FASB Issues Financial Instruments Proposal Revisions of Keen Interest to Banks, Insurers

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By Steve Burkholder

NORWALK, Conn.-The Financial Accounting Standards Board issued a closely watched proposal Feb. 14 that is aimed at improving and simplifying how banks, insurers, and other enterprises account for a broad range of financial instruments, including loans.

“The proposed accounting standard would measure financial assets based on how a reporting entity would realize value from them as part of distinct business activities,” FASB Chairman Leslie Seidman said in a prepared statement. The gauging of financial liabilities would be consistent with how the enterprise plans to settle those liabilities, she added.

In that way, accounting under the proposal would differ markedly from current guidance and its hinging on instruments' legal form--“that is, whether an asset qualifies as a security or a loan,” according to the draft accounting standards update, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

“The proposed guidance would improve not only the relevance of the information about financial assets in an entity's financial statements, but also the comparability of that information across entities because the legal form of the financial asset is not relevant in determining how to measure it, either initially or subsequently,” FASB states in the exposure draft.

The proposal, which represents a revision of earlier, comprehensive draft rules on instruments issued in May 2010 (101 DTR G-5, 5/27/10) is the product of a high-priority, difficult joint project on which FASB has been working with the International Accounting Standards Board.

FASB and IASB so far are aligned on main tenets of the proposal, which focuses on how to classify and measure financial assets and financial liabilities. However, the two boards remain relatively far apart on related draft rules for reporting credit losses, including loan losses, an issue of paramount importance for banks and for banking and securities regulators

The fresh FASB draft rules on classification and measurement have a comment deadline of May 15.

The proposal does not proffer an effective date for standards that would result from the proposal. However, board members generally have suggested that enterprises would have ample time to shift to new accounting policies.

New standards on financial instruments are not expected to be effective before 2015--roughly the same time that planned new FASB and IASB prescriptions on revenue recognition could be in use.

The proposed guidance on instruments' classification and measurement and the Feb. 14 edition of FASB in Focus are available at FASB's homepage at http://www.fasb.org.

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