The Boards have divided the project into three areas: 1) classification and measurement, 2) impairment, and 3) hedging. The FASB will probably re-expose their decisions on classification and measurement in early 2012; impairments will probably be re-exposed later in 2012. With respect to hedging, there is still too much work to be done to predict when a proposed standard will be issued, and therefore hedge accounting is not included as part of my summary.
Classification and Measurement:
- FI are classified and subsequently measured based on characteristics of the FI and the entity’s business strategy. The business strategy classification criterion requires a higher level of aggregation, and differs from the current model of classifying FI based on the business intent of individual instruments.
- Guidance based on the FI characteristics will typically result in the following classifications.
- Most equity securities will be measured at fair value (FV) with changes in FV going to net income (NI).
- Derivatives will be measured at FV-NI, except cash flow hedges and hedges of a net investment in a foreign operation.
- Plain-vanilla loans, trade receivables, and certain private placement debt securities are likely to qualify for amortized cost measurement.
- Other debt securities currently classified as held-to-maturity or available-for-sale would likely be measured at FV with changes in FV going to OCI with recycling.
- Most financial liabilities will be measured at amortized cost, with fair value measurement as the exception; financial liabilities will not be measured at FV-OCI.
- Reclassification between categories is prohibited, even when a company subsequently sells or intends to sell assets that were part of a portfolio initially measured at amortized cost.
- For hybrid FI, current U.S. GAAP is retained that requires bifurcation and separate accounting of embedded derivatives if certain criteria are met.
- A practicability exception to fair value measurement is provided for nonpublic entities that hold nonmarketable equity securities. Carrying value is adjusted only when a change in price is observable.
- Equity method investments no longer have a fair value option. However, companies are required to measure investments at FV-NI if held for sale, even if the investment would otherwise qualify for equity method treatment.
- Unconditional fair value option not allowed.
- Parenthetical presentation of amortized cost must be shown on the balance sheet for own debt that is measured at fair value. Also, parenthetical presentation of fair value required for financial assets and liabilities measured at amortized cost.
- Cumulative credit losses must be shown on the face of the balance sheet.
- For assets measured at amortized cost or FV-OCI:
- Three-bucket approach. Assets in Bucket 1 will reflect expected losses over the next 12 or 24 months. Lifetime impairments will be recognized for assets in Buckets 2 and 3.
- All assets are initially included in Bucket 1 and transfers between buckets would be based on deterioration or improvement in credit quality (i.e., no day-1 losses).
- For equity method investments and nonmarketable equity securities with the practicability exception, single step impairment approach requires company to assess qualitative factors to determine whether impairment exists.
- Impairment losses on equity method investments are not reversed.