United States

Proposed narrow-scope amendments to financial instruments standards


The Financial Accounting Standards Board recently issued a proposed Accounting Standards Update (ASU), Codification Improvements—Financial Instruments, to clarify and correct certain financial instrument standards, namely, ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; and ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The proposed clarifications and corrections to each of these standards are summarized in part below. Reference should be made to the proposed ASU for a complete understanding of its provisions.

Related to ASU 2016-13, the proposed amendments would permit an entity to:

  • Measure the allowance for credit losses on accrued interest, and report accrued interest and its related allowance, separately from other components of the amortized cost basis of the assets to which it relates
  • Separately disclose the total amount of accrued interest included in the amortized cost basis of various financial assets as a single balance to meet certain disclosure requirements
  • Make an accounting policy election to write off accrued interest amounts either through a reversal of interest income or through an adjustment to the allowance 
  • Make an accounting policy election to not recognize an allowance for credit losses on accrued interest if the entity writes off uncollectible accrued interest on a timely basis

Additionally, the proposed amendments related to ASU 2016-13 would:

  • Address the accounting for the allowance for credit losses or valuation allowance when transferring loans and debt securities between classifications or categories
  • Indicate that recoveries should be included when estimating the allowance for credit losses, but should not exceed the aggregate amount of previous writeoffs
  • Clarify that all reinsurance recoverables are within the scope of Subtopic 326-20
  • Remove the prohibition of using projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments
  • Permit adjusting the effective interest rate used to discount expected future cash flows for expected prepayments on financial assets, to appropriately isolate credit risk in determining the allowance for credit losses
  • Clarify that the estimated costs to sell should be considered when foreclosure on a financial asset is probable and the entity intends to sell rather than operate the collateral
  • Indicate that the amortized cost basis of line-of credit arrangements that are converted to term loans should be presented within each credit quality indicator in the origination year that corresponds with the period in which the most recent credit decision was made by the entity
  • Indicate that consideration should be given to extension or renewal options that are not unconditionally cancellable by the entity in determining the contractual term of a financial asset

The proposed amendments related to ASU 2017-12 would clarify certain matters related to:  

  • Partial-term fair value hedges
  • The amortization and disclosure of a fair value hedge basis adjustment
  • Considering the contractually specified interest rate being hedged when applying the hypothetical derivative method
  • The transfer of a debt security from held-to-maturity to available-for-sale in accordance with the standard’s transition provisions

The proposed amendments related to ASU 2016-01 would clarify that:

  • Entities that are not public business entities are exempt from fair value disclosure requirements for financial instruments that are not measured at fair value on the balance sheet, including held-to-maturity debt securities
  • The remeasurement of an equity security without a readily determinable fair value when an orderly transaction is identified for an identical or similar investment of the same issuer is a nonrecurring fair value measurement, subject to the relevant disclosure requirements of Topic 820, Fair Value Measurement

The proposed ASU is available for comment until December 19, 2018.