In our comment letter on the FASB's Proposed Accounting Standards Update, Financial Instruments-Overall (Subtopic 825-10) — Recognition & Measurement of Financial Assets and Financial Liabilities, we express support for the proposed comprehensive framework for classifying financial instruments but note improvements are needed.
While we support the need for a business model assessment that focuses on the primary purpose for holding portfolios of financial assets, we are concerned with the absence of clarity in the proposed guidance when there is uncertainty at inception about whether an instrument will be held or sold, and we believe the proposed guidance for the types of allowable sales from the amortized cost category is too restrictive.
We agree with the need for a cash flow characteristics assessment and believe the nature and extent of cash flow variability are relevant factors for determining the classification of a financial instrument. However, we note the proposed solely payment of principal and interest approach is overly restrictive and would inappropriately preclude many financial assets from the amortized cost or fair value through other comprehensive income categories.
We encourage the FASB to consider a fair value through other comprehensive income category for equity investments, similar to the IASB model, however we would insist on fair value changes being recycled to income upon derecognition of the investment.