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
- In February 2013, the FASB proposed updated guidance for the classification and measurement of investments in debt and equity securities. The proposal includes a “mixed measurement” approach that calls for measurement at amortized cost for certain financial assets. Under this proposed guidance, many more financial assets would be measured at fair value with the changes in fair value reported in net income.
- The IASB completed its deliberations on targeted amendments to its classification and measurement standard and issued an exposure draft in November 2012. The IASB also proposed a mixed measurement model.
- Following the comment period, both boards began redeliberations with the goal of achieving a converged solution. However, as a result of significant negative feedback received on the cash flow characteristics test for classifying and measuring financial assets, the FASB unanimously decided in December 2013 to abandon that approach. Instead, they decided to retain the current guidance related to the bifurcation of hybrid financial assets. The IASB, however, continued to move forward with their proposal.
- 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 and adjusted for observable prices. The accounting for debt investments (i.e., loans and debt securities) will remain unchanged subject to the new proposed impairment model (see below).
- The unrestricted fair value option that currently exists in U.S. GAAP will be retained.
- Financial liabilities will generally be recorded at amortized cost with limited exceptions. If the fair value option is elected for a financial liability, adjustments to the value due to changes in instrument-specific credit risk will be recorded in other comprehensive income.
- The requirement to assess hybrid financial instruments for the need to bifurcate embedded derivatives from their host and account for them separately remains. To the extent that an embedded derivative must be bifurcated and accounted for separately, it will be measured at fair value with changes in fair value recognized in net income.
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 FASB opted for a model that requires recognition, at the inception or acquisition of a financial asset, of an allowance for the full amount of contractual cash flows not expected to be collected. The FASB issued an exposure draft on its model, referred to as the current expected credit loss (CECL) model, in December 2012.
- 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, struggling to reconcile the recognition of credit losses at the inception of a lending arrangement with the credit assessment inherent in the pricing of the transaction. 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, and conducted joint discussions with the IASB. Ultimately, after considering several alternatives, the FASB decided in December 2013 to move forward with the CECL model and refine various aspects, where necessary. That decision eliminates the possibility of convergence between the FASB and IASB in the recognition and measurement of credit losses. The major difference between the IASB and FASB’s models is the credit deterioration trigger in the IASB’s model—that is, the FASB will require recognition of full lifetime expected credit losses upon initial recognition, whereas the IASB would record such losses upon a significant deterioration in credit.
- Following its decision to move forward with the CECL approach, the FASB has continued to refine that model. Specifically, the board decided that the CECL model should apply to all financial assets measured at amortized cost. For financial assets measured at fair value with qualifying changes in fair value recognized in other comprehensive income (FV-OCI), the board decided that expected credit losses should be recognized only to the extent the financial asset’s fair value is less than its amortized cost basis.
- The FASB also decided that for loans subsequently reclassified as held-for-sale and measured at the lower of cost or market, the amortized cost basis on the transfer date would be considered the loan’s cost basis and a valuation allowance should be recorded equal to the amount by which amortized cost exceeds fair value. For debt securities subsequently identified for sale, the full difference between fair value and amortized cost would be the amount of impairment recorded. For beneficial interests (purchased or retained) for which there is a significant difference between contractual and expected cash flows, the credit allowance should be recognized and measured consistent with the approach for purchased credit-impaired assets under the proposed update.
What's Next for Financial Instruments?
- Classification and measurement: The FASB will continue redeliberations on this project and expects to issue a final standard in the second half of 2014.
- Impairment: The FASB expects to issue a final standard in the second half of 2014.
- The IASB issued IFRS 9, Financial instruments, in July 2014. IFRS 9 introduces a new model on classification and measurement and impairment.
Quarter closeThe quarter close — Third quarter 2014: Publication and new video perspectives
9/15/14 | 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 Q3 publication and view our new video perspectives.
In depthIn depth: IFRS 9 – Expected credit losses
8/13/14 | Assurance services
The IASB published the complete version of IFRS 9, Financial instruments, which replaces most of the guidance in IAS 39. This In depth considers the new impairment model in IFRS 9.
In depthIn depth: IFRS 9 – Classification and measurement
8/13/14 | Assurance services
The IASB published the complete version of IFRS 9 Financial Instruments, which replaces most of the guidance in IAS 39. This In depth considers the changes to classification and measurement of financial assets in IFRS 9.
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
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
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.
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.
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.
EITF observerEITF observer - September 13, 2013 meeting highlights
9/17/13 | Assurance services
The EITF met on September 13th, 2013 to discuss three issues. PwC's EITF observer provides you an insightful summary of decisions reached and the changes affecting GAAP.
- 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.
VideoDerivatives reform: Beyond the banks
3/18/13 | Assurance services
Derivatives reform: Beyond the banks.
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.