Running Head: FINANCIAL INSTRUMENTS
Part 1: FASB - ASU 2016-01
4. Determine the method(s) for measuring and/or presenting the income statement effects
of debt securities.
Debt securities effects in an income statement are presented and measured as an
amortized cost or fair value depending on the type of debt security. An amortized cost
measurement allows for spreading of the cost of debt security over its useful life. This is within a
business model whose main objective holds tangible and intangible assets so as to get contractual
cash flows over a period of time. This method of measurement allows for expensing in an
income statement that takes into account the time value of the debt security. That is; the same
amount is expensed in an income statement throughout the debt securities useful life. In the case
of loans for instance, presenting its effects in an income statement allows for the presenting of
loan payments as a unit of both the principle and interest in each payment. For debt securities
held for trading purposes as well as those classified as available for sale, the fair value
measurement is the most appropriate (Cotter, 2012).
5. Discuss whether you agree with this Update’s required bifurcation of embedded derivative
from hybrid financial instrument. Does IFRS 9 require bifurcation of hybrid financial
This update’s required bifurcation of embedded derivatives is an addition that is very
necessary in the accounting process especially for an income statement. The problem with a system
that does not separate embedded derivatives, is that they may be represented in contracts that may
not clearly reflect their effects. This is why bifurcation is a very agreeable addition into the
accounting system. For instance in the case of bonds, the stock option needs to be accounted for
separately because it is an embedded derivative. This way it can be clearly measured and
represented as any other derivative in an income statement which will clearly show its effects. This
process has to be done at the fair value level in order for all the effects to be fully accounted for.
The IFRS 9 does not change a lot of the requirements of bifurcation of hybrid financial
instruments. However, it provides a framework for embedded derivatives to be analyzed to
determine the kind of measurement to be used to represent them under the new framework. That
is, the financial instrument is put under the “solely payments of principle and interest test”. This
will help determine if the variability presented is significant. If the test is fail then the financial
instrument is measured using the fair value classification in its entirety as opposed to bifurcation.
This has greatly simplified the process of accounting while still maintaining the same standards
as before (Cotter, 2012).
6. What is the percentage of ASU 2016-01 dissenters to total number of FASB members?
What does this percentage imply to you about the quality of this ASU?
The percentage of dissenters of the ASU 2016-01 is 43%. This value is close to half of all
the members of FASB which implies that the ASU2016-01 has some short comings that need to
be addressed. It also implies that the updates presented are not able to address some of the
financial reporting issues especially as it regards to scope and application.
7. Discuss the reasons for why Messrs. Linsmeier and Siegel dissented. Be sure to discuss
why the ASU 2016-01 fails to meet the three objectives of the financial instrument project.
The main reasons for dissention from the ASU 2016-01 had to do with applicability and
clarity in some specific areas. First the update did not clarify the applicability of the new
mechanism on equity securities whose fair value cannot be directly determined. This shortcoming
directly relates to the first objective of the project that aimed to adjust the recognition and
measurement of financial instruments. Second issue has to with clarity on financial assets that not
specifically fall under the two main classifications. Such financial assets have to be presented using
methods from the old systems. Third issue has to do with the scope of recognition. The update
accommodates all forms of assets and liabilities under two broad classification despite presence of
more variability (Cotter, 2012).
Part 2: IFRS 9 and U.S GAAP on Financial Instruments
1. How shall an entity subsequently measure financial assets? Besides Section 4.1, be
sure to explain “business model” in reasonable details using relevant part of
Appendix B: Application Guidance. Also discuss fair value option for financial assets.
IFRS 9 includes the requirements utilized in the recognition, measurement, impairment,
derecognition and general hedge accounting. In the subsequent measurement of financial assets,
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into those measured
at amortized cost and those measured at fair value. Where assets are measured at fair value, gains
and losses are either recognized entirely in profit or loss or recognized in other comprehensive
income. For debt instruments, the classification of fair value through other comprehensive
income classification is mandatory for certain assets unless the fair value option is elected.
Whilst for equity investments, the fair value through other comprehensive income classification
is an election. In addition, the requirements for reclassifying gains and losses recognized in other
comprehensive income are different for debt instruments and equity investments. The
classification of a financial asset is made at the time it is initially recognized (Cotter, 2012).
Notably, an entity classifies financial assets as subsequently measured at amortized cost,
fair value through other comprehensive income or fair value through profit or loss on the basis of
the entity’s busin...