Financial reporting

May 1, 2013

  FASB issued a revised proposal that would provide a comprehensive framework for classifying and measuring financial instruments.

The Proposed Accounting Standards Update (ASU), Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, would require financial assets to be classified and measured based on the asset’s flow characteristics and the entity’s business model for managing the asset, rather than on its legal form or whether the asset is a loan or security.

Financial assets would be classified into one of three categories:

  • Amortized cost. This would include financial assets constituted solely of payments of principal and interest that are held for the collection of contractual cash flows.
  • Fair value through other comprehensive income (OCI). This would include financial assets constituted solely of payments of principal and interest that are both held for the collection of contractual cash flows and for sale.
  • Fair value through net income. This would include financial assets that do not qualify for measurement at either amortized cost or fair value through OCI.


Equity investments (except those accounted for under the equity method of accounting) would be measured at fair value with changes in fair value recognized in net income, because such investments do not have payments of principal and interest. A “practicability exception” to measurement at fair value would be provided for equity investments without fair values that can be readily determined.

Financial liabilities would generally be required to be carried at cost unless:

  • The reporting organization’s business strategy is to subsequently transact at fair value, or
  • The obligation results from a short sale.


The embedded derivative requirements for hybrid financial liabilities would be retained.

Public companies would be required to disclose fair values parenthetically on the face of the balance sheet for financial assets and financial liabilities measured at amortized cost, with exceptions for demand deposit liabilities, and receivables and payables due in less than a year. Nonpublic entities would not be required to disclose this fair value information parenthetically or in the notes.

Comments on the proposal, available at tinyurl.com/b6getlq, are due May 15.

“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, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities,” FASB Chairman Leslie Seidman said in a statement.

Seidman said the revised proposal simplifies the classification methods currently in use and provides an opportunity for convergence with the proposal issued by the International Accounting Standards Board (IASB) in November.

If approved, the proposal would narrow the availability of the existing fair value option for financial assets and financial liabilities. In the limited cases where the fair value option would be allowed for financial liabilities, changes in the fair value attributable to an organization’s own credit risk would be reported in OCI rather than net income.

The proposal is part of a broader joint project with the IASB to improve and converge accounting for financial instruments, which has received significant scrutiny in the wake of the global financial crisis.

FASB decided to require amortized cost as a measurement attribute for assets held for collection of cash flows, because the value is realized over the holding period of the asset. Assets that might be sold to manage interest rate risk or liquidity risk would not qualify for cost measurement. FASB also decided that financial liabilities would generally be measured at amortized cost unless certain conditions are met.

Accounting for expected credit losses on debt instruments carried at amortized cost or fair value through OCI is addressed in FASB’s ASU on credit losses, which was issued in December. Both ASUs are part of the broader financial instruments project.

The IASB issued a classification and measurement proposal for financial instruments in November and released its ED on financial instruments impairment in March. The IASB’s expected credit loss model differs from FASB’s, but the boards are holding out hope for convergence after comments are reviewed.


  FASB changed the format for reporting amounts reclassified out of other comprehensive income (OCI) in a move designed to increase transparency at minimal cost.

ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, does not change current requirements for reporting net income or OCI in financial statements.

All the information required by the ASU already is required to be disclosed elsewhere in the financial statements. The ASU, available at tinyurl.com/clsufr2, simply creates new presentation requirements. Organizations will be required to:

  • Present the effects on the line items of net income of significant amounts reclassified out of accumulated OCI, but only if the item reclassified is required to be reclassified to net income in its entirety during the same reporting period. Presentation should occur either on the face of the statement where net income is presented, or in the notes.
  • Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. An example would be when a portion of the amount reclassified out of accumulated OCI initially is transferred to a balance sheet account rather than directly to income or expense.


OCI includes gains and losses that initially are excluded from net income for an accounting period. Later, those gains and losses are reclassified out of accumulated OCI into net income.

All public and private companies that report items of OCI are required to comply with the ASU. Public companies are required to comply for interim and annual reporting periods.

Private companies are required to meet the reporting requirements of the amended paragraphs about the roll forward of accumulated OCI for interim and annual reporting periods. But private companies are required to provide information about the impact of reclassifications on line items of net income only for annual reporting periods.

The ASU takes effect for reporting periods beginning after Dec. 15, 2012, for public companies, and for reporting periods beginning after Dec. 15, 2013, for private companies.


  Private companies and nonpublic not-for-profits are exempt from a particular fair value disclosure as a result of a FASB amendment that underwent a speedy review process.

The amendment clarifies that the requirement to disclose the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (as Level 1, Level 2, or Level 3) does not apply to private companies and nonpublic not-for-profits for items:

  • That are not measured at fair value in the statement of financial position, but
  • For which fair value is disclosed.


ASU No. 2013-03, Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities, makes the clarification. The ASU clarifies guidance in ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.

FASB was notified by stakeholders in December that the 2011 amendments, codified in ASC Section 825-10-50, appeared to be inconsistent with the board’s intentions. FASB decided to expedite the clarification.

The update, available at tinyurl.com/d6b6bm2, takes effect immediately.


  The Financial Accounting Foundation (FAF) will conduct post-implementation reviews on a 1992 FASB standard focusing on accounting for income taxes, and on two GASB standards governing reporting of risk financing and insurance-related activities of state and local governments, including public risk pools

A FAF team will review FASB Statement No. 109, Accounting for Income Taxes, which establishes standards for reporting the effects of income taxes in an organization’s financial statements. The standard is mostly codified in ASC Topic 740, Income Taxes.

FAF also will conduct a review of GASB Statements No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and No. 30, Risk Financing Omnibus—an Amendment of GASB Statement No. 10.

A review of FASB Statement No. 141R, Business Combinations, also is under way.

Another FAF post-implementation review affirmed the effectiveness of two GASB standards established to improve state and local government financial reporting for deposit and investment risk, and repurchase and reverse repurchase agreements.

The FAF team reviewed:

  • GASB Statement No. 3, Deposits With Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements.
  • GASB Statement No. 40, Deposit and Investment Risk Disclosures.


Both statements require note disclosures about deposit and investment risk. Statement No. 3 also provides guidance for reporting of repurchase and reverse repurchase agreements.

After receiving input from creditors, analysts, citizen and taxpayer groups, preparers, auditors, and academics, the review team concluded that the statements generally meet the needs of shareholders and result in reliable deposit and investment risk information.


The FAF board of trustees approved a more collaborative agenda-setting process for FASB and GASB. Decisions regarding project plans, agenda setting, and priority of projects at FASB and GASB now will be approved by a majority vote of the respective boards instead of by the board chair alone.

The trustees voted to end the previous process, which vested the chairs with the authority to make these decisions. All agenda decisions now will be voted on by the boards in public meetings.


  A Federal Accounting Standards Advisory Board (FASAB) committee issued proposed implementation guidance for financial reporting on general property, plant, and equipment cost accumulation, assignment, and allocation. The proposal, available at tinyurl.com/bvn23gh, was created to give federal agencies a consistent framework for interpreting existing guidance.

In addition, the proposal is intended to help federal entities correctly apply the general property, plant, and equipment standards and ensure the cost of producing that information does not outweigh the benefits.

The ED proposes implementation guidance for applying FASAB’s standards related to:

  • Recognition requirements related to program costs incurred during the general plant, property, and equipment lifecycle, the required levels of precision, and acceptable methods for recognizing these costs.
  • The concept of a cost accumulation and allocation decision framework.
  • Management’s role in applying the cost accumulation, assignment, and allocation decision framework.


A decision framework is provided to help management apply the principles described in the proposal.

Comments on the proposed implementation guidance were due May 1.

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