The Financial Accounting Standards Board on May 26 issued an Exposure Draft of a proposed Accounting Standards Update (ASU) entitled “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities,” intended to improve financial statement reporting by incorporating both amortized cost and fair value information about financial instruments held for collection or payment of cash flows. The proposal would require (1) presentation of both amortized cost and fair value on an entity’s statement of financial position for most financial instruments held for collection or payment of contractual cash flows and (2) the inclusion of both amortized cost and fair value information for these instruments in determining net income and comprehensive income. The proposal would require that financial instruments held for sale or settlement (primarily derivatives and trading financial instruments) be recognized and measured at fair value with all changes in fair value recognized in net income. The proposal would provide nonpublic entities with less than $1 billion in total assets with four years to implement the new requirements as they relate to loans, loan commitments, and core deposit liabilities that meet certain criteria.

Nutter Notes: All entities that hold financial instruments would be affected by the proposed requirements. The extent of the effect would depend on the relative significance of financial instruments to an entity’s operations and financial position as well as the entity’s business strategy. The proposal acknowledges that traditional banks, which currently measure a large number of financial assets at amortized cost, would be affected to a greater extent than brokers and dealers in securities and investment companies that currently measure most financial assets at fair value. Insurance companies would be affected to varying degrees depending on their asset mix, with companies that invest more heavily in equity securities being the most affected. Some specific types of financial instruments, such as pension obligations and leases, would be exempt from the proposed guidance. Also, short-term receivables and payables would continue to be measured at amortized cost (plus or minus fair value hedging adjustments). Comments on the proposed ASU must be submitted by September 30, 2010. The FASB intends to hold public roundtable meetings immediately following the close of the comment period in October to collect further input.