Financial instruments have been the subject of numerous issuances of technical guidance interpretation, revisions in standards, and harsh criticism from the investor community. While some instruments are recorded at historical cost, similar to property plant, and equipment, many are regularly revalued to fair value. At the date that this text is being written, fair value is handled differently under US GAAP and IFRS, although a pending standard by the IASB is nearly identical to the present US GAAP.
The consternation and division in the user community about the accounting for financial instruments is rooted in the balance between relevance and reliability. Because financial instruments are liquid, meaning they can be turned into cash quickly, the standard setters favor reporting at fair value since it is useful and relevant to users of the financial statements in assessing the amount, timing, and risk of cash flows. This near-cash quality is what makes financial instruments so different from other noncash assets.
As a compromise to counter the volatility that fair value reporting can impart on an entity’s results, current rules required the classification of financial instruments into three classes:
HTM securities are deemed to be most illiquid, insofar as the entities’ intent and ability to not sell the investment in the foreseeable future. This is the case for a company that has more than adequate ...