Proposed ASU on Financial Instruments

As you may recall the FASB and the IASB have been working on a number of joint projects. One of these projects is Accounting for Financial Instruments. As a result of this project FASB issued the Proposed Accounting Standards Update. Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815) on May 26, 2010. The comment period ends September 30, 2010,

Under this proposal,

• Most financial instruments would be measured at fair value in the statement of financial position each reporting period.
• For derivatives and financial instruments for which an entity’s strategy is trading the instruments, fair value would continue to be required, with all changes in fair value recognized in net income each reporting period.
• Changes in the fair value of equity securities, certain hybrid instruments, and financial instruments that can be contractually prepaid in such a way that the holder would not recover substantially all of its investment also would be recognized in net income each reporting period regardless of an entity’s business strategy with respect to those financial instruments.
• Financial instruments for which an entity’s business strategy is to hold for collection or payment(s) of contractual cash flows, the proposed guidance would recognize the utility to financial statement users of both fair value and amortized cost information by requiring a reconciliation from amortized cost to fair value on the face of the statement of position.
• Financial liabilities would be accounted for similar to financial assets, thus reflecting how financial assets and liabilities are managed together.
• Hedge accounting criteria would be simplified.

The FASB has scheduled a free webcast on Financial Instruments on June 30, 2010. You may register for it on the FASB website, http://www.fasb.org/.

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