The FASB has just issued a long-awaited, and much-debated, Exposure Draft of a Proposed Accounting Standards Update (ASU) that would dramatically change the accounting for financial instruments.

As noted in a press release (full text available here):

Among other changes, the proposed ASU would seek to bring more transparency into financial statements by incorporating both amortized cost and fair value information about financial instruments held for collection or payment of cash flows….The proposal also aims at providing more timely information on anticipated credit losses to financial statement users by removing the “probable” threshold for recognizing credit losses. It seeks to better portray the results of asset-liability management activities at financial institutions. In the proposal, non-public entities with less than $1 billion in total consolidated assets would be allowed a four year deferral beyond the effective date from certain requirements relating to loans and core deposits.

Other potential improvements addressed by the ASU include:

  • A single credit impairment model for both loans and debt securities.
  • The criteria for hedge accounting would be simplified in order to improve the consistency in the reporting of the economic impacts of hedging activities.

FASB Chairman Robert Herz stated:

“The changes we are proposing are aimed at improving the accounting for financial  instruments in a number of ways. The proposal would impact the reporting by financial institutions and all other entities that have financial instruments as the goal of greater transparency in financial statements is pursued. We encourage all interested parties to carefully review the proposal and provide us with your comments. Through its due process, the FASB will ensure that it obtains and considers a broad range of input on this important proposal.”

The full text of the proposed ASU is available here, and the comment period for the proposed ASU will run through September 30, 2010.

A podcast featuring an in-depth audio interview with Bob Herz talking about financial instruments is available here.