financial instruments
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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Financial Instruments
Future Changes in Standards?Exposure Draft 2010
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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
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What is a Financial InstrumentFinancial InstrumentCash, 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.
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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
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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
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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)
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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
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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