If business strategy should drive how financial assets are measured and booked in the financial statements, then it should drive measurement and recognition of financial liabilities too. That's the latest thinking from the Financial Accounting Standards Board as it continues to rewrite its controversial proposal for how to account for financial instruments.

The board focused on “plain vanilla” financial liabilities, such as core deposits and an entity's own debt, in deciding that the same criteria established for measuring financial assets should be applied to measuring financial liabilities as well. That would mean fair value with changes recognized in net income at one end of the spectrum and historical or amortized cost at the other end.

For financial assets, FASB has already determined it will back away from its original call for fair value to create three categories of assets, each measured differently depending on how an entity manages them. Amortized cost would be permitted for any asset where the entity has a long-term plan to hold it and collect any cash flow it produces. Fair value with changes flowing through net income would be required for assets that are actively traded. For investments where an entity's focus is on managing risk and return, FASB would require fair value measurement but with changes flowing through other comprehensive income, or equity, rather than net income.

FASB still needs to sort out the various criteria that would be used to distinguish which liabilities would be accounted for under what methods. It also hasn't fully determined whether that middle category of fair value flowing to OCI would apply to financial liabilities.

For equity securities, the FASB determined that fair value is still the way to go, except for securities that can only be redeemed for a set amount or those that are measured according to the equity method of accounting. The board plans to develop some exceptions for private companies to make the standard more practical for their purposes.

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