting at the Overnight Indexed Swap (“OIS”) rate.
In briefIn brief: Hedging: IASB issues final standard (No. 2013-47)
11/21/13 | Assurance services
IASB issues final standard which aligns hedge accounting with risk management.
Private company reporterPrivate company reporter - PCC approves alternative that exempts certain arrangements from VIE guidance
11/15/13 | Assurance services
The PCC approved a final standard that offers private companies an exemption from applying the VIE consolidation model to certain common control leasing arrangements.
Private company reporterPrivate company reporter - September 30 and October 1, 2013
10/7/13 | Assurance services
At its most recent meeting, the PCC approved final standards for the accounting for goodwill and for a simplified hedge accounting model for certain interest rate swaps.
In briefIn brief: FASB changes course on repurchase agreement project (No. 2013-43)
10/4/13 | Assurance services
The FASB decided to retain some aspects of the accounting model for repo agreements in its January 2013 exposure draft -- a significant change from its prior decisions.
Corporate Governance SeriesThe quarter close - Directors edition: A look at this quarter's financial reporting issues - Q3 2013
10/3/13 | Center for Board Governance
The Q3 2013 edition focuses on accounting and reporting issues for private companies that could impact public companies, statement of cash flows, entities under common control, contingencies, new vice-chairman at the FASB, PCAOB proposal on improving auditor reporting, and international developments on auditor rotation and retendering.
EITF observerEITF observer - September 13, 2013 meeting highlights
9/17/13 | Assurance services
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- Derivatives: Global convergence becomes global confusion
9/9/13 | Financial services regulatory practice
The CFTC offers a road map and timeline for cross border derivatives regulation, but much uncertainty remains.
DatalineDataline: Joint and several liability arrangements – FASB issues new guidance to achieve consistency (No. 2013-20)
9/4/13 | Assurance services
This Dataline discusses the key provisions of a new FASB standard issued in February 2013 to address diversity in accounting for joint and several liabilities.
Accounting guidesGuide to Accounting for Derivative Instruments and Hedging Activities - 2013 edition
8/23/13 | Assurance services
PwC is pleased to offer the 2013 edition of our popular publication, Guide to Accounting for Derivative Instruments and Hedging Activities.
Accounting guidesGuide to Accounting for Transfers and Servicing of Financial Assets - 2013 edition
8/23/13 | Assurance services
PwC is pleased to offer the 2013 edition of our popular publication, Guide to Accounting for Transfers and Servicing of Financial Assets.
Accounting guidesGuide to Accounting for Financing Transactions: What You Need to Know about Debt, Equity, and the Instruments in Between - 2013 edition
8/8/13 | Assurance services
The accounting guidance for the issuance, modification, conversion and repurchase of debt and equity securities has developed over many years into a complex set of rules. Although the guidance is now codified within the FASB’s Accounting Standards Codification, the analysis continues to involve detailed and sequential consideration of the relevant provisions of the guidance. Our Guide provides a roadmap to the applicable accounting literature to help you determine which steps are necessary for a particular transaction.
- Credit exposure: Affiliate transaction rule in sight
8/6/13 | Financial services regulatory practice
Various provisions of Dodd-Frank require banks to incorporate credit exposures from derivatives and securities financing transactions when calculating prudential limits.
DatalineDataline: Responses are in on the FASB and IASB's financial instruments credit loss proposals (No. 2013-18)
8/1/13 | Assurance services
This Dataline provides a high-level summary of the comments received on the board's respective credit loss proposals.
DatalineDataline: Responses are in on the FASB and IASB's financial instruments classification and measurement proposals (No. 2013-15)
7/1/13 | Assurance services
This Dataline provides a high-level summary of the of the comments received on the board's respective proposals.
EITF observerEITF observer: A meeting synopsis - June 2013
6/14/13 | Assurance services
The EITF met on June 11, 2013 to discuss six issues. PwC's EITF observer provides you an insightful summary of decisions reached and the changes affecting US GAAP.
Private company reporterPrivate company reporter - June 13, 2013
6/13/13 | Assurance services
On June 10, the FASB endorsed each of the accounting alternatives previously approved by the PCC, related to intangible assets, goodwill and interest rate swaps. This edition of Private company reporter provides further information on the proposed alternatives, as well as highlights of other recent developments related to private company reporting.
PwC comment letter (FASB)PwC comments on FASB's proposed Accounting Standards Update, Financial Instruments — Credit Losses
5/31/13 | Assurance services
PwC does not support the FASB's proposed standard on credit losses and provides recommendations to the boards for an enhanced model.
PwC comment letter (FASB)PwC comments on FASB's Proposed Accounting Standards Update, Recognition & Measurement of Financial Assets & Liabilities
5/15/13 | Assurance services
PwC issued its comment letter on the FASB's Proposed Accounting Standards Update, Recognition & Measurement of Financial Assets & Liabilities.
DatalineDataline: How FASB's financial instruments proposals would affect not-for-profit organizations (No. 2013-08)
4/26/13 | Assurance services
In February 2013, the FASB issued a revised exposure draft of a proposed standard for the classification and measurement of financial instruments (the "C&M proposal"). A proposed impairment model for debt instruments was described in a separate exposure draft issued in December 2012 (the "impairment proposal"). This Dataline discusses how the classification, measurement, and impairment approaches described in those proposals might be applied by most not-for-profit organizations.
DatalineDataline: A summary of the IASB proposal on impairment of financial assets – Including a comparison to the IAS 39 model and the FASB’s credit loss proposal (No. 2013-07)
4/25/13 | Assurance services
In March 2013, the IASB an exposure draft (ED), Financial Instruments: Expected Credit Losses, that proposes an expected loss model to replace the current incurred loss model of IAS 39, Financial Instruments: Recognition and Measurement. In December, 2012, the FASB also released a proposal on impairment of financial assets. This Dataline looks at the IASB's proposal and compares it to the IAS 39 model and the FASB's proposal.
PwC comment letter (IASB)PwC Comments on Exposure Draft: Novation of Derivatives and Continuation of Hedge Accounting
4/2/13 | Global accounting consulting services
PwC supports the board’s efforts in clarifying whether an entity is required to discontinue hedge accounting when an over-the-counter (OTC) derivative is novated to a central counterparty (CCP) as required by law or regulation. We also appreciate the board’s responsiveness in addressing this urgent issue in a pragmatic way, as requiring entities to treat such novations as a discontinuance of hedge accounting would not provide useful information to investors.
PwC comment letter (FASB)PwC Comments on Proposed ASU: Transfers and Servicing (Topic 860): Effective Control for Transfers with Forward Agreements to Repurchase Assets and Accounting for Repurchase Financings
3/29/13 | Assurance services
PwC fully supports the Board’s continuing efforts to respond in a timely manner to stakeholder concerns over elements of the transfers of financial assets accounting model.
PwC comment letter (IASB)PwC Comments on Exposure draft: Classification and Measurement: Limited Amendments to IFRS 9
3/28/13 | Global accounting consulting services
PwC agrees with the board’s objectives to amend IFRS 9 and commend the board on their progress in achieving those objectives. The letter includes key comments that we would like to raise with the board.
DatalineDataline: Financial instruments classification and measurement – FASB issues its exposure draft (No. 2013-05)
3/22/13 | Assurance services
Classification and measurement is an important part of the FASB and IASB’s joint project on financial instruments. The boards have agreed on changes that will broadly converge the accounting for debt investments and financial liabilities, but significant differences in accounting for equity investments will remain. The FASB issued its exposure draft on February, 14 2013 with a comment period ending May 15, 2013. The comment period on the IASB exposure draft, which was issued in November 2012, ends on March 28, 2013. This Dataline looks at FASB’s proposals as outlined in its exposure draft and compares them to the IASB's model.
DatalineDataline: Credit losses on financial assets -- An overview of the FASB's current expected credit loss model (No. 2013-01)
1/16/13 | Assurance services
Impairment is a major component of the FASB and IASB's (the boards’) joint project to revisit most aspects of financial instruments accounting. In the aftermath of the recent financial crisis, the current incurred loss approach has been criticized for delaying the recognition of credit losses. The FASB has issued a new exposure draft on financial asset impairment. Our Dataline explains their "current expected credit loss" model and how it differs from the IASB's model.
DatalineDataline: Highlights of the 2012 AICPA National Conference on Current SEC and PCAOB Developments (No. 2012-22)
12/13/12 | Assurance services
The 2012 AICPA National Conference on Current SEC and PCAOB Developments (the Conference) was held on December 3, 4, and 5, 2012. Conference presenters included representatives from regulatory and standard-setting bodies, auditors, users, preparers, industry experts, and an investor panel. Remarks centered mainly on the status of potential incorporation of IFRS into the U.S. financial reporting system, updates on regulatory and financial reporting matters, capital formation, and the auditing profession’s impact on the reliability and usefulness of financial statements.
M&A snapshotFinancial risk management considerations in an acquisition (M&A snapshot)
12/13/12 | Assurance services
The acquisition of a business can have a significant impact on both the risk exposures and risk management strategies of the combined entity. In many cases, an acquirer’s financial risk exposure will increase as a result of the acquisition. However, there may be situations in which the acquiree’s operations reduce the acquirer’s current risk exposure. In any event, identifying potential changes in enterprise risks, creating an action plan to address them, and managing changes to risk management strategies post-acquisition are critical to developing short- and long-term solutions for integrating financial risk management considerations in an acquisition.
DatalineDataline: Financial instruments classification and measurement - An update on the FASB's tentative approach to be exposed in Q1 2013 (No. 2012-21)
12/7/12 | Assurance services
Classification and measurement is an important part of the FASB and IASB’s joint project on financial instruments. This Dataline provides a summary of the boards' decisions that is based on the project summaries posted on their websites, our observations of their meetings, and our understanding of their intent.
DatalineDataline: 2012 year-end accounting and reporting considerations - Leading practices and lessons learned on key topics (No. 2012-20)
12/3/12 | Assurance services
This year end, entities continue to face many complex financial reporting issues such as providing new fair value disclosures, accounting for debt modifications, and evaluating revenue recognition guidance. Economic challenges around the world continue to have broad financial reporting implications. While not an all-inclusive list, this Dataline is intended to serve as a timely reminder of leading practices and lessons learned on key issues that companies should consider as they navigate the year-end financial reporting process.
DatalineDataline: Accounting and disclosure implications of Hurricane Sandy (No. 2012-17)
11/12/12 | Assurance services
Hurricane Sandy is expected to be the second-costliest Atlantic hurricane in history, only surpassed by Hurricane Katrina in 2005. Many businesses were disrupted by Hurricane Sandy and its aftermath including the New York Stock Exchange, which was closed for two days. While not all-inclusive, this Dataline discusses several accounting and disclosure-related matters companies may encounter in dealing with the financial reporting implications of Hurricane Sandy.
DatalineDataline: Implications to hedge accounting of changes to derivative counterparties or hedging relationships (No. 2012-16)
11/6/12 | Assurance services
Market protocols for derivatives may be changing in the near future. Financial reform legislation could make novations (in this case, substitution of counterparties to a contract) more common as over-the-counter (OTC) transactions are migrated to central exchanges. In anticipation of these changes, the International Swaps and Derivative Association (ISDA) asked the SEC’s Office of the Chief Accountant if the novation of a bilateral OTC derivative contract to a central counterparty "on the same financial terms" would require the designation of a new hedging relationship.
DatalineDataline: Highlights of the 2012 AICPA National Conference on Banks and Savings Institutions (No. 2012-14)
10/18/12 | Assurance services
The 2012 AICPA National Conference on Banks and Savings Institutions was held September 10 through 12, 2012 in Washington, DC. Representatives from the banking regulators, SEC, and standard setters presented at the Conference along with auditors, users, preparers, and industry experts. Presenters expressed views on a wide range of important accounting, auditing, and financial reporting topics. This Dataline provides highlights of topics discussed at the Conference.
VideoStandard-setting update: Leases and financial instruments
9/17/12 | Assurance services
Standard-setting update: Leases and financial instruments
EITF observerEITF observer: A meeting synopsis - June 2012
6/22/12 | Assurance services
At the EITF's June 21 meeting, the Task Force discussed the three Issues reaching a consensus-for-exposure on two Issues (12-B and 12-D). Further discussion is expected for one Issue (11-A). This edition of EITF observer provides a synopsis of the meeting.
EITF observerEITF observer: A meeting synopsis - March 2012
3/18/12 | Assurance services
At the EITF's March 15 meeting, the EITF discussed six Issues, reaching a consensus-for-exposure on three Issues. The remaining three Issues will be discussed further at a future meeting.