The Financial Accounting Standards Board discussed the standards for accounting for financial liabilities at a meeting Wednesday and how to address changes in an entity’s own credit risk of financial liabilities measured at fair value.

The board affirmed its prior classification and measurement decisions on financial liabilities and decided to include separate presentation of significant changes in fair value related to changes in an entity’s creditworthiness. Financial liabilities with a principal amount that are held for payment of contractual cash flows that do not contain embedded derivative features that would require bifurcation (under Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives) would be measured at fair value, with certain changes in fair value presented in other comprehensive income.

Financial liabilities with a principal amount that are held for payment of contractual cash flows that contain an embedded derivative that would require bifurcation would be measured at fair value, with changes in fair value presented in net income.

For all financial liabilities measured at fair value, including financial liabilities without a principal amount and financial liabilities that are not held for payment of contractual cash flows, an entity would present on the face of the performance statement significant changes in fair value related to changes in the entity’s credit standing. That information would be presented separately for financial liabilities for which certain changes in fair value are presented in other comprehensive income and financial liabilities for which all changes in fair value are presented in net income.

The amount presented on the performance statement would reflect only the change in the entity’s creditworthiness and not a change in the price of credit. The board will discuss at a later meeting how changes in fair value related to an entity’s creditworthiness should be measured.

For more information on the developments at Wednesday’s meeting, click here.

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