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AICPA Expresses Concerns on FASB Financial Instruments Proposal


By Matthew G. Lamoreaux
OCTOBER 1, 2010

The AICPA’s Financial Reporting Executive Committee (FinREC) on Thursday said it was concerned about the fair value measurement and impairment models along with other provisions of FASB’s comprehensive proposal to revamp financial instruments accounting.


FinREC (formerly the Accounting Standards Executive Committee) said that while it shares the board’s desire to provide financial statement users with a more timely and representative depiction of companies’ involvement in financial instruments and supports FASB’s efforts to achieve greater convergence with the IASB, it believes changes are needed to Proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities.


The FinREC comment letter, which includes an attachment with 27 pages of detailed suggestions, goes on to recommend changes to several provisions of the FASB proposal.


Fair Value vs. Mixed Attribute Model

“We support a mixed attribute model for financial instruments over the ‘fair-value-for-almost-all-financial-instruments’ approach proposed by the FASB,” the letter said. It explains that “the mixed attribute model allows the measurement and reporting of financial instruments to reflect the way these instruments are actually managed.” 


FinREC said it agrees with dissenting FASB Board members who stated the FASB proposal “would introduce fair value accounting for some nonmarketable, plain-vanilla instruments that are held for collection (long-term investment), and most liabilities held for payment, which they believe would not reflect the likely realization of those items in cash and, therefore, would not be the most relevant way to measure those items in the statement of financial position and comprehensive income.”


On this classification and measurement issue, FinREC said “the IASB’s mixed attribute classification and measurement model for financial instruments, included in IFRS 9, Financial Instruments, and in the Exposure Draft, Fair Value Option for Financial Liabilities, and IAS 39, Financial Instruments: Recognition and Measurement, is generally superior to that of the FASB’s proposed classification and measurement model.”



On the impairment issue, FinREC expressed reservations about both the FASB and IASB proposals.


“FASB’s credit impairment model is impracticable and would be extremely difficult to implement as it mixes together interest income and the allowance for credit losses,” FinREC said. “We recommend that the FASB retain the incurred loss model, but lower the threshold for when credit losses should be recognized from probable to more-likely-than-not.” 


Recognition of Interest Income

FinREC said interest income recognition should be based on the financial asset’s effective interest rate applied to the amortized cost balance, rather than amortized cost net of any allowance for credit losses. This would provide “a more accurate portrayal of the economic yield associated with the security.”


In addition FinREC said accounting for the allowance for credit losses “should not be commingled with the accounting for interest income.”


Hedge Accounting

Although FinREC said it generally supports the proposed provisions related to hedge accounting, it does not understand why hedge dedesignations without terminating the hedging instrument would not be allowed because dedesignation and redesignation of hedge relationships reflects the dynamic nature of hedging as a prudent risk management practice.



FinREC said it does not support the proposal overall “because it fails to achieve convergence [with the IASB] on fundamental issues….We encourage the FASB and IASB to work together on the financial instruments standard and reconcile the differences in their models.”


FASB received more than 1,300 comment letters on its financial instruments proposal. The letters are available here.


--Matthew G. Lamoreaux ( is a JofA senior editor.


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