Accounting for Financial Instruments

Transcription

1 Accounting for Financial Instruments Summary of Decisions Reached to Date During Redeliberations As of December 12, 2012 The Summary of Decisions Reached to Date is provided for the information and convenience of constituents who want to follow the Board s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Accounting Standards Update. The Accounting for Financial Instruments Project is comprised of the following three topics: 1. Classification and Measurement 2. Credit Impairment 3. Hedge Accounting. This document summarizes the decisions to date for each topic. Classification and Measurement The summary below reflects the tentative classification and measurement model for financial instruments. Scope and Scope Exceptions Specific Financial Instruments The tentative classification and measurement model would apply to all financial instruments (as that term is defined in the FASB Accounting Standards Codification Master Glossary) unless explicitly excluded. The following financial instruments would be excluded from the scope of the tentative model: 1. Derivative instruments that are in the scope of Topic 815, Derivatives and Hedging 2. Regular-way security trades 3. Instruments that are an impediment to sale accounting 4. A contract that is not exchange-traded if the underlying is any of the following: 5. Leases a. A climatic or geological variable b. The price or value of a nonfinancial asset or liability of one of the parties to the contract provided that the asset is not readily convertible to cash c. Specified volumes of sales or service revenues of one of the parties to the contract 1

2 6. Residual value guarantees 7. Registration payment arrangements 8. A loan commitment and a financial standby letter of credit held by a potential borrower 9. All financial guarantee contracts 10. An instrument held or issued by an entity that is classified in its entirety in the entity s shareholders equity (see guidance on distinguishing liabilities from equity in Topic 480, Distinguishing Liabilities from Equity, and the guidance on equity in Topic 505, Equity) 11. An equity component that has been bifurcated from a hybrid instrument and classified in an entity s stockholders equity in accordance with the guidance on debt in Topic 470, Debt, Topic 480, or another Topic that requires separate accounting for the components of a hybrid financial instrument 12. All financial instruments within the scope of Topic 944, Financial Services Insurance, except for the following that would be included in the scope of the tentative model: a. Mortgage loans that are subject to Subtopic , Financial Services Insurance Receivables (presentation guidance in Section also would be retained) b. All financial instruments that are subject to Subtopic , Financial Services Insurance Investments Debt and Equity Securities c. All financial instruments that are subject to Subtopic , Financial Services Insurance Investments Other (presentation guidance in Section also would be retained) d. All financial instruments that are subject to Subtopic , Financial Services Insurance Debt. 13. A holder s investment in a life insurance contract included in the scope of Subtopic , Investments Other Investments in Insurance Contracts 14. All pledges receivable and payable resulting from voluntary nonreciprocal transfers of not-forprofit entities 15. An employer s or plan s obligation and the related assets, if any, that are within the scope of any of the following Topics: a. Topic 710, Compensation General b. Topic 712, Compensation Nonretirement Postemployment Benefits c. Topic 715, Compensation Retirement Benefits d. Topic 718, Compensation Stock Compensation e. Topic 960, Plan Accounting Defined Benefit Pension Plans f. Topic 962, Plan Accounting Defined Contribution Pension Plans g. Topic 965, Plan Accounting Health and Welfare Benefit Plans. 16. An equity investment in a consolidated subsidiary (see Subtopic , Consolidation Overall) 2

3 17. A noncontrolling interest in a consolidated subsidiary (see Subtopic ) 18. An interest in a variable interest entity that the entity is required to consolidate in accordance with Subtopic An investment in the equity instruments of another entity that qualifies for use of the equity method in accordance with Topic 323, Investments Equity Method and Joint Ventures (see section Equity Method of Accounting below regarding amendments to Topic 323) 20. Acquisition-related contracts and contingent consideration arrangements in the scope of Topic 805, Business Combinations. Applicability to Specialized Industries The following specialized guidance would be retained in the relevant industry Topics in the FASB Accounting Standards Codification : Broker Dealers 1. Initial measurement guidance on (a) fail-to-deliver assets, (b) fail-to-deliver liabilities, (c) financial-restructuring transactions, and (d) proprietary trading securities 2. Subsequent measurement guidance on (a) securities underlying suspense accounts, (b) shares that a broker-dealer is firmly committed to purchase but that have not yet been subscribed to by customers, (c) investments in the form of equity or financing provided to another entity in connection with financial-restructuring transactions, and (d) proprietary trading securities. Investment Companies 1. Initial measurement guidance, which requires investments to be initially measured at transaction price 2. Subsequent measurement guidance on investments in debt and equity securities 3. Measurement guidance on (a) dividends and interest, (b) investment securities sold, (c) capital stock sold, and (d) other accounts receivable, such as receivables from related parties, including expense reimbursement receivables from affiliates and variation margin on open futures contracts 4. Measurement guidance on foreign currency gains or losses in Subtopic , Financial Services Investment Companies Foreign Currency Matters. Investment companies and brokers and dealers in securities would not be allowed to use the proposed practicability exception (see section on Equity Securities below) to fair value measurement for investments in nonmarketable equity securities. Investments in Agricultural Cooperatives of Farmers 1. Recognition guidance in paragraphs and Initial measurement guidance in paragraphs through

4 3. Subsequent measurement guidance in paragraphs and Certain Exchange Memberships of Brokers and Dealers in Securities 1. Initial measurement guidance in paragraphs and Subsequent measurement guidance in paragraphs and Federal Home Loan Bank and Federal Reserve Bank Stock of Banks 1. Subsequent measurement guidance in paragraph National Credit Union Share Insurance Fund Deposits of Credit Unions 1. Subsequent measurement guidance in paragraph (An entity also would apply the proposed impairment model for nonmarketable equity securities to the following financial assets: (a) Investments in exchange memberships recognized as ownership interests that are held by brokers and dealers within the scope of Topic 940, Financial Services Brokers and Dealers, and (b) Investments in Federal Home Loan Bank and Federal Reserve Bank stock that are held by depository and lending institutions within the scope of Topic 942, Financial Services Depository and Lending.) The following specialized guidance would be superseded in the relevant industry Topics in the Codification. Therefore, such entities would apply the tentative model for classification and measurement of such instruments: Depository and Lending Institutions 1. Initial measurement guidance on debt-equity swaps 2. Subsequent measurement guidance on (a) debt-equity swaps and (b) short sales of securities. Mortgage Banks 1. Initial measurement guidance on (a) affiliated transactions and (b) loans held as long-term investments 2. Subsequent measurement guidance on (a) loans held for sale and (b) securitizations of mortgage loans held for sale. Initial Measurement of Financial Instruments The initial measurement principle would depend on the subsequent measurement of a financial instrument. Financial instruments subsequently measured at fair value with all changes in fair value recognized in net income (FVNI) would be initially measured at fair value. Financial instruments subsequently measured at fair value with fair value changes recognized in other comprehensive income (FVOCI) or subsequently measured at amortized cost would be initially measured at the transaction price. 4

5 In certain circumstances, an entity would be required to evaluate whether the consideration given or received at recognition for a financial instrument that is not otherwise required to be initially measured at fair value indicates that an element other than the financial instrument is included in the transaction. Subsequent Measurement of Financial Instruments The classification and measurement of financial assets would be based on both the contractual cash flow characteristics of the financial assets and the entity s business strategy for the financial assets. Contractual Cash Flow Characteristics Assessment Solely Principal and Interest A financial asset would be eligible for a measurement category other than FVNI (depending on the business model within which it is held) if the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (P&I). Interest is consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time. Principal is understood as the amount transferred by the holder on initial recognition. 1. If the financial asset contains a component other than principal and the consideration for the time value of money and the credit risk of the instrument, the financial asset must be measured at FVNI. 2. If the financial asset only contains components that are principal and the consideration for the time value of money and the credit risk of the instrument but the relationship between them is modified (for example, the interest rate is reset and the frequency of reset does not match the tenor of the interest rate), an entity must consider the effect of the modification when assessing whether the cash flows on the financial asset are still consistent with the notion of solely P&I. 3. If the financial asset only contains components that are principal and the consideration for the time value of money and the credit risk of the instrument and the relationship between them is not modified, the financial asset would be eligible for a measurement category other than FVNI (depending on the business model within which it is held). Contingent Cash Flows A contractual term that changes the timing or amount of payments of principal and interest would not preclude the financial asset from a measurement category other than FVNI as long as any variability only reflects changes in the time value of money and the credit risk of the instrument. The probability of contingent cash flows that are not solely P&I should not be considered. Financial assets that contain contingent cash flows that are not solely P&I must be measured at FVNI. An exception, however, will be made for extremely rare scenarios. 5

6 Assessment of Economic Relationship between P&I A entity would need to compare the financial asset under assessment to a benchmark instrument that contains cash flows that are solely P&I to assess the effect of the modification in the economic relationship between P&I. An appropriate benchmark instrument would be a contract of the same credit quality and with the same terms, except for the contractual term under evaluation. If the difference between the cash flows of the benchmark instrument and the instrument under assessment is more than insignificant, the instrument must be measured at FVNI because its contractual cash flows are not solely P&I. Prepayment and Extension Options A prepayment or extension option, including those that are contingent, does not preclude a financial asset from a measurement category other than FVNI as long as these features are consistent with the notions of solely P&I. Application to Beneficial Interests in Securitized Financial Assets A beneficial interest in a securitized financial asset has contractual cash flow characteristics that are payments of principal and interest on the principal amount outstanding, if all of the following three conditions are met: 1. The contractual terms of the beneficial interest being assessed for classification (without looking through to the underlying pool of financial instruments) give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (for example, the interest rate on the beneficial interest is not linked to a commodity index). 2. The underlying pool of financial instruments has the following cash flow characteristics: a. The underlying pool must contain one or more instruments that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. b. The underlying pool may also include instruments that either: i. Reduce the cash flow variability of the instruments in (2)(a) above and, when combined with the instruments in (2)(a), result in cash flows that are solely payments of principal and interest on the principal amount outstanding (for example, an interest rate cap or floor or a contract that reduces the credit risk on some or all of the instruments in (2)(a)). ii. Align the cash flows of the tranches of beneficial interests with the cash flows of the pool of underlying instruments in (2)(a) to address differences in and only in any of the following: 1. Whether the interest rate is fixed or floating 2. The currency in which the cash flows are denominated including inflation in that currency 6

7 3. The timing of the cash flows. (An entity must look through until it can identify the underlying pool of instruments that are creating [rather than passing through] the cash flows. This is the underlying pool of financial instruments.) 3. The exposure to credit risk in the underlying pool of financial instruments inherent in the tranche of beneficial interest is equal to or lower than the exposure to credit risk of the underlying pool of financial instruments (for example, this condition would be met if the underlying pool of instruments were to lose 50 percent as a result of credit losses and under all circumstances the tranche would lose 50 percent or less). If the holder of a beneficial interest in securitized financial assets cannot assess the above criteria at initial recognition, the beneficial interest must be measured at fair value with all changes in fair value recognized in net income. Furthermore, if the underlying pool of financial instruments can change after initial recognition in such a way that the pool may not meet the criterion in item 2 above, then the beneficial interest must be measured at fair value with all changes in fair value recognized in net income. Business Model Assessment Financial assets are classified at initial recognition into one of three classification categories on the basis of an entity s business model. The business model assessment only applies to financial assets that pass the contractual cash flow characteristics assessment. Financial assets that fail the contractual cash flow characteristics assessment are classified and measured at FVNI. The classification of financial asset(s) is determined at origination or acquisition by the entity s key management personnel on the basis of how the asset(s) will be managed together with other financial assets within a distinct business model. An entity may have more than one business model for managing its financial assets. Amortized Cost Financial assets would qualify for amortized cost if the assets are held within a business model whose objective is to hold the assets in order to collect contractual cash flows. Fair Value through Other Comprehensive Income (FVOCI) Financial assets would qualify for classification and measurement at FVOCI if they are managed within a business model whose objective is both to hold the financial assets to collect contractual cash flows and to sell the financial assets. Fair Value through Net Income (FVNI) FVNI is the residual category, that is, financial assets that fail the amortized cost and FVOCI business model assessment will be measured at FVNI. 7

8 Application Guidance for Business Model Assessment for Financial Assets The application guidance to be included in the proposed standard would incorporate the following concepts to assist stakeholders in applying the principle associated with the business model assessment for classification and measurement of financial assets: Amortized Cost Category 1. Examples of types of business activities that would be consistent with an amortized cost classification. 2. Sales of financial assets as a result of significant credit deterioration would be consistent with the objective of amortized cost classification if such sales are to maximize the collection of contractual cash flows through sales rather than through cash collection. Sales for other reasons should be very infrequent. 3. Sales of financial assets that result from managing the credit exposure due to concentration of credit risk would not be consistent with the primary objective of amortized cost classification. FVOCI Category 1. Examples of types of business activities that would be consistent with a FVOCI classification. 2. Financial assets classified at FVOCI may be held for collection of contractual cash flows or sold. That is, management may hold the assets for an unspecified period of time or sell the assets to meet certain objectives. FVNI Category 1. Financial assets that are held for sale at initial recognition would not be consistent with the primary objective of amortized cost or FVOCI classification. Financial Assets Subsequently Identified For Sale An entity may have financial assets that qualify for the amortized cost category at initial recognition that it subsequently identifies for sale. In such circumstances, an entity should continue to classify and measure the financial assets at amortized cost (less impairment) and recognize resulting gains, if any, only when the sale is complete. Impairment of a financial asset subsequently identified for sale should be recognized in net income in an amount equal to the entire difference between the asset s amortized cost basis and its fair value. An entity may anticipate that a portion of a pool of similar financial assets will be sold while the other portion will continue to be held for collection of contractual cash flows. However, individual assets that will be subsequently sold are not specifically identified for sale at initial recognition. In these circumstances, an entity must classify and measure all financial assets into one of the three categories according to the business model assessment. An entity would not be prevented from managing the same or similar financial assets through different business models. 8

9 Equity Securities Equity securities would be measured at FVNI. Both public and nonpublic entities would be provided with a practicability exception to fair value measurement for investments in nonmarketable equity securities. The practicability exception would permit nonmarketable equity securities to be measured at cost less any impairment plus or minus adjustments in fair value when information about a change in price is observable. An entity would use observable price changes in orderly transactions for the identical or a similar financial asset with the same issuer as an input for adjusting the carrying value of a nonmarketable equity security. When information about a change in price is observable, the entity would be required to adjust the carrying value of a nonmarketable equity security upward or downward. For a nonmarketable equity security accounted for under the practicability exception, an entity would apply a single-step approach in which the entity assesses qualitative factors (that is, impairment indicators) to determine whether it is more likely than not that the fair value of a nonmarketable equity security is less than its carrying amount (that is, an impairment exists). If an impairment exists, an impairment loss would be recognized in earnings equal to the entire difference between the investment s carrying value and its fair value. Financial Liabilities An entity would measure financial liabilities at amortized cost unless either of the following conditions is met: 1. Financial liabilities for which an entity s business strategy at acquisition, issuance, or inception, is to subsequently transact at fair value 2. Financial liabilities that are short sales. Financial liabilities that meet either of the conditions above would be classified as FVNI. In circumstances in which financial assets will be used to settle nonrecourse financial liabilities, an entity should measure the financial liabilities consistently with the measure of the related financial assets, taking into account the same factors in determining each amount. For example, if both the assets and the liabilities are measured at amortized cost and the reported amount of the assets is reduced by a credit impairment, the reported amount of the nonrecourse liabilities should include the same reduction. Loan Commitments, Revolving Lines of Credit, and Standby Letters of Credit (Issuer s Accounting) Loan commitments, revolving lines of credit, and standby letters of credit would not be required to meet the characteristics of the instrument criterion. The potential lender (the issuer) would measure a loan commitment on the basis of the likelihood of the exercise of the loan commitment. 9

10 If the likelihood of exercise of the loan commitment is not remote, the issuer would measure the loan commitment consistent with the measurement of the underlying loan under the tentative model. That is, if the underlying loan is measured at fair value, the loan commitment would be measured at fair value. Similarly, if the underlying loan is measured at amortized cost, any commitment fees received would be deferred and recognized over the life of the funded loan as an adjustment of yield in accordance with existing guidance in Subtopic , Receivables Nonrefundable Fees and Other Costs. If the likelihood of exercise of the loan commitment is remote, the issuer would recognize any commitment fee received as fee income over the commitment period in accordance with existing guidance in Subtopic Hybrid Financial Instruments Hybrid financial assets would be classified and measured in their entirety. Hybrid financial assets that contain cash flows that are not solely payment of principal and interest would be classified and measured at FVNI. Bifurcation and separate accounting analysis (as required under Topics 815, 470, and 480) for hybrid financial liabilities should be performed before applying the tentative model. Therefore, only a financial liability host or a debt-equity hybrid instrument recognized as a financial liability in its entirety or as having a separately reportable financial liability component would be classified and measured in accordance with the tentative model. Hybrid Nonfinancial Instruments A hybrid nonfinancial asset that contains an embedded derivative that requires bifurcation and separate accounting under Subtopic would be measured in its entirety at fair value (with changes in fair value recognized in net income). For a hybrid nonfinancial liability, an entity would apply the bifurcation and separate accounting requirements in Subtopic and account for the embedded derivative in accordance with Topic 815. The financial liability host that results from separation of the nonfinancial embedded derivative would be subject to the tentative model. At initial recognition, an entity would be permitted to initially and subsequently measure the hybrid nonfinancial liability at fair value (with changes in fair value recognized in net income) if after applying Subtopic an entity determines that an embedded derivative that requires bifurcation and separate accounting exists. The fair value option in paragraph (f) that permits an entity to measure at fair value (with changes in fair value recognized in net income) a host financial instrument resulting from the separation of an embedded nonfinancial derivative from a nonfinancial hybrid instrument under paragraph would be eliminated. 10

11 Fair Value Option for Financial Instruments An unconditional fair value option would not be provided for financial assets or financial liabilities. However, an entity would be permitted to measure a group of financial assets and financial liabilities at fair value with changes in fair value recognized in net income if both of the following conditions are met: 1. The entity manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) on a fair value basis. 2. The entity provides information on that basis to the reporting entity s management. An entity would only be permitted to elect that conditional fair value option for a group of financial assets and financial liabilities at recognition, and the election could not subsequently be changed. An entity also would be able to elect at initial recognition to apply a conditional fair value option for hybrid financial liabilities to avoid bifurcation and separate accounting for an embedded derivative feature unless either of the following occurs: 1. The embedded derivative or derivatives do not significantly modify the cash flows that otherwise would be required by the contract; or 2. It is clear with little or no analysis when a similar hybrid financial instrument is first considered that separation of the embedded derivative or derivatives is prohibited. Recognition and Presentation of Changes in Fair Value Attributable to Changes in Own Credit Changes in fair value that result from a change in a reporting entity s own credit risk for financial liabilities that are designated under the fair value option and, thus, measured at FVNI would be recognized and presented separately in other comprehensive income (OCI). Cumulative gains and losses recognized in OCI associated with changes in own credit will be recognized in net income upon the settlement of the liability. The entire risk in excess of a base market risk, such as a risk-free interest rate, would be considered as the change in own credit or an alternative method that an entity deems as a more faithful measurement of such a risk. Recognition of Realized Gains and Losses For financial assets classified as FVOCI, realized gains and losses from sales or settlements would be recognized in net income. Recognition of Foreign Currency Gains and Losses for Foreign-Currency-Denominated Debt Instruments Classified at FVOCI For foreign-currency-denominated debt instruments classified as FVOCI, an entity would recognize foreign currency gains and losses in net income. An entity should calculate the measurement of the foreign currency gain or loss using a method based on fair value of the instrument, for example, by measuring the instrument at fair value in the foreign currency times the difference between the end of period spot exchange rate and the beginning of the 11

12 period spot exchange rate. Other fair-value-based approaches also would be appropriate and the method would be applied consistently period over period. Assessment of the Need for a Valuation Allowance against Deferred Tax Assets Related to Debt Instruments Classified and Measured at Fair Value though Other Comprehensive Income (FVOCI) An entity should evaluate the need for a valuation allowance on deferred tax assets related to debt instruments classified and measured at FVOCI separately from its evaluation of other deferred tax assets. Reclassification of Financial Assets Change in Business Model An entity would be required to prospectively reclassify financial assets when (and only when) the business model changes, which should be very infrequent. Changes in business model that require reclassifications must be (1) determined by an entity s senior management as a result of external or internal changes, (2) significant to an entity s operations, and (3) demonstrable to external parties. Reclassification Date An entity would reclassify financial assets on the last day of the reporting period in which there is a change in an entity s business model. Reclassification Mechanics For reclassifications of financial assets as a result of a change in an entity s business model, when financial assets are reclassified from: 1. FVNI to amortized cost The fair values of financial assets on the reclassification date would become their new carrying amounts for amortized cost purposes. 2. Amortized cost to FVNI The fair values of financial assets on the reclassification date would become their new carrying amounts with the difference between the previous carrying amounts and fair values recognized in net income. 3. FVOCI to FVNI The financial assets would continue to be measured at fair value and any accumulated other comprehensive income balances should be derecognized from other comprehensive income and recognized in net income on the date of reclassification. 4. FVNI to FVOCI The financial assets would continue to be measured at fair value and certain changes in fair value after the reclassification date would be recognized in other comprehensive income. 5. Amortized cost to FVOCI The financial assets would be measured at fair value on the reclassification date with any difference between the previous carrying amounts and the fair values recognized in other comprehensive income. 6. FVOCI to amortized cost The financial assets should be measured at fair value on the reclassification date and the accumulated other comprehensive income balance at the 12

13 reclassification date would be derecognized through other comprehensive income with an offsetting entry against the financial assets balances. As a result, the financial assets would be measured at the reclassification date at amortized cost as if they had always been classified that way. Equity Method of Accounting Criteria for Application of the Equity Method of Accounting An entity would be required to classify and measure equity investments that otherwise would qualify for the equity method of accounting at fair value with changes in fair value included in net income if the investment is held for sale. An entity would perform a held-for-sale evaluation upon the investment s initial qualification for the equity method of accounting, and the entity could not subsequently change the classification of the investment. The following indicators would be determinative that an investment is held for sale: 1. The entity has specifically identified potential exit strategies even though it may not yet have determined the specific method of exiting the investment. 2. The entity has defined the time at which it expects to exit the investment, which may be either an expected date or range of dates; a time defined by specific facts and circumstances, such as achieving certain milestones; or the investment objectives of the entity. Impairment of Equity Method Investments An entity would apply a single-step impairment approach for equity method investments in which the entity assesses qualitative factors (that is, impairment indicators) to determine whether an equity method investment is impaired. A single impairment model would be applied to both marketable and nonmarketable equity method investments. An entity that accounts for an investment under the equity method may not reverse previously recognized impairment losses. Fair Value Option for Equity Method Investments A fair value option would not be available for equity method investments. Financial Statement Presentation of Financial Instruments Some of the following presentation requirements apply only to public entities. Statement of Financial Position An entity would be required to separately present financial assets and financial liabilities on the statement of financial position by classification and measurement category. Financial Assets and Financial Liabilities Measured at Amortized Cost 13

14 A public entity would be required to present parenthetically on the face of the statement of financial position the fair value, measured consistently with the requirements in Topic 820, for financial assets and financial liabilities, except for demand deposit liabilities, that are measured at amortized cost. A public entity would be required to disclose a present value amount for demand deposit liabilities in the notes to the financial statements. Receivables and payables due in less than a year would not be subject to the parenthetical disclosure of fair value. A nonpublic entity would not be required to present parenthetically on the face of the statement of financial position or disclose in the notes to the financial statements the fair value amounts for financial assets and financial liabilities measured at amortized cost. All entities would be required to separately present cumulative credit losses on the face of the statement of financial position. Financial assets that qualify for the amortized cost category at initial recognition that are subsequently identified for sale will be presented in a separate line item on the face of the statement of financial position. Financial Liabilities Measured at Fair Value All entities would be required to present parenthetically on the face of the statement of financial position the amortized cost of an entity s own debt that is measured at fair value. Equity Method Investments Equity method investments that are held for sale would be presented in a separate line item on the face of the statement of financial position Statement of Comprehensive Income Financial Assets At a minimum, an entity would be required to present in net income an aggregate amount for realized and unrealized gains or losses for financial assets measured at FVNI. An entity would be required to separately present the following items in net income for both financial assets measured at FVOCI and financial assets measured at amortized cost: 1. Current-period interest income 2. Current-period credit losses 3. Realized gains and losses. 14

15 Financial Liabilities At a minimum, an entity would be required to present in net income an aggregate amount for realized and unrealized gains or losses for financial liabilities measured at FVNI. An entity would be required to separately present the following items in net income for financial liabilities measured at amortized cost: 1. Current-period interest expense 2. Realized gains and losses. Disclosures of Financial Assets and Financial Liabilities Financial Instruments Measured at Amortized Cost An entity with financial instruments that are measured at amortized cost for which fair value information is presented parenthetically on the statement of financial position would disclose the following about the fair value information: 1. The level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3) 2. For fair value measurements categorized within Level 3 of the fair value hierarchy, quantitative information about the significant unobservable inputs used in the fair value measurement 3. For fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement 4. A description of the changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments, including the reason(s) for making the change, if any, during the period 5. For fair value measurements categorized within Level 3 of the fair value hierarchy, a description of the valuation processes used by the reporting entity (including, for example, how an entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period). An entity that has sold financial assets that were carried at amortized cost would disclose the following: 1. The net carrying amount of the asset(s) sold 2. The net gain or loss in accumulated other comprehensive income for any derivative that hedged the forecasted acquisition of the amortized cost security 3. The related realized gain or loss on asset(s) sold 4. The circumstances leading to the decision to sell the asset(s) 5. The amortized cost basis, fair value, and the unrealized gain or loss on asset(s) subsequently identified for sale. 15

16 Financial Assets Classified at FVOCI An entity with financial assets classified at FVOCI would disclose the following: 1. The amortized cost basis of the assets 2. Fair value 3. Total gains for financial assets with net gains in accumulated other comprehensive income 4. Total losses for financial assets with net losses in accumulated other comprehensive income. An entity that has sold financial assets classified at FVOCI would disclose the following: 1. The proceeds from sales and the gross realized gains and gross realized losses that have been recognized in earnings as a result of those sales 2. The amount of the net unrealized holding gain or loss on assets for the period that has been included in accumulated other comprehensive income and the amount of gains and losses reclassified out of accumulated other comprehensive income into earnings for the period. Reclassification of Financial Assets Due to a Change in Business Model For financial assets that have been reclassified because of a change in an entity s business model, an entity would disclose the following: 1. The date of reclassification 2. A detailed explanation of the reason for the change in business model and a qualitative description of its effect on the entity s financial statements 3. The amount reclassified into and out of each category. Core Deposit Liabilities A public entity would not be required to disclose a present value amount for demand deposit liabilities in the notes to the financial statements. However, a public entity would be required to provide, on the basis of an appropriate level of disaggregation by significant types of core deposit liabilities, the following disclosures on an annual basis: 1. The core deposit liability balance 2. The implied weighted-average maturity period 3. The estimated all-in-cost-to-service rate. (A nonpublic entity would not be required to provide disclosures about its core deposit liabilities.) 16

17 Other Disclosures Entities that apply the practicability exception to fair value measurement for investments in nonmarketable equity securities would disclose the following: 1. The carrying amount of equity securities that the entity concludes are nonmarketable 2. The amount of any impairments and upward and downward adjustments, both annual and cumulative 3. As of the date of the most recent statement of financial position, additional information (in narrative form) that provides sufficient information to allow financial statement users to understand the quantitative disclosures and the information that the entity considered (both positive and negative) in reaching the carrying amounts and upward or downward adjustments. An entity with nonrecourse financial liabilities would disclosure the following: 1. Qualitative information about the relationship between financial assets and the nonrecourse financial liabilities that will be used to settle them, and the line items where they are reported 2. The carrying amounts of the financial liabilities and the related financial assets that will be used to settle the nonrecourse financial liabilities. For changes in fair value due to changes in own credit risk (applicable to financial liabilities for which an entity has elected the fair value option), an entity would disclose the following: 1. The amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in the instrument specific credit risk 2. How the gains and losses attributable to changes in instrument specific credit risk were determined 3. If a liability is settled during the period, the amount (if any) presented in other comprehensive income that was realized in net income at settlement. Transition Guidance and Disclosures An entity would apply the tentative model to all outstanding instruments as of the effective date and record a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is effective. Upon transition an entity would disclose the following: 1. The nature and reason for the change in accounting principle, including an explanation of the newly adopted accounting principle. 2. The method of applying the adoption. 3. The effect of the adoption on any line item in the statement of financial position, if material, as of the beginning of the first period for which the guidance is effective. Presentation of the effect on financial statement subtotals is not required. 17

18 4. The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the first reporting period in which the guidance is effective Early Adoption Early adoption of the tentative model would not be permitted, except for the requirement to present separately in other comprehensive income the changes in fair value that result from a change in a reporting entity s own credit risk for financial liabilities that are designated under the proposed fair value option and thus measured at FVNI. Specifically, an entity would be permitted to early adopt this separate presentation requirement for only those hybrid financial liabilities that would continue to qualify and be measured at FVNI under the tentative model as if the entity had early adopted the proposed conditional fair value option requirement, which permits an entity to measure the hybrid financial liability at FVNI in order to avoid bifurcation and separate accounting for an embedded derivative feature. Effective Date The effective date will be discussed during final deliberations on the tentative model after considering the feedback received on the Exposure Draft. However, the Exposure Draft will include a question for nonpublic stakeholders to seek feedback on a delayed effective date for nonpublic financial and nonpublic nonfinancial entities beyond what will be required of public entities. Comment Period The comment letter period for the proposed Update would be the longer of (1) 90 days from the exposure date of the proposed Update or (2) April 30,

19 Credit Impairment See Exposure Draft. 19

20 Hedge Accounting The Board has not begun redeliberations on hedge accounting. See Proposed Accounting Standards Update for a summary of the Board s decisions to date. In December 2010, the IASB published the Exposure Draft, Hedge Accounting. The comment period for the Exposure Draft ended on March 9, The FASB participated in the IASB s discussion of the feedback that the IASB received on its Exposure Draft and will consider the feedback during its redeliberations. On February 9, 2011, the FASB issued an Invitation to Comment, Selected Issues about Hedge Accounting, to solicit input on the IASB Exposure Draft, in order to improve, simplify, and bring about convergence of the financial reporting requirements for hedging activities. The comment period on the Invitation to Comment ended on April 25, The FASB has discussed the feedback received on the Invitation to Comment, which it will consider during its redeliberations. 20