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Client Alert: FASB Issues Guidance on Recognition and Measurement of Financial Assets and Financial Liabilities

On January 5, 2016, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Update (ASU) 2016-01, Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. The overarching principles of ASU 2016-01 are to provide more decision-useful information to investors and other users of the financial statements while not adding to the complexity of existing U.S. GAAP.

Key Provisions
The following are the key provisions of ASU 2016-01:

  • Equity investments - except those accounted for under the equity method of accounting, or those that result in consolidation of the investee - are measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. 

    Any adjustment as of the beginning of the period of adoption is recorded as a cumulative effect adjustment to retained earnings.

    With regard to equity investments without readily determinable fair values, the impairment assessment is simplified by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

  • For non-public entities, ASU 2016-01 eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost. This amendment can be adopted early for any fiscal years for which financial statements have not been issued.
  • Public business entities must still disclose the fair value of financial instruments (except for receivables and payables due within one year and core deposit liabilities for financial institutions) measured at amortized cost either parenthetically on the balance sheet or in the notes to the financial statements. However, the requirement to disclose the methods and significant assumptions used to estimate the fair value has been eliminated. 
  • Public entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
     
  • If an entity has elected to measure a liability at fair value in accordance with the fair value option for financial instruments, the portion of the total change in the fair value resulting from a change in the instrument-specific credit risk (“own credit”) is recorded in other comprehensive income. This amendment can be adopted early for both public and non-public entities.
  • Separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) is required either on the balance sheet or the accompanying notes to the financial statements.

    In other terms, this requires assets and liabilities, such as loans, investments, receivables, debt etc., to be disclosed separately and further disaggregated by those that are measured at fair value through net income, fair value through other comprehensive income, or amortized cost.

  • The guidance clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

Effective Date and Transition
For public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For non-public entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. Early adoption for non-public entities is allowed, but no earlier than years beginning after December 15, 2017.

As noted above, ASU 2016-01 permits earlier adoption of the own credit provision and the elimination for non-public entities from having to disclose fair value information about financial instruments measured at amortized cost.

With limited exceptions, the adoption of this guidance is accounted for as a cumulative effect change to retained earnings as of the beginning of the period of adoption. In addition, in the year of adoption, including interim periods for public entities, there are additional disclosure requirements regarding the impact of the adoption.

If you have any questions, please contact your engagement officer or manager, or Daniel F. Morrill, CPA, Principal, at 413-726-6857 or dmorrill@wolfandco.com.