Classification and Measurement of Financial Instruments: A Study of Divergence, Not Convergence

• Published date: 01 July 2015
• Author: Paul Munter,Oscar J. Holzmann
• DOI: http://doi.org/10.1002/jcaf.22072
• Date: 01 July 2015

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© 2015 Wiley Periodicals, Inc.

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

DOI 10.1002/jcaf.22072

Classification and Measurement of

Financial Instruments: A Study of

Divergence, Not Convergence

Oscar J. Holzmann and Paul Munter

Financial instruments are

defined as cash, evidence of an

ownership interest in an entity,

or contracts that obligate

entities to exchange cash or

another financial instrument.1

Under U.S. generally accepted

accounting principles (GAAP),

the measurement of a financial

asset has depended on its legal

form, a criterion that distin-

guishes between equity securi-

ties, debt securities, and loans,

and upon the holder’s intended

use of a financial asset. Dur-

ing joint deliberations by the

Financial Accounting Stan-

dards Board (FASB) and the

International Accounting

Standards Board (IASB), the

Boards at one point tentatively

agreed that the relevance of the

information about financial

assets in an entity’s financial

statements could be improved

and a converged standard

also could improve the com-

parability of that information

across entities by focusing on

the instrument’s contractual

cash flow characteristics and

the entity’s business model to

classify and measure financial

assets. While the IASB pro-

ceeded with this approach in

finalizing its requirements on

classification and measurement

of financial assets,2 the FASB

continues to deliberate the U.S.

GAAP requirements, focus-

ing more narrowly on minor

changes to its classification and

measurement standards with a

continuing focus on the form

of the instrument and manage-

ment’s intent.

HISTORICAL BACKGROUND

The FASB has long

expressed concern that while

the complexity, risks, and vol-

ume of financial instruments

have been increasing, the appli-

cable accounting and financial

statement 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 atten-

tion on the goal of providing

financial statement users with

more decision‐useful informa-

tion about an entity’s involve-

ment in financial instruments,

while reducing the complex-

ity in accounting for those

instruments.

In March 2006, the Boards

issued a Memorandum of

Understanding, which included

a joint effort to reduce com-

plexities in accounting for

financial instruments.3 In an

effort to achieve this converged

objective, the IASB issued its

March 2008 Discussion Paper,

which was also published by

the FASB.4 The IASB chose to

proceed by working on three

phases of the topic: (1) clas-

sification and measurement,

(2) impairment, and (3) hedge

accounting. In November 2009

the IASB issued International

Financial Reporting Stan-

dard (IFRS) 9, which required

that financial assets be clas-

sified and measured at either

amortized cost or fair value

through profit or loss (FVPL).

The guidance in IFRS 9 was