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Financial Instruments. Future Changes in Standards? Exposure Draft 2010. Financial Instruments NOW. Some financial instruments are currently reported at fair value on a routine basis: Those included in trading and available for sale investment portfolios

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Presentation Transcript
financial instruments

Financial Instruments

Future Changes in Standards?

Exposure Draft 2010

financial instruments now
Financial Instruments NOW
  • Some financial instruments are currently reported at fair value on a routine basis:
    • Those included in trading and available for sale investment portfolios
    • Those for which the fair value option has been adopted at acquisition date
  • Most liabilities are carried at amortized cost with fair values disclosed in the notes
what is a financial instrument
What is a Financial Instrument

Financial Instrument

Cash, evidence of an ownership interest in an entity, or a contract that both:

  • a. Imposes on one entity a contractual obligation either:
    • 1. To deliver cash or another financial instrument to a second entity
    • 2. To exchange other financial instruments on potentially unfavorable terms with the second entity.
  • b. Conveys to that second entity a contractual right either:
    • 1. To receive cash or another financial instrument from the first entity
    • 2. To exchange other financial instruments on potentially favorable terms with the first entity.
fasb exposure draft
FASB Exposure Draft
  • Under the proposal, almost all financial instruments would be reported at fair value on the balance sheet.
  • This would include many liabilities currently carried at amortized cost
    • Exception: long-term debt related to long-lived assets like a mortgage on a building
  • In some cases, the gain/loss would be in other comprehensive income rather than net income
exposure draft
Exposure Draft
  • If this ED becomes a standard (as written)
    • We would be getting rid of the 3-categories of investments we have from SFAS115 (trading, available for sale, and held-to-maturity)
    • In effect, we could still have HTM but we would have fair value on the balance sheet and the gain/loss would be reported in “other comprehensive income” rather like what we currently do for available-for-sale securities
amortized cost is also important
Amortized Cost is Also Important
  • The FASB doesn’t want to lose valuable information so the proposal calls for reporting BOTH fair value and amortized cost on the face of the balance sheet
  • Complications:
    • Credit-worthiness affects borrowing rate
    • a lower credit rating = higher interest rate
    • Higher interest rate = lower present value (when using level 2 measurements)
balance sheet display investment side
Balance Sheet Display – Investment Side

*

**

*Amortization of discount/premium is charged to credit impairment allowance

**To bring carrying value to fair value of the financial instrument

exposure draft1
Exposure Draft
  • Proposal includes disclosure of the portion of the gain/loss that is related to the change in credit score separately from the gain/loss related to general changes in interest rates
  • Choice of equity method for investments will be limited to situations where the investee is closely related to the investor’s business strategy. Otherwise, will be reported at fair value
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