Classification and Measurement of Financial Instruments: ASU 2016‐01

• Date: 01 July 2016
• Author: Paul Munter,Oscar J. Holzmann
• Published date: 01 July 2016
• DOI: http://doi.org/10.1002/jcaf.22184

77

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22184

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FASB

Classification and Measurement of

Financial Instruments: ASU 2016-01

Oscar J. Holzmann and Paul Munter

INTRODUCTION

In an earlier issue of this

column,1 we reported on the

status of the efforts by the

Financial Accounting Stan-

dards Board (FASB) and the

International Accounting Stan-

dards Board (IASB) to improve

the classification and measure-

ment of financial instruments2

of their respective standards.

One year later, the IASB has

largely finished its standard set-

ting activities3 and the FASB

has moved forward to develop-

ing its guidance. In January

2016, the FASB revised its

guidance on classification and

measurement when it issued

Accounting Standards Update

(ASU) 2016-01.4

BACKGROUND

The issuance of ASU

2016-01 represents the culmi-

nation of the first phase of

a long process of developing

revised financial accounting

and reporting guidance for

financial instruments. The

FASB has long expressed

concern that while the com-

plexity, risks, and volume of

financial instruments have

been increasing, the applicable

accounting and financial state-

ment disclosure guidance has

failed to keep pace with those

changes. The global economic

crisis increased these concerns

and focused the FASB’s and

IASB’s attention on the goal of

providing financial statement

users with more decision-useful

information about an entity’s

involvement in financial instru-

ments, while reducing the com-

plexity in accounting for those

instruments and increasing

convergence between the appli-

cable U.S. generally accepted

accounting principles (GAAP)

and IFRS requirements in this

area.

The measurement of a

financial asset in accordance

with U.S. GAAP and IFRS

had historically depended on

the asset’s legal form and on

the holder’s intended use of the

asset. Seeking improvement

in the relevance of an entity’s

financial statement informa-

tion about financial assets, the

Boards agreed that to classify

and measure financial assets

a converged standard focused

on the financial instruments’

contractual cash flow character-

istics and the entity’s business

model could result in greater

comparability of financial

instrument information across

entities.5 In November 2009,

the IASB issued the first phase

of its new standard with IFRS

9 (2009),6 which required that

financial assets be classified

and measured at either amor-

tized cost or fair value through

profit or loss (FV-PL, where PL

is the same as NI, net income).

Through a series of updates

and amendments to IFRS 9,

the IASB arrived at its final

version of the standard in July

of 2014, which is effective for

annual periods beginning on

or after January 1, 2018. For

the most part, its classification

and measurement requirements

coincide with those included

in the FASB’s 2013 Exposure

Draft (ED)7; that is, it estab-

lishes that the classification and

measurement of a financial

asset is determined through

assessing the asset’s contractual

cash flow characteristics and, if

the cash flows are solely for the

payment of principal and inter-

est (SPPI), the assessing of the

business model employed by