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Accounting & Audit

Financial Instruments: Implementing the Improvements

By March 21, 2017No Comments

The Financial Accounting Standards Board (“FASB”) issued a new accounting standards update, ASU 2016-01, to make the reporting of financial instruments simpler and more beneficial to financial statement users. If your organization holds financial assets or owes financial liabilities, be ready to integrate these recognition, measurement, presentation, and disclosure changes into your accounting processes.

In response to the current complex economic environment, FASB issued ASU 2016-01 to improve certain aspects of financial instrument reporting. Below are the amendments announced in the update:

  • Equity investments, except for those accounted for under the equity method or those acquired through consolidation, are required to be recorded at fair value with the change in fair value recognized in net income. This update supersedes previous guidance to record the change in fair value based on the equity investments’ classification (trading vs. available-for-sale). This is intended to provide more relevant information as well as reduce the complexity of reporting at fair value. If an equity investment does not have a readily determinable fair value, the entity can choose to report the asset at cost less impairment, if any, plus or minus any observable price changes seen in identical or similar investments by the same issuer.
  • Equity investments without readily determinable fair values are required to have a qualitative assessment to identify impairment, similar to that of the assessment for long-lived assets and goodwill. If impairment does exist, the asset is to be reported at fair value and recognize the amount of impairment in net income.
  • Entities that are not public business entities are no longer required to disclose the fair value and methods used to determine fair value of financial instruments measured at amortized cost.
  • Public business entities are required to use the exit price when disclosing the fair value of financial instruments.
  • If an entity elects to measure a financial liability using the fair value option, the portion of the total change in fair value of the liability resulting from a change in the instrument’s credit risk is to be presented separately in other comprehensive income.
  • Financial assets and financial liabilities are to be presented separately in the financial statements and accompanying notes by measurement category.
  • Entities should evaluate the need for a valuation allowance on deferred tax assets related to available-for-sale securities.

These amendments are effective for public business entities for fiscal years beginning after December 15, 2017. For all other entities, including not-for-profit entities and employee benefit plans, the amendments are effective for fiscal years beginning after December 15, 2018.

We would be more than happy to assist you in planning for and implementing these changes. Please feel free to contact Kristi Yanover at 858-558-9200.

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