The FASB issued for public comment a proposal to improve financial reporting by providing a comprehensive measurement framework for classifying and measuring financial instruments.

Under the proposal, the classification and measurement of a financial asset would be based on the asset’s cash flow characteristics and the entity’s business model for managing the asset, rather than on its legal form, that is, whether the asset is a loan or a security. Based on this assessment, financial assets would be classified into one of three categories:

. Amortized Cost–financial assets comprised solely of payments of principal and interest that are held for the collection of contractual cash flows

. Fair Value through Other Comprehensive Income (OCI)–financial assets comprised solely of payments of principal and interest that are both held for the collection of contractual cash flows and for sale

. Fair Value through Net Income–financial assets that do not qualify for measurement at either amortized cost or fair value through other comprehensive income

All equity investments (excluding those accounted for under the equity method of accounting) would be measured at fair value with changes in fair value recognized in net income, because such investments do not have payments of principal and interest. The proposal also provides a practicability exception to measurement at fair value for equity investments without readily determinable fair values.

The proposal also would require financial liabilities to generally be carried at cost, unless the reporting organization’s business strategy is to subsequently transact at fair value or the obligation results from a short sale. The proposal would retain the embedded derivative requirements for hybrid financial liabilities.

Stakeholders are asked to provide written comments on the proposal by May 15, 2013.

To read the FASB news release: click here.