WASHINGTON — The Financial Accounting Standards Board proposed steps Thursday for simplifying the classification of loans and securities on banks' balance sheets as part of a broader project to harmonize U.S. accounting standards with those of other countries.
Financial institutions currently classify loans and securities into one of five categories. Loans are classified either as held-for-investment, or held-for-sale. Securities fall into one of three buckets: long-term investments that a bank will likely never sell; investments that may be sold; and those likely to be traded. (Under accounting rules, each category has parameters on how a bank is able to value the asset.)
The new FASB proposal, which is similar to the classification approach taken by the International Accounting Standards Board, would essentially create three categories to be used for classifying both loans and securities. The three new buckets would resemble the categories used today for securities.
The three new buckets would be: "Amortized Cost", meaning long-term assets that collect principal and interest; "Fair Value through Other Comprehensive Income", meaning assets that are held either long-term or for sale; and "Fair Value through Net Income", which would include assets most likely to be sold.
The proposal is another component of attempts by accounting standards setters to achieve "convergence" between U.S. and international accounting requirements, which has been a process fraught with complications and disagreements between FASB and IASB. The two boards essentially agreed to go in different directions on proposed standards for how banks set aside loss reserves. However, their respective approaches for the classification scheme for financial instruments appear more aligned.
In releasing the proposal, which includes a three-month comment period, the board said the new classification model is meant to reflect more of what a company plans to do with an asset and less about the taxonomy of the specific holding.
"The proposed accounting standard would measure financial assets based on how a reporting entity would realize 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 F. Seidman said in a statement accompanying the proposal.