FASB Moves Financial Instruments Standard Ahead

Impact to Financial Institutions Appears Limited

A divided Financial Accounting Standards Board (FASB) gave its permission to conclude a project that was undertaken to provide external users of financial statements a clearer picture regarding complex financial instruments that some financial institutions report on their financial statements. Although the drafting of the new standard was approved to proceed, almost all FASB members expressed reservations or indicated the project fell short of what was originally intended when the FASB undertook the project of how best to classify and measure financial instruments.

Initial Criticism and Response 

In February 2013, the FASB released Proposed Accounting Standards Update (ASU) No. 2013-220, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which set out to overhaul the accounting for financial instruments by classifying instruments into three measurement categories. After intense criticism from financial institutions and auditors that the model was too complex, the FASB announced that it would make targeted improvements rather than sweeping changes to U.S. GAAP.

At its January 14, 2015, meeting, FASB concluded that all investments in equity securities, except those that qualify to be accounted for under the equity method, would be measured at fair value with changes recognized in current earnings. Also, those equity securities without a readily determinable fair value could be reported at its cost basis less any permanent impairment. FASB also decided that entities electing to use fair value to measure a financial liability must present separately in other comprehensive income the portion of value changed by its own credit risk.

Disclosure of Deposits

FASB also decided not to require additional disclosure regarding a financial institution's deposits. FASB originally proposed requiring disclosure of a breakdown of the different types of deposit accounts and total balances as well as weighted average life of the core deposit liabilities based upon the financial institution's experience, as well as disclosing the definition of what management considers its core deposits.

Please note, this standard is still in the proposal stage. Look for more updates from Eide Bailly as they become available. In the meantime, please contact your local Eide Bailly professional with any questions.