FASB/IASB Joint Project: Financial Instruments
In May 2010, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815) (the 2010 proposed ASU). The proposed ASU would have required fair value measurement for most financial instruments and was therefore highly controversial given the volatility this would introduce to financial statements. The comment letter period ended in September 2010, and many comment letter respondents expressed strong opposition to various provisions of the proposed guidance. Given the concerns raised in the comment letter process, the FASB reconsidered many of the conclusions in the 2010 proposed ASU during their redeliberations. As a result, the decisions reached by the FASB during their redeliberations differed in many respects from those included in the 2010 proposed ASU.
After the 2010 proposed ASU was issued, the FASB's efforts on the financial instruments project were split into three parts: (1) classification and measurement, (2) impairment and (3) hedging.
Classification and measurement
In February 2013, the FASB issued a proposed ASU Financial Instruments—Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities (the 2013 proposed ASU). While with the issuance of this ASU the FASB changed its position from the 2010 proposed ASU by not requiring most financial instruments to be carried at fair value, the 2013 proposed ASU would still result in more financial assets being accounted for at fair value in comparison to current U.S. generally accepted accounting principles (GAAP). The 2013 proposed ASU includes a new and comprehensive recognition and measurement model for financial instruments that would replace the instrument-specific guidance currently in U.S. GAAP. The major provisions of the proposed ASU are summarized in our article, FASB releases financial instruments recognition and measurement exposure draft, and discussed further in our white paper, Accounting for financial instruments: Overview of FASB's exposure draft on recognition and measurement.
In December 2012, the FASB issued a proposed ASU, Financial Instruments—Credit Losses (Subtopic 825-15) (the 2012 proposed ASU), which includes a new accounting model intended to require more timely recognition of expected credit losses on financial assets that are not accounted for at fair value through net income. The 2012 proposed ASU would apply to all entities that hold financial assets exposed to credit risk, including debt instruments as well as loan, lease, reinsurance and trade receivables. The major provisions of the 2012 proposed ASU are briefly summarized in our article, FASB proposes new credit impairment model, and discussed further in our white paper, Credit impairment – A long and winding road.
The FASB has not redeliberated the hedging-related guidance included in the 2010 proposed ASU. Refer to the related FASB project update page for information about this part of the financial instruments project.
While the financial instruments project is a joint project of the FASB and International Accounting Standards Board (IASB) (collectively, the Boards), for the most part each board initially approached the project separately. As a result, the direction taken by the FASB in its 2010 proposed ASU differed in many significant respects from the direction taken by the IASB in its work on the financial instruments project. As the FASB evaluated the feedback on the 2010 proposed ASU, it engaged in joint redeliberations with the IASB. With respect to recognition and measurement, the joint redeliberations resulted in a greater degree of convergence with the IASB, particularly when considering the amendments the IASB proposed in November 2012 to International Financial Reporting Standard 9, Financial Instruments (which are discussed in our article, Limited amendments to IFRS 9 proposed). However, there are still areas of divergence, which are discussed further in our white paper, Accounting for financial instruments: Overview of FASB's exposure draft on recognition and measurement. With respect to credit impairment, the joint redeliberations fell far short of convergence. As discussed in our article, IASB proposes model to recognize credit losses more timely, the IASB issued an exposure draft in March 2013, which includes a fundamentally different impairment model than that included in the FASB's 2012 proposed ASU. With respect to hedging, the IASB is much further along than the FASB given the IASB's plans to issue a final standard on general hedge accounting in 2013.
For a synopsis of this and other joint projects currently being worked on by the FASB and IASB and their status, see our summary, FASB and IASB convergence projects at-a-glance.