Alert: FASB Accounting Standards Update – Technical Corrections and Improvements to Financial Instruments

On February 28, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-03 Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU makes minor technical amendments to the guidance previously issued in ASU No. 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is summarized in this MNP Alert.

The ASU clarifies the guidance on the following topics:

Equity Securities Without a Readily Determinable Fair Value

• An entity measuring its equity securities using the measurement alternative in 321-10-35-2 (i.e., cost minus impairment plus/minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer) may make an irrevocable election to change its measurement approach to a fair value method under Topic 820 Fair Value Measurement.
  • This elected method would also apply to all existing and future purchases of similar investments of the same issuer.
• Any adjustments made to the carrying value of an equity security under the measurement alternative method in relation to an observable transaction for a similar security should be reflected as of the date of that transaction rather than the reporting date.
• The prospective transition approach for equity securities without a readily determinable fair value is meant only for instances in which the measurement alternative is applied.
  • The approach is available to insurance entities applying Topic 944 Financial Services – Insurance that hold such equity securities, and must be applied consistently to all similar equity securities for which the measurement alternative is elected.

Remeasurement of Forward Contracts and Purchased Options

• An entity must remeasure the entire value of forward contracts and purchased options to account for a change in the observable price or impairment of the underlying equity securities.

Presentation Requirements for Certain Fair Value Option Liabilities

• An entity electing to apply the fair value option for a financial liability must present separately, in other comprehensive income, the portion of the total change in fair value that results from a change in the instrument-specific credit risk.
  • This presentation requirement applies regardless of whether the fair value option was elected under either Subtopic 815-15 Derivatives and Hedging – Embedded Derivatives or Subtopic 825-10 Financial Instruments – Overall.

Fair Value Option Liabilities Denominated in a Foreign Currency

• An entity electing to apply the fair value option for a financial liability denominated in a foreign currency must measure any change in the fair value arising from the instrument-specific credit risk:
  • First, in the liability’s currency of denomination, when presenting it separately from the total change in fair value of the financial liability; and
  • Then, remeasure both components of the change in the fair value of the foreign-currency-denominated liability into the entity’s functional currency using the end-of-period spot rates.

The amendments in ASU 2018-03 are effective for:

• Public business entities, for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years beginning after June 15, 2018.
  • To clarify, for public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018, the entity is not required to adopt the ASU until the interim period beginning after June 15, 2018.
• For all other entities (including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting), consistent with the effective date of ASU 2016-01 – i.e., for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2019.

Early adoption, including in an interim period, is permitted for fiscal years beginning after December 15, 2017, if ASU 2016-01 has also been adopted.

Entities impacted by this ASU should also consider the requirements of SAB 74 Disclosures and Controls for New Accounting Standards. For additional information, refer to the Center for Audit Quality Alert No. 2017-03, or the SEC’s Codification of Staff Accounting Bulletins for Topic 11: Miscellaneous Disclosure, Topic M

To access the full script of ASU No. 2016-01, click here.

To access the full script of ASU No. 2018-03, click here.

For more information on the financial reporting library, contact a local MNP Assurance Professional, or Jody MacKenzie, Director, Assurance Professional Standards.

This communication contains a general overview of the topic and is current as of February 28, 2018. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2018. All rights reserved.