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Presentation Requirements Take Shape for Classification and Measurement Project

June 6, 2014

The FASB has moved away from a plan that would overhaul accounting for the classification and measurement of financial assets and liabilities and instead is focusing on making targeted improvements to existing U.S. GAAP. Some of the changes involve how banks and businesses that hold financial assets and liabilities present these instruments in their financial statements.

The FASB on June 4, 2014, continued to chip away at its classification and measurement project, focusing on the best way for banks and businesses that hold financial assets and liabilities to present this information in their financial statements.

In line with its decision late last year to abandon the major parts of its February 2013 proposal, Proposed Accounting Standards Update (ASU) No. 2013-220,Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, the FASB decided to not require separate presentation of financial assets and financial liabilities grouped by measurement category on the face of company balance sheets.

If finalized, the decision goes against the advice of investors and analysts, who told the FASB that a breakdown on the balance sheet would provide them more transparent information.

“Investors think the form of investment is very, very important—the form of the asset, the form of the liability—and also the measurement of each,” said Shandy Smith, the FASB’s investor liaison. “I think the simplest way we can put it out there… I think that’s on the balance sheet by form and by measurement. That’s simple.”

FASB member Harold Schroeder, a former analyst, also supported breaking down the information on the balance sheet because there is often a delay between earnings releases and financial statement filing dates and investors would like to get all the information simultaneously.

“Location matters here,” Schroeder said. “Why not go ahead and make it a little bit easier for investors?”

Most banks and businesses, however, said they worried about cluttering the balance sheet and potentially confusing investors and lenders. A majority of FASB members also said they believed that putting breakdowns in the footnotes would convey enough information to analysts.

“We are constantly dealing with this notion that we need to get information out to investors more quickly, which effectively implies that we need to get everything on the face of the financial statement because some companies decide they’re going to make preliminary earnings releases that include balance sheets and income statements—and we have no authority over that,” FASB member Lawrence Smith said. “Therefore, I think we should make our decision based upon what’s included in the financial statement.”

After much discussion, a majority of the board agreed to retain current U.S. GAAP, which does not require businesses to provide this information on the balance sheet. Instead, the board decided to require businesses to disclose in the footnotes of their financial statements all financial assets and financial liabilities grouped by measurement category and form of financial assets.

The FASB next tackled how public companies and publicly held banks that hold financial assets and liabilities measured at amortized cost would convey this information. The board agreed that they would have the choice to disclose their fair value either in parenthesis on the face of the balance sheet or in the footnotes. Disclosures would not be required for receivables and payables due in less than a year and for liabilities associated with demand deposits—customer deposits, such as checking deposits, that are available for withdrawal at any time.

Businesses reporting their own debt instruments at fair value with changes recorded in net income should disclose the difference between the aggregate fair value and the aggregate unpaid principal balance of such outstanding debt instruments. These businesses would not have to note the amortized cost of the instruments in parenthesis on the balance sheet, the board decided.

The classification and measurement project was once the centerpiece of the FASB’s and IASB’s effort to write streamlined guidance for financial products that came under increased scrutiny in the wake of the 2008 financial crisis.

The FASB in February 2013 released Proposed Accounting Standards Update (ASU) No. 2013-220, which largely aligned with the IASB’s Exposure Draft (ED) No. 2012-4, Classification and Measurement: Limited Amendments to IFRS 9 (Proposed amendments to IFRS 9-2010).

The proposals called for financial instruments to be measured in one of three ways—amortized cost, fair value with changes recorded in net income, and fair value with changes recorded in other comprehensive income. Instruments were assigned to categories based upon their cash-flow characteristics and the business models they serve.

Loans that a lender listed on its balance sheet and held to collect payments of principal and interest would have been measured at amortized cost, while assets that are traded would be measured at fair value, with changes recorded in net income. Financial products a business may hold onto but could sell later fell into a third category: fair value with changes recorded in other comprehensive income.

The FASB, however, had a change of heart late last year and announced it would make targeted improvements to U.S. GAAP instead of the sweeping changes that would be required to produce a converged standard with the IASB.

The two boards had disagreed on several key issues and the FASB eventually said the joint model was too complex to represent an improvement over existing U.S. GAAP.

The FASB plans to publish a final update to U.S. GAAP by the end of the year.

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