The Financial Accounting Standards Board (FASB) has proposed to improve financial reporting by providing a comprehensive measurement framework for classifying and measuring financial instruments.

The proposal issue, the Accounting Standards Update Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, is part of FASB’s joint project with the International Accounting Standards Board (IASB) on financial instruments.

Under the proposal, the classification and measurement of a financial asset would be based on the asset’s cash flow characteristics and the entity’s business model for managing the asset, rather than on its legal form.

The proposal also would require financial liabilities to generally be carried at cost, unless the reporting organisation’s business strategy is to subsequently transact at fair value or the obligation results from a short sale.

"The proposed accounting standard would measure financial assets based on how a reporting entity would realise value from them as part of distinct business activities, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities," FASB chairman Leslie Seidman explained.

The proposal is the most recent step of FASB and IASB’s joint work on financial instrument standards that first appeared on in its agenda in 2010.

"This revised proposal is responsive to the feedback the FASB received on our 2010 Exposure Draft, it simplifies the multitude of classification methods currently in use, and it offers an opportunity for convergence with the IASB’s proposal issued last November," Seidman said.

Stakeholders are encouraged to review the proposal and comment on it by 15 May 2013.

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Related links

The Financial Accounting Standards Board

The International Accounting Standards Board