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The companion document to the ED of proposed Accounting Standards Update, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (proposed Update on financial instruments) was issued on February 14, 2013. The companion proposed Accounting Standards Update, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities—Proposed Amendments to the FASB Accounting Standards Codification®, includes the following:
1. Consequential amendments to various Topics in the Accounting Standards Codification that are affected by the proposed Update on financial instruments, including proposed amendments to Subtopic 825-10.
2. Amendments to Subtopic 825-10 to reflect the Board’s decision to eliminate the fair value options in paragraph 825-10-15-4 for financial instruments that are not in the scope of the proposed Update on financial instruments. These include the fair value option related to:
a. Guarantees and other contingencies accounted for in accordance with Topic 460, Guarantees, or contingencies accounted for in accordance with Topic 450, Contingencies, that will not be within the scope of the forthcoming proposed Update on insurance contracts. The effective date and transition provisions to eliminate the fair value option for these items would be consistent with the guidance in the proposed Update on financial instruments.
b. Rights and obligations under an insurance contract and obligations under a warranty that currently are accounted for under Topic 944, Financial Services—Insurance, or would be accounted for in accordance with the forthcoming proposed Update on insurance contracts. The effective date and transition provisions to eliminate the fair value option for these items would be consistent with the forthcoming proposed Update on insurance contracts.
c. Rights under a warranty that would be accounted for in accordance with the guidance in the forthcoming Update on revenue recognition. The effective date and transition provisions to eliminate the fair value option for these items would be consistent with the guidance in the Update on revenue recognition.
d. Written loan commitments accounted for in accordance with the proposed Update on financial instruments. The effective date and transition provisions to eliminate the fair value option for these items would be consistent with the guidance in the proposed Update on financial instruments.
e. Firm commitments that otherwise would not be recognized at inception and that involve only financial instruments. In addition, the Board also clarified that physically settled forward and purchased option contracts (with no intrinsic value at inception) to purchase or sell loans that do not meet the definition of derivative instrument would follow the same accounting as the underlying loan in accordance with Subtopic 825-10, as amended by the proposed Update on financial instruments. The effective date and transition provisions for these items would be consistent with the guidance in the proposed Update on financial instruments.
The Board believes that retaining the unconditional fair value options in 2(a) through (e) above has the potential to impair comparability and, thus, make financial statements less decision useful. The Board further believes that such fair value options are no longer needed given the Board’s projects on financial instruments, insurance contracts, and revenue recognition. Thus, the Board decided to link the transition and effective date for eliminating these fair value options to those respective projects.
The amendments in this proposed Update do not include amendments included in the proposed Accounting Standards Update, Financial Instruments—Credit Losses (Subtopic 825-15), which was issued on December 20, 2012. Only relevant paragraphs that were either superseded or amended by that proposed Update are included to the extent that this proposed Update results in consequential amendments to those paragraphs. In addition, this proposed Update does not include amendments to the financial instruments Topics or relevant industry Subtopics that may be affected by the Board’s forthcoming final Accounting Standards Updates on revenue recognition and investment companies.