In brief: FASB financial instruments project - Convergence no longer likely (No. 2013-50)

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In brief 12/23/2013 by Assurance services
In brief: FASB financial instruments project - Convergence no longer likely (No. 2013-50)

At a glance

The FASB has made important decisions related to the classification and measurement, and impairment projects that increase divergence from the IASB.

What happened?

At its December 18 meeting, the FASB made two significant decisions in its financial instruments projects that reduce the likelihood of convergence with the IASB:

  • Classification and measurement - the FASB decided unanimously to abandon the solely payment of principal and interest model governing the classification of debt investments, and instead retain the current guidance for bifurcating hybrid financial instruments
  • Impairment - the FASB agreed to retain its “full lifetime expected credit loss” model

Both of these decisions diverge from the IASB’s approach in their parallel projects, leaving the prospects for convergence in jeopardy.

Classification and measurement

As a result of significant negative feedback received on the solely payments of principal and interest (SPPI) criterion for classifying and measuring financial assets, the FASB unanimously decided to abandon that approach. Instead, they voted to retain the current guidance related to the bifurcation of hybrid financial assets. Although this is a tentative decision, given that it is fundamental to the direction of the project, it seems unlikely that the FASB will revisit it.

Under the original proposal, financial assets were to be recorded at (a) amortized cost, (b) fair value through OCI, or (c) fair value through net income.  To be eligible for the amortized cost or fair value through OCI categories, the contractual terms of the financial asset would have been required to give rise to cash flows that were solely payments of principal and interest on the principal amount outstanding[1].

Deciding to retain the current bifurcation approach means that entities will need to separately account for embedded derivatives contained in hybrid financial assets if those derivatives are not “clearly and closely related” to the host contract. Under this approach, the presence of an embedded derivative will not necessarily result in the classification of the entire instrument as a “fair-value-through-net-income” asset, as would have been the case under the original proposal. However, the embedded derivative, in most cases, will be.

The Board directed the staff to perform further research as to how best to determine the classification of the host contract once the embedded derivative is separated.


Since issuing its proposed ASU in December 2012[2], the FASB received mixed feedback from constituents in comment letters as well as through its outreach activities. The FASB proposal requires full lifetime expected credit loss recognition at inception for all instruments within scope. After considering various alternative models, the FASB decided to move forward with its existing proposal and to make further refinements where necessary in response to specific constituent concerns. In reaching this decision, a majority of board members reiterated their view that this model provides the most decision-useful information for users of the financial statements.

Why is this important?

The Board’s decisions are a significant setback to achieving global convergence in the accounting for financial instruments.

The FASB’s decisions related to classification and measurement creates significant divergence with the IASB’s currently proposed model. Until this latest decision, the FASB’s model related to debt investments was substantially converged with the IASB’s proposal.

The decision to move forward with the full lifetime expected credit loss model in the impairment project also eliminates the possibility of convergence between the FASB and IASB in measuring impairment losses for loans and debt securities. 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.

What's next?

The FASB plans to continue redeliberations on both projects with the hope of issuing a final standard by the middle of 2014.


PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).

[1] For additional details on the proposed model, refer to Dataline 2013-05, Financial instruments classification and measurement.

[2] Proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15).


Authored by: 

John Althoff
Phone: 1-973-236-7021

Paul Moran
Phone: 1-973-236-5548