Following up on Lisa’s post, I see that the FASB has summarized the key conclusions of this week’s Board meeting:

The Board agreed to propose a model to improve financial reporting for financial instruments.   The Board reached the following decisions:

  1. The Board agreed to propose that all financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost.   For those financial instruments whose change in value is recognized in other comprehensive income, amortized cost will be displayed on the balance sheet in addition to a fair value adjustment to arrive at fair value.
  2. The Board agreed to propose that changes in an instrument’s value may be recognized in other comprehensive income on the basis of qualifying criteria related to an entity’s management intent/business model and the cash flow variability of the instrument. The Board will provide additional guidance on how to apply those qualifying criteria.   The Board agreed to propose that changes in value for derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, will be recognized in net income.   The Board agreed to propose that for all financial instruments, interest and dividends will continue to be recognized in net income.   Credit impairments, as well as realized gains and losses from sale and settlement, also will be recognized in net income.   The classification of instruments will be determined at initial recognition of the instrument and will not be subsequently changed.
  3. The Board agreed to propose to require one statement of financial performance with subtotals for net income and other comprehensive income.  It also agreed to propose to continue to only require earnings per share for net income.

Point 1 reflects the discomfort that some Board members have expressed about fair valuing a firm’s own debt.  Leslie Seidman and Larry Smith both emphasized their concerns when they spoke at FASRI Office Hours.  (If you haven’t seen it, definitely take a look at my summary of Leslie’s comments about when FV is appropriate.)  Both 1 and 3 reflect a surprising degree of sensitivity to presentation issues.  Some fair value  changes will pass through ‘other comprehensive income’ — which no doubt will partly mollify the American Banking Association (again, thanks to Lisa for this pointer to the ABA).  But the Board is going to make sure that even these changes get a fair bit of exposure, with disclosure of fair values on the balance sheet, and (point 3) other comprehensive income subtotled on the income statement.  However, point 3′s decisions to “only require earnings per share for net income” probably means that analysts and the financial press will focus on net income, not comprehensive income.

It will be interesting to see if and how these decisions will change the tenor of the fair value debate (including this one between Hales, Waymire and Wilks).  The option to carry own debt at amortized cost will quiet some critics, but I wonder how many will be pleased with the role of management intent/business model.

These decisions are part of a larger project on Improvements to Recognition and Measurement of Financial Instruments, details here.