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FASB Turns Attention to Cash Flows and Accounting Methods

Last week, the Financial Accounting Standards Board (“FASB”; “the Board”) met to discuss its cash flows pre-agenda research and the project on accounting for financial instruments. As part of the April 23rd meeting, the Board expressed concern regarding progress on Topic 230, Statement of Cash Flows. Per its discussion, the Board spoke on cash flow problems associated with classifying particular types of cash receipts and cash payments.

Also at the meeting, the FASB revisited its proposed Accounting Standards Update, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The Board focused on how an entity could provide changes in fair value resulting from an adjustment in the instrument-specific credit risk for financial liabilities assessed at fair value by means of net income. Referencing its April 4th meeting, the FASB acknowledged the decision to preserve the fair value option in the proposed Accounting Standards Update.

The Board also determined that when an entity uses the fair value option to assess a financial liability at its fair value, it would independently give through other income the fraction of the total fair value change produced by an adjustment in instrument-specific credit risk. Another decision made is that an entity can take into account the part of the total change in fair value that surpasses the amount causing from a base market risk change to be the outcome of an adjustment in instrument-specific credit risk. In contrast, an entity may decide how valuable the changes in the instrument-specific credit risk are through other means it is more confident will exemplify such change. Further, it would be required by an entity to reveal how it uncovers the gains and losses related to instrument-specific credit risk and must consistently use that process.

The FASB added the cash flows project to the technical agenda during its April 28th meeting.